Month: September 2015

September 17, 2015

“What the…?” Part 3: What is a Balance Sheet???

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“What the…?” Part 3: What is a Balance Sheet???

September 17, 2015

Ah, the balance sheet. So overlooked, so misunderstood, so integral to your business. You are not alone if you can honestly admit you have NO CLUE how to read this report or have the foggiest idea what it means. Let’s break it down, shall we?

The Balance Sheet is like a snapshot of your business, showing its health. Rather than covering a period of time, a balance sheet report is for a certain date, usually at the end of a period (like the 31st of a month, end of a quarter, or 12/31 of the year).

The Accounting Equation. Some of you may have heard of the accounting equation in Business 101 or possibly in a small business class. What is the accounting equation? It is the formula for the Balance Sheet:

Assets = Liabilities + Owner’s Equity

Let’s break it down further. Assets consititute stuff that is yours or money owed to you. Cash from banking/savings accounts, your accounts receivable (money owed to you by customers), any loans you’ve provided to other people, inventory, furniture, fixtures, equipment, buildings and land that you own. These are all things that belong to YOU and cause you to slide toward positive on the net worth scale. Typically, assets are listed in order of liquidity (how quickly you can convert them to cash), starting with cash, ending with buildings and land.

Conversely, liabilities are any money you owe someone else. Any bills that you haven’t paid, credit card balances, lines of credit, short- or long-term loans, etc. This is all money that is owed to another person, vendor, bank, or business. Having high liabilities can push you toward negative net worth. Even though these seem like negatives in our minds, all numbers are listed in the positive on the balance sheet (this can get confusing when there are true negative credit accounts, but we won’t go there for now).

Finally, we have equity (aka owner’s equity). The accounts here vary in type and name depending on your entity (how you file your business taxes…consult with a CPA if you’re unsure or if you think it’s time to revisit this conversation), but they basically all behave the same way. This section of the balance sheet contains several important pieces of information:

Shareholder Contributions. How much money owners (aka partners/shareholders/investors/you and your family) have contributed to the business. This is called many things; paid-in capital, capital stock, contributions from shareholders, cash infusion, etc. and is different from income. This is money put into your business NOT from operating activities, but due to infusing your own funds (or funds from shareholders) into the business. Many times you may do this to cover expenses when you don’t have enough cash in the bank.

Dividends. Money taken out of your business and provided to investors/shareholders/owners/partners. This too can have many aka’s: owner draw, partner A draw/partner B draw, distributions, etc. In a very small business, this account may reflect the amount an owner pays herself.
Retained Earnings. This is the business’ earnings over the course of its lifetime after all dividends/distributions have been paid out. It can also be called accumulated earnings. It’s similar to putting money in a piggy bank to save up vs. spending it on something you want now. It can be used much like an emergency fund or a means to invest in new assets, product development or marketing.

Net Income. The amount of revenue you’ve managed to hang onto at the end of an accounting period (month/quarter/year). When placed side by side with your Income Statement for the same period, the net income line will match the very bottom line of your income statement (net income/loss). When your fiscal year is over, this amount is rolled into your retained earnings (or subtracted out if you had a loss) and your net income starts over.

The biggest reason it’s called the balance sheet is because BOTH SIDES OF THE ACCOUNTING EQUATION MUST BALANCE. If they don’t, you’ve got problems on your hands. Using algebra (who knew I’d use this in the real world?), we can change the formula to read:

Assets – Liabilities = Owner’s Equity

Or we can say the stuff we have minus the stuff we owe equals what we own outright. This is also known as our Net Worth.

There are hundreds of ratios and equations that financial minds can put to the numbers in your balance sheet and income statement in order to make determinations about the health of your business (and whether or not investing in your company or loaning you money may be a smart or dangerous proposition). This is why it’s so important to ensure your numbers are correct and balanced.

Does your balance sheet balance? Are you a safe bet or a high risk? Feel free to reach out to us – we can help!

Until next time!

Check out:

Part 1: The Chart of Accounts Explained

Part 2: The Income Statement Explained

September 12, 2015

EMV Chip Cards and the liability shift goes into effect on October 1, 2015!!!

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EMV Chip Cards and the liability shift goes into effect on October 1, 2015!!!

You may have heard that the United States is transitioning to full adoption of EMV chip-enabled cards to reduce credit card fraud. This means that there will be changes to the way payments are made and accepted. We wanted to share a bit more about EMV with you, our ProAdvisors.

What is EMV?

EMV is the global standard for smart card payments and acceptance devices, named after the developers: Europay, MasterCard, and Visa. EMV microchip-enabled cards provide stronger security and other capabilities not possible with traditional magnetic stripe cards.

An EMV chip-enabled card has a square microchip on the front of the card and is something you may already have in your wallet. A special card reader is required to read these EMV chips, but you can still swipe the cards through the same magnetic stripe readers you’re using today.

To encourage businesses to adopt the more secure technology of EMV/chip cards, a liability shift is going into effect on October 1, 2015. Today, if businesses swipe a counterfeit or stolen card, the bank assumes the loss. Starting in October, if businesses swipe a counterfeit or stolen EMV/chip card using a magnetic stripe reader, they could be liable for that charge.

