Equity: The goal and purpose of business

The third and final part of the balance sheet is the equities, or capital, section. This will look different, depending on the structure of your business. Like I've mentioned before, The equities are the net result of everything else that occurs in your business during a period of activity, whether it's monthly, quarterly or yearly. As you generate sales, incur expenses and pay or get paid for these activities, the results impact your equity. Part of the closing of your books takes the net of income and expenses and moves it into equity. Some of the money you receive will pay down loans or accounts payable, buy assets or maybe get put into an asset. Maybe your sales went up but they were all charge sales. So...your receivables go up, an increase to assets. Maybe you didn't have to pay your 6-month insurance premium, so you still have some money in your bank account. When all of this activity is finalized for whatever reporting period you're looking at, the end result hits equity.

Remember the reason for the name "Balance Sheet". Assets must equal, or balance with, liabilities and equity. So, to follow a little bit of algebra (using an equation), Assets minus Liabilities must equal equities. Sometimes you will take money out of your business by way of the drawing account. This gets counted against equity. The final answer to all of these ups and downs throughout the month gets finalized to a "net equity" figure. This is how much your business is worth after everything else is wrapped up. The point to running a business is to see this figure grow. The result is that your net worth, or your partners' or your shareholders' stake in the business. In a sole proprietorship, this is called owner's equity. A corporation has shareholders' equity and retained earnings. Partners' shares are also separated by each partner's stake in the business. As any owner's or shareholder's value of the business grows, it is a return on investment.

This is the world of capitalism. The capital of a business is expected to grow. This is the reward for taking the risk of running a business or placing your money into it to help it grow. My commentary: The growth of capital is not only to benefit you, but also to be used for the good of others. When the U.S. uses its capitalist profits around the world for the good of those in need, it has done the right thing.

Go be a capitalist. Have a great weekend.

Gary