Beyond simply tracking revenues and expenses, oen should also keep track of assets and liabilities in any business. This is commonly overlooked by many small business owners, or they try to track it in their head. A complete bookkeeping system will help you to track all aspects of your business finances.
Business Liabilities
The liabilities of the business are what it owes to people or businesses outside of itself. These can include loans to the bank, credit from vendors, credit cards, vehicle leases or loans, and loans to related parties, including shareholder loans. It is important to track these accurately so that you understand what kind of a financial position your company is in, and how much it owes different parties.
Business Assets
These are the items that are used to help make money in your business, such as furniture, buildings, vehicles, tools, equipment, inventory, cash, money owed to you, and investments. Those that are to be sold (inventory or assemblies) are considered short term assets, as are any monies owed to you and due in less than one year. Cash and its equivalents are also considered short term. All other assets are considered long term. These can be broken into investments, long term debts, and fixed assets. Fixed assets means those items that do not change over the long term, such as furniture, buildings, equipment, and vehicles. The difference between the value of all of your assets and all of your liabilities is considered your business equity. This is one way of looking at how much value your business has accumulated to you. It is not the value of your business!
Tracking Assets and Liabilities
To keep a proper record of your assets and liabilities, you must enter them into your accounts when they are bought at the value you paid for them or the value that is owed to you. If, for example, you buy 100 items to sell for $10 each, then your inventory value is $1000. Every time you sell one of these items, say for $20, then your inventory value decreases by the cost of that one item ($10), and the surplus amount is considered your gross profit. The $20 for the sale is entered into revenue, $10 comes out of inventory and $10 is sent to retained earnings. Bookkeeping must always have an equal amount entered on each side of an entry. This concept is always difficult to master, because the accounts themselves aren’t always so straightforward.
Some assets depreciate. This means that they lose value with time. The decrease in value is an expense called depreciation or amortization. It is best if you have an experienced accountant calculate your depreciation for you, then s/he can give you the entries to put into your books. Other assets, such as investments, appreciate over time. This means they increase in value. This is usually due to interest gained or an increase in market or book value. Again, an experienced accountant is best to deal with these, unless they are very simple.
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Johanus Haidner - Johanus Haidner (BA, BEd, MBA) is a martial artist, writer, craftsman, artist and life coach in Edmonton, Alberta.
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