Liabilities and Owners’ Equity in Balance Sheet Accounts
The Chart of Accounts for a business includes balance sheet accounts that track liabilities and owners’ equity. Liabilities include what your business owes to others, such as vendors and financial institutions. Liabilities are lumped into two types: current liabilities and long-term liabilities.
Owners’ equity includes all accounts that track the owners of the company and their claims against the company’s assets, which includes any money invested in the company, any money taken out of the company, and any earnings that have been reinvested in the company.
Current liabilities are debts due in the next 12 months. Some of the most common types of current liabilities accounts that appear on the Chart of Accounts are:
Accounts Payable: This account tracks money the company owes to vendors, contractors, suppliers, and consultants that must be paid in less than a year. Most of these liabilities must be paid in 30 to 90 days from initial billing.
Sales Tax Collected: You may not think of sales tax as a liability, but because the business collects the tax from the customer and doesn’t pay it immediately to the government entity, the taxes collected become a liability tracked in this account. A business usually collects sales tax throughout the month and then pays it to the local, state, or federal government on a monthly basis.
Accrued Payroll Taxes: This account tracks payroll taxes collected from employees to pay state, local, or federal income taxes as well as Social Security and Medicare taxes. Companies don’t have to pay these taxes to the government entities immediately, so depending on the size of the payroll, companies may pay payroll taxes on a monthly or quarterly basis.
Credit Cards Payable: This account tracks all credit card accounts to which the business is liable. Most companies use credit cards as short-term debt and pay them off completely at the end of each month, but some smaller companies carry credit card balances over a longer period of time.
How you set up your current liabilities and how many individual accounts you establish depend upon how detailed you want to track each type of liability. For example, you can set up separate current liability accounts for major vendors if you find that approach provides you with a better money management tool.
Long-term liabilities are debts due in more than 12 months. The number of long-term liability accounts you maintain on your Chart of Accounts depends on your debt structure. The two most common types of long-term liability accounts are:
Loans Payable: This account tracks any long-term loans, such as a mortgage on your business building. Most businesses have separate loans payable accounts for each of their long-term loans.
Notes Payable: Some businesses borrow money from other businesses using notes, a method of borrowing that doesn’t require the company to put up an asset, such as a mortgage on a building or a car loan, as collateral. This account tracks any notes due.
In addition to any separate long-term debt you may want to track in its own account, you may also want to set up an account called “Other Liabilities” that you can use to track types of debt that are so insignificant to the business that you don’t think they need their own accounts.
Owners’ equity accounts
Every business is owned by somebody. Equity accounts track owners’ contributions to the business as well as their share of ownership. For a corporation, ownership is tracked by the sale of individual shares of stock because each stockholder owns a portion of the business. In smaller companies, equity is tracked using Capital and Drawing Accounts.
Here are the basic equity accounts that appear in the Chart of Accounts:
Common Stock: This account reflects the value of outstanding shares of stock sold to investors. A company calculates this value by multiplying the number of shares issued by the value of each share of stock. Only corporations need to establish this account.
Retained Earnings: This account tracks the profits or losses accumulated since a business was opened. At the end of each year, the profit or loss calculated on the income statement is used to adjust the value of this account.
Capital: This account is only necessary for small, unincorporated businesses. The Capital account reflects the amount of initial money the business owner contributed to the company as well as owner contributions made after initial start-up.
The value of this account is based on cash and other assets contributed by the business owner, such as equipment, vehicles, or buildings. If a small company has several different partners, then each partner gets his or her own Capital account to track his or her contributions.
Drawing: This account is for businesses that aren’t incorporated. The Drawing account tracks any money that a business owner takes out of the business. If the business has several partners, each partner gets his or her own Drawing account.