Blue Sky – Owner’s Equity

MP900433095

Dear M & M:

I have heard the term blue sky, what does it mean?

– Amanda

Dear Amanda:

“Blue sky” is an informal term that means, according to Merriam-Webster, “having little or no value” and “not grounded in the realities of the present.” The term is often used in reference to the intangible value of a business. Business usage of the term “blue sky” is probably best replaced with the term “goodwill” which does specifically refer to the intangible value of a business. Goodwill is defined as the difference between the purchase price of a business and the tangible assets being acquired. It represents the total intangible assets of a business. Goodwill may consist of customer and vendor relationships, branding, trade name, intellectual property, or any other asset not capitalized on the balance sheet. A formula used to better explain the term would look something like this: Purchase price – tangible assets (inventory, cash, building, land, equipment) = Goodwill (Blue Sky). Blue Sky generally speaking is an immeasurable asset and perhaps unsupported value above that of the real tangible assets. I caution not to place much value on Blue Sky. Blue sky is often a ‘hidden’ increase and sometimes an over evaluation of the business.  It’s often referred to as the ‘potential’ a business has because of past marketing campaigns, customer recognition, location, or awareness of the products or services offered to the public and reputation. Before I’d place much value in blue sky, I would ask myself one question. If the blue sky has such potential to achieve greatness, why hasn’t it?

-M&M

 

Dear M & M:

What does the term owners’ equity mean?

– Laura

Dear Laura:

The term owners’ equity is the owners’ interest in the assets of a business. Owners’ equity includes the amount invested by the owners plus the profits (or minus the losses) in the enterprise. Owners’ equity and liabilities are used to finance a firm’s assets. Sometimes owners’ equity is also called net assets, shareholders’ equity, and stockholders’ equity. Owner’s equity represents the owner’s investment in the business minus the owner’s draws or withdrawals from the business plus the net income (or minus the net loss) since the business began. Mathematically, the amount of owner’s equity is the amount of assets minus the amount of liabilities. Since the amounts must follow the cost principle (and others) the amount of owner’s equity does not necessarily represent the current fair market value of the business. In the company chart of accounts there are generally two accounts set up to track owners’ equity (capital and drawing). Capital: 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: 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.

-M&M

To ask your questions: Call the Small Business Development Center(SBDC) at Cochise College (520)-515-5478 or email schmittm@cochise.edu or contact the Sierra Vista Economic Development Foundation(EDF) at 520-458-6948 or email  hollism@svedf.org .

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