Let’s explore the key components:

• Assets: Resources owned by the company that have economic value. Assets are typically classified into two categories:
  • Current Assets: Assets that can be converted into cash or used up within one year.
    • Examples: Cash and Cash Equivalents (money in your bank account, petty cash), Accounts Receivable (money owed to your business by customers), Inventory (clean cookstoves, briquettes, solar cooker parts waiting to be sold), Other Current Assets.
  • Non-Current Assets (Fixed Assets): Assets that are not expected to be converted into cash within one year; they are used for long-term operations.
    • Examples: Property, Plant, and Equipment (PP&E) (like your shop building if you own it, machinery for briquette production, vehicles for delivery).
  • Liabilities: Obligations or debts that the company owes to outside parties. Like assets, liabilities are also classified into two categories:
    • Current Liabilities: Obligations due within one year.
      • Examples: Accounts Payable (money your business owes to suppliers for purchases on credit), Short-term Loans (loans to be repaid within a year), Accrued Expenses (expenses incurred but not yet paid, like utility bills due next month).
    • Non-Current Liabilities (Long-Term Liabilities): Long-term obligations that are due beyond one year.
      • Examples: Long-Term Debt (loans with repayment terms longer than one year), Other Non-Current Liabilities.
    • Equity: Also known as owner’s equity or shareholders’ equity, it represents the residual interest in the assets of the company after deducting liabilities. It’s essentially what would be left for the owner if all assets were sold and all debts were paid off. Components of equity may include:
      • Owner’s Capital/Common Stock: The initial investment made by the owner(s) into the business.
      • Retained Earnings: The cumulative profits that a company has earned to date that have been reinvested in the business rather than paid out as dividends.
        • Formula: Retained Earnings (current year)=Retained Earnings (previous year)+Net Earnings (current year)−Dividends Paid

Example  If Jemal had ETB 50,000 in retained earnings at the end of last year, and his business made a Net Profit