Assets and Liabilities

Revenues, expenses, and profits are used to describe what your business does; assets and liabilities describe what your business owns and owes. Here's how they're defined:

• Assets. Assets are those items that you own. Assets can be in the form of physical things (land, buildings, equipment, fixtures), cash or cash equivalents, or accounts receivable. In short, anything you own or that is owed to you is counted as an asset.

• Liabilities. Liabilities are the opposite of assets; they're things that someone else owns and for which you owe. Liabilities are typically in the form of loans, expenses, or taxes due.

If you take everything you own and subtract everything you owe, the balance represents your net worth in your businessalso known as your equity. This equation is the core concept behind that financial statement called a balance sheet.

Equity Equation

ASSETS LIABILITIES = NET WORTH

Again, a short example. Let's say that you have $300 in inventory sitting in your garage, another $100 in unused shipping boxes, plus you're owed $100 for closed auctions that the buyer hasn't paid yet. You also happen to have a whole $100 sitting in your business bank account. Add it all together, and that $600 total represents your assets.

Now let's look at what you owe. Rummaging through your "bills to pay" file, you see that you have a $100 bill due to pay for those shipping boxes, plus another $220 due for various other expensesutilities, Internet service, and the like. That $320 total represents your liabilities.

Subtract the $320 in liabilities from the $600 in assets, and you end up with a net worth of $280. That's your current equity in your business.