Equity – that’s an accounting speak for your handmade business term used by CPA’s, tax professionals, and business advisors for how much your business is worth. That’s why Equity are the third section of your Chart of Accounts and your Balance Sheet report.
What the heck is Equity?
Equity is a tricky little devil and isn’t entirely straightforward (imagine that!). Depending on the type of business entity that you have (sole proprietor, LLC, Partnership, Corporation) the equity accounts will have slightly different names – which is also confusing. For the purpose of this article I’m going to use a Sole Proprietor business entity. Talk to your CPA, tax professional, or business advisor for additional help.
Basically, equity means the ownership in a company or business.
What are Equity accounts in a handmade business and how are they numbered?
If you read the blog post Chart of Accounts-Accounting Speak Your Handmade Business, you’ll remember that I said Equity accounts are numbered between 30000 and 39999.
Ok, so when you first start(ed) your handmade business, you most likely used your own money to do so – most of us do. That initial money is often referred to as “Start up money” but in accounting terms it’s called an Owner Investment and is they way that you begin building the equity in your business. You need to keep track of the money that you put into your business.
Equity also takes into consideration money that you take out of your business – this is called an Owner’s Draw. Again, you need to keep track of money or inventory that you take out of the business for personal use.
Equity also takes into consideration the profit (or loss) that your company has each year that is in business.
If you use accounting software, most likely you’ll see a single account that represents all three of the above items.
As a long time bookkeeper working with small business owners, I’ve found that most business owners want to see the individual line items I mentioned above. So, I always leave the single Owner’s Equity account (because that is where the software will automatically post Net Income or Net Loss at the end of your tax year, but I add two more so that the Equity section looks something like this:
- 30000 Owner Investments
- 31000 Owner Draws
- 32000 Owner’s Equity (the original account)
Now, in accounting there is this funky formula for calculating Equity:
That’s it for this week, I don’t want to give you a huge headache! 🙄 If you are working on a Chart of Accounts for your own handmade business, you may want to include Owner Investments and Owner’s Draw accounts.
Next week, we’ll talk about Income and what that means in your handmade business.
Until then, Happy Handmade!