One of the benefits of good business accounting is that if you discover missing information, you can often find what it is from the rest of your records. For example, if your business received cash as an additional investment, but you didn't record the amount, you can figure it out by studying your balance sheet.
TL;DR (Too Long; Didn't Read)
You find additional investment as part of the owners' equity on the balance sheet. Equity equals the equity on the previous balance sheet, plus additional owner's investment, plus net income, less shareholder dividends or owners' draw. You can figure out the additional investment if you know the other numbers in the equation.
Equity on the Balance Sheet
Underneath all the details, the balance sheet for your business is an equation: Your total assets minus your liabilities equals the owners' equity. For example, suppose your partnership has assets of $275,000 and liabilities to pay off of $180,000. The equity is $95,000, which is what the owners would divide up if the company closed its doors, sold its assets and paid off its debts.
There are several ways owners' equity changes, year to year.
- Your company earns a profit. Rather than distribute all of it to the owners, you retain some of the earnings, increasing equity.
- You issue additional stock, bringing in more money.
- If your business received cash as an additional investment from you or your business partners, that increases owners' equity.
- Withdrawing some of your investment reduces equity.
Investing and Withdrawing
For an example of received cash as additional investment, suppose you're in a three-person partnership. Your company ended last year with $360,000 in assets and $120,000 in liabilities leaving $240,000 in owner's equity.
This year, you're planning to buy your own office building, add staff, and take other steps to expand. You agree to put another $120,000 additional investment into the company, raising owners' equity to $360,000.
Alternatively, one of you might withdraw $40,000 from equity, reducing it to $200,000. The amount of equity each of you gets to withdraw should be worked out in the partnership agreement.
Additional Investment Formula
In a partnership or a sole proprietorship, the owners' capital accounts should show how much additional investment they contributed in a year or any other accounting period. If there's a screw-up in the accounting, you can reconstruct most of the information from the balance sheet.
The equity formula is:
Equity = received cash as additional investment - last year's ending equity + net income - owners' draws
You can use this formula to figure out the additional investment formula, as in this example:
- Last year's balance sheet reported owners' equity of $600,000. Net income this year was $350,000, and owners drew out $300,000. That gives you a total of $650,000 in equity.
- This year's balance sheet shows you actually have $800,000 in equity after subtracting liabilities from assets.
- The additional investment formula shows the business received cash as an additional investment to the tune of $150,000.
Dividing Up Investment
Even if you can figure out the amount using the additional investment formula, you may not be able to figure out how much money each owner contributed. It's much preferable to keep track of capital accounts and owner withdrawals throughout the year. Arguments over how to divide up equity are a common problem for small businesses.
It's not just a matter of tracking the amount of received cash as additional investment. Different partners contribute different amounts and in different ways. You might contribute technical know-how, another partner might provide administrative expertise, and a third puts up most of the money. Figuring out how much each of you is entitled to withdraw takes a lot of thought and negotiation.
At the start of the company, you may not be sure how much each owner will contribute. Sometimes starting with a tentative agreement, then waiting a few months to sit down and negotiate is the best move.
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com