Gross Profit: Gross Profit = Revenue - COGS Revenue: how much you earned from selling popsiclesĬost of Goods Sold (COGS): the total amount it cost you to make the popsicles: popsicle sticks, locally-sourced ingredients, etc. Here’s an example of an income statement, from the Bench app. It shows you how much you made (revenue) and how much you spent (expenses). While the balance sheet is a snapshot of your business’s financials at a point in time, the income statement (sometimes referred to as a profit and loss statement) shows you how profitable your business was over an accounting period, such as a month, quarter, or year. This is where the income statement comes in.
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…how much it cost you to make the popsicles you sold? No. You’ve added $1,000 to your retained earnings by saving more cash, even though your liabilities haven’t changed. One month passes.Īt the end of July, your balance sheet shows this: July Balance Sheet Category Not bad! It’s summer, your busiest time of year. It looks like this: June Balance Sheet Category Let’s say you run a food cart selling vegan, gluten-free, organic popsicles.Īt the end of June, you get a balance sheet from your bookkeeper. Here’s an example to explain how it works. To put it simply: Whatever value (equity) your business actually has consists of what it owns (assets) minus what it owes ( liabilities).įurther reading: What Are Assets, Liabilities, and Equity? To grasp how the three categories on the balance sheet work together, remember this formula: When selling a business, buyers usually pay more than the book value of the business based on things like the company’s annual earnings, the market value of tangible and intangible property it owns, and more. It’s not your business’ market value if you wanted to sell the business. It’s important to note that equity is only the “book value” of your company. Before you even made a sale, that $1,000 would be listed as owner’s equity on your balance sheet. This is a way some business owners choose to pay themselves.Įquity can also consist of private or public stock, or else an initial investment from your company’s founders.įor instance, suppose you started an online store, and put $1,000 in its bank account as operating capital (to pay web hosting costs and other expenses). This means someone who owns part of the company has withdrawn some money from shareholder’s equity. In the Bench balance sheet, you’ll also note a modification to the equity, a shareholder drawing of $7,380.58. This might be retained revenue-money the company has earned to date-as in the example above. EquityĮquity is the remaining value of the company after subtracting liabilities from assets.
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But total liabilities can also include credit card debt, mortgages, and accrued expenses such as utilities, taxes, or wages owed to employees. On our balance sheet example above, the only liability is a bank loan. Liabilities are debts you owe to other people. Money in transit (being transferred from another account)īut total assets can also include things like equipment, furniture, land, buildings, notes receivable, and even intangible property such as patents and goodwill. On the Bench balance sheet shown above, assets consist of: Here’s an example of what a balance sheet looks like if you’re a Bench customer.Īssets are anything valuable that your company owns. On the other hand, a small Etsy shop might only get a balance sheet every three months.īalance sheets are broken up into three general categories: assets, liabilities, and equity. Some businesses get daily or monthly financial statements, some prepare financial statements quarterly, and some only get a balance sheet once a year.įor example, banks move a lot of money, so they prepare a balance sheet every day. How often your bookkeeper prepares a balance sheet for you will depend on your business. It tells you about the assets you own, and liabilities (i.e., debts) you owe, at a particular point in time. A balance sheet is a snapshot of your business finances as it currently stands.