The true measure of a company's value is equity, which is the difference between assets -- all that a company owns -- and liabilities -- all that a company owes. This third and final look at the balance sheet explains how to account for current and long-term liabilities and how to calculate equity. (For articles about current and fixed assets, see BottomLine, June 2002 and July 2002.)
--Judith Miller, a Bay area construction business consultant and trainer, specializes in business planning, accounting and finance, and computerization.
All items listed in Current Liabilities should be paid off within a year.
Salaries Payable is the value of work done that is not yet paid. For most small contractors, this comes into play only at the end of the fiscal year.
Accounts Payable includes all trade, subcontract, and overhead payables, including company-related credit card balances. Contractors who use cash accounting can easily forget about payables and overestimate income.
|Billings in Excess of Costs||$35,000|
|Workers' Comp Payable||$3,691|
|Line of Credit Payable||$15,000|
|Total Current Liabilities||$125,598|
Unemployment and workers' comp premiums paid quarterly or monthly. Benefits payable includes health insurance premiums and accrued vacation pay. Billings in Excess of Costs parallels the Underbillings account in Current Assets. This line holds amounts you have billed but for which you have not yet incurred expenses -- for example, contract deposits.
G/L-Umbrella Insurance: Liability insurance premiums are typically paid once a year based on estimated work volume, then reconciled in an end-of-year audit. The lump sum payment is posted to Prepaid Assets (in the Current Assets portion of the balance sheet). Each month, it's reduced by one-twelfth and the balance is compared with actual payroll. If more work has been done than estimated, this line is a positive number and you'll owe more after the insurance audit; if less work, it's negative and you'll owe less.
During the last year of a vehicle loan, the loan balance should be moved up into Current Liabilities in an account called Vehicle Loan Payoff.
Owner's Equity is all cash and assets invested by owners during start-up. This number never changes. Sole proprietors rarely keep track of this, but corporations are required for tax purposes.
|Long Term Liabilities|
|Vehicle Loans Payable||$16,932|
|Total Long Term Liabilities||$16,932|
|Total Net Worth||$316,161|
|Total Liabilities + Net Worth||$458,691|
Retained Earnings is the value of all money left in the company since its inception, including positive amounts, such as profit and additional owner contributions, as well as negative amounts, such as losses and owner draws (in excess of payroll).
Your Profit/Loss Statement is revenue less expenses from current operations as reported on the Income Statement.
Total Liabilities + Net Worth: This line gives this statement its name because it "balances" against Current Assets.