What this means for you and your customers

If there is any concern around fraudulent credit card transactions, your clients may want to get an EMV reader. An EMV device reads the microchip embedded in the card and authenticates that the credit card is valid. This reduces their liability for fraudulent transactions.

Some questions to consider:

  • Do you sell to customers that they don’t know?
  • Do yousell expensive items?
  • If you accept a counterfeit or stolen credit card and can’t collect the funds, would that have a material impact on your business?

To Learn More about the EMV Chip Cards, visit

As always, I’m here if you have any questions!

September 9, 2015

“What the…?” Part 2: The Income Statement (aka Profit & Loss)

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“What the…?” Part 2: The Income Statement (aka Profit & Loss)

September 9, 2015

Does this look a bit more familiar? Of all of the financial statements businesses need to pay attention to, the Income Statement (also called the Profit & Loss Statement) is the most widely recognized. Why?

Because it tells you whether you’re making a profit or a loss, right? Indeed, that is true. Broken down to the simplest explanation, what you see here is money coming in by selling your product/services (revenue) minus money coming out to run your business (expenses). The ending result, if positive, is your profit. If negative, it’s a loss.

As an example, let’s say you have a shoe store. You buy your shoes wholesale for $10/pair, and you sell them at $20/pair. You have a small storefront that you rent for $250/month and you spend $100 to take ads out in the local newspaper. You sell 30 pairs of shoes your first month. Your basic income statement looks like this:


Income Statement

May 1-30, 2015


Sales $600

(less) COGS -$300 (Cost of Goods Sold or COGS: expenses that are tied DIRECTLY to your
sales. If you didn’t sell it, you wouldn’t incur the cost)

Gross Profit $300


Rent $250

Marketing $100

Total Expenses $350

Net Income(Loss): -$50


Shoot, we lost $50 last month. But because we put an ad in the paper, 50 more people now know we’re open and came in to buy shoes. This month you sold a total of 80 pairs of shoes, which equates to $1600 in sales. $800 of that $1600 went to buy shoes at wholesale, so we’re left with a gross profit of $800. If our expenses stay the same, then $800-$350=$450 in net income. One could argue that by investing $100 into marketing, you received an additional 50 customers, equating to a gross profit of $500. If you break this all the way down, you now see that for every $1 you spend in marketing, it gets you an additional $5 in sales. We may decide that the newspaper ad is worth the expense and we’re going to continue the expense. Not bad!

Most income statements for small businesses are quite a bit more expanded than the example I gave you above, but you get the idea. You can put as much detail in your income statement as you’d like. You may want to have one “marketing expense” account, or you may want several: “online marketing,” “print marketing,” and “marketing supplies” in order to help you decide what marketing strategies are working for you and which aren’t worth the added expense.

Always aim to customize this report to give you the most amount of information with the least amount of effort. Don’t get too detailed if you aren’t planning to analyze the expense (ie: having one utilities account is probably fine; you don’t have to break it down by electric, water, sewer, phone, etc unless you intend to explore savings in this area in some way).

The income statement is a wonderful way to analyze your costs to see where you may be spending too much money, or to see if maybe you need to increase your prices. It’s a great tool to track how much revenue is coming in for one type of product vs. another (ie: shoes vs. socks). And yes, it’s a good measuring stick to see if you’re operating at a profit or a loss.

Until next time!

Part 1:  The Chart of Accounts

Part 3:  The Balance Sheet

September 2, 2015

What the …? Chart of Accounts Explained

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What the …? Chart of Accounts Explained

September 2, 2015

“What…in the WORLD…am I looking at? “ you may be wondering. If you own a business and you hope to make ANY relatively informed decisions about the future of said business, you’ll want to become best friends with this list: the Chart of Accounts.

What Is It Exactly?

A Chart of Accounts, when you strip away all the fancy jargon, is simply your list of buckets for classifying the money that comes into and goes out of your business. If you sell widgets, the money you bring in from the sale is Revenue. The money you spend on the items to build the widgets is called a Cost of Goods Sold (also called COGS). The money you spend on electricity and employee pay is an expense. These are just some examples of accounts you will find in EVERY chart of accounts you come across. When you spend or bring in money, each transaction will be classified under one (sometimes more than one) of your accounts in this list.

How do I know what accounts I should use?

Well, first, you should have some idea of what types of information you want out of your reports. Is it important to you to know how much you spend on supplies for your business vs. utilities for your business? If the answer is yes, then you’re going to want to make separate expense categories for these two types of transactions. A great idea is to use a search engine to find a standard chart of accounts for your industry and then customize it from there, depending on how detailed you want your information.

A word of caution! The more detail, the more time this will take you! If you truly don’t need to know line item detail for a certain category, keep it as simple as possible.

How do I know if the transaction is income, expense, cost of goods sold, asset, liability, or equity?

Any accountant or bookkeeper worth his or her salt is going to tell you to ASK if you are not sure, and I will do the same here. Ask! But, as a general rule,

money coming in will be revenue.

money going out will be an expense.

There is much more to classifying your transactions than can be listed in a single blog post. In upcoming posts, I will take you to explore the standard accounts of the Profit & Loss(Income) Statement and the Balance Sheet . Aren’t you so excited?