The Owner’s Equity (sometimes called Shareholder’s Equity) represents the assets of the company that the owners and/or shareholders own. You calculate the owner’s equity by subtracting your company’s total liabilities from all of the assets (i.e., total assets – total liabilities = owner’s equity).

• Capital Stock - the cash and assets you contributed to start your business.
• Retained Earnings - earnings that have not been distributed to the owners.

The long-term liabilities section of the balance sheet shows the obligations your company has that will take longer than a year to pay. As I stated in my previous post, the short-term portion (due in less than a year) of long-term payables are reported in the current liabilities section of the balance sheet.

• Notes Payable – obligations to pay for equipment, land, buildings, etc.
• Deferred Income Tax – taxes you owe, but are legally ably to defer into future years.
• Lease Obligations – capital leases (put simply, a lease that resembles a purchase) are required to be reported as long-term liabilities.

The current liabilities section of the balance sheet shows the obligations that your business will be paying in a year or less. As with the current assets section of the balance sheet, the current liability categories are listed in order of liquidity.

Below is a list of the typical liability categories, in order of liquidity:

• Accounts Payable – invoices your company incurs for day-to-day operational and general and administrative expenses.
• Current Income Tax Liabilities – payroll taxes and taxes due for the owners of your company.
• Short-Term Part of Loans and Notes Payable – in financial statements, loans are divided into two categories: (1) short-term balance due (due in next year), and (2) long-term balance due (balance due in more than a year).
• Other Current Liabilities – these are other obligations your company has, that are due in less than a year, that do not fit into the other short-term liability categories.

Long-term assets, sometimes called long-term investments, are assets that you plan to hold for a year or more.

Long-term assets are generally broken down into 4 categories:

1. Securities – include stocks, bonds, and long-term notes receivable.
2. Fixed Assets Not Currently Used in Operations – such as land acquired but not being used.
3. Special Funds – pension funds, funds for future expansion, and the cash surrender value of life insurance.
4. Nonconsolidated Subsidiaries and Affiliated Companies - accounting rules say that closely related companies must consolidate their financial statements into one set of statements. This category of long-term assets is for affiliate and subsidiary companies that are not considered closely held.

The current assets section of the balance sheet reports the assets your company has that will be converted into cash in a year. On the balance sheet, the current assets are generally listed in order of liquidity, which is how quickly the assets will be converted into cash.

Below is a list of the common categories found in the current asset section of the balance sheet (listed in the normal order of liquidity):

• Cash – listed at its current balance on the date of the balance sheet. This includes your company’s savings and checking accounts.
• Short-Term Investments – listed at their fair value, which is the price you could sell the investment for now. This would include certificate of deposits and other similar short-term investments that are close to their maturity date.
• Accounts Receivable – reported at the amount you think you will actually collect from your total receivables. The accounts receivable balance is often reported showing total receivables less estimated bad debt.
• Inventories – presented in the basis you value your inventory, such as Costs, First In First Out (FIFO) or Last in First Out (LIFO).
• Prepaid Items – are expenditures you have already made for costs or services, such as insurance or equipment rent, that are paid in advance.

The balance sheet shows the financial position of your company on a specific date. Balance sheets are usually dated at the end of the month, such as September 30, 2009.

The balance sheet is composed of three sections:

1. Assets – include current assets (cash or other assets that will be converted into cash in a year or less), long-term assets (assets that will be held for a year or more), and property, plant, and equipment (durable assets used in the operations of the business).
2. Liabilities – include current liabilities (obligations that will be paid with assets in a year or less) and long-term liabilities (obligations that will take longer than a year to repay).
3. Owners Equity - includes capital stock (the cash and assets you contributed to start your business) and retained earnings (profit that has not been distributed to the owners).

Over the next few days, I will explain in more detail the three sections of the balance sheet.

There are two additional analyses that I like to perform when comparing the results of two periods. The first is to calculate the dollar amount of change from period to period. I do this by subtracting the current period results for an account from the prior period’s results.

After I do this, I calculate the percentage change. This is calculated by dividing the dollar change amount from the first period’s results for that account. Reviewing both the dollar and percentage changes give me a better feel for the actual performance.

Included in this section is almost every other expense your company has that is not found in the cost of sales section of the income statement. Advertising, salespersons and managers salaries and expenses, insurance, taxes, office staff, and office rent are all examples of expenses that are reported in the general and administrative section of the income statement.

The net profit follows the general and administrative expenses section of the income statement. The net profit is often what many call "The Bottom Line".

Included in the cost of sales are the labor costs and the materials used in production. Some example of expenses that would fall under this category would be hotdogs, labor cost for the person who works at the hot dog stand, and any expendable materials such as aluminum wrappers for the hotdogs and cups for drinks.

The gross profit is found directly below the cost of sales and is calculated by subtracting the cost of sales from the revenue. This figure lets you see how profitable your sales actually are.

Some examples of revenue by source would be hot dog sales, hot dog combo sales, drink sales, dessert sales, etc. By segregating the types of sales you have, you are able track and analyze your revenue sources.

This is especially helpful when your income statement includes prior period amounts as well as the current period’s revenues. By comparing prior periods with your current sales revenue, you are able to see what areas you are excelling in, what areas you need improvement in, trends (upward or downward), and possibly identify new revenue sources.

The sum of all the revenues in the income statement is called the gross revenue.