Equity which shows the combined total of your investment in your arts and crafts business is one of the sections on your balance sheet. Another term for equity is net assets, which is the difference between assets, which are resources a your company owns, and liabilities, which are claims against your company. Depending on the organization of your business, how you record owners' interest in the equity section of the balance sheet differs. The basic concept remains the same, but with the exception of retained earnings you use different accounts to record owners equity.
There are three different types of entities you can use to organize your arts or crafts business: sole proprietorship, flow-through entity such as a partnership and a corporation. This page shows the equity section for a sole proprietorship.
Characteristics of a Sole Proprietorship
Like the name implies, a sole proprietorship has one and only one individual owner. And this owner can't collectively own the business with anyone else like their spouse or another relative or friend. While there can be only one owner, the sole proprietorship can hire as many employees as it needs. Formation is a snap. In most states there is no formal filing for a sole proprietorship like there is for a corporation. Once the company makes its first sale or incur its first business expense it is officially in business as a sole proprietorship.
The sole proprietorship has two unique equity accounts: owner capital and owner draw. Here's information about each:
The owner capital accounts shows a few different items:
- Cash Contributions: This is any money you used to start the business. Many sole proprietorships also have an on-and-off need over the years for an influx of cash from the owner. It's a simple fact of doing business that sometimes you have to pay for businessexpenses before you collect the money from your customers.
- Non-Cash Contributions:When you started your sole proprietorship, you may have already personally owned computer equipment and furniture that you converted to business use. If you decide to make these assets properly of the business, you increase your owner's capital for the fair market value, which is what an unrelated third party would pay in an open marketplace, of the assets. For example, you have a desk that originally cost $500. Comparable used desks are selling online for $100. Your fair market value is $100.
- Net Income (Loss): Net income (loss) is the difference between your arts and crafts revenues and expenses. If your business revenues are more than your expenses, you have net income. If your business expenses are more than your revenue, you have a net loss. How much money your arts or crafts business brings in at the end of day affects your capital account. Net income increase it and net loss decreases it.
- Retained Earnings: This shows the combined total of all net income (loss) over the years the arts and crafts business is operating. For example, the net income for Metropolitan for 2012 is $15,000. Let's say they have net income of $20,000 in 2013, retained earnings at 12/31/2013 is $35,000 ($15,000 + $20,000).
Owners' draw shows money and other assets the owner takes from the business to use personally. This account is used pretty frequently by sole proprietors as this is how they get paid. This is because a sole proprietor doesn't receive a paycheck with taxes withheld, reported on a W-2 at the end of the year. They just write themselves a check, adding to their draw account and reducing their overall capital and owners' equity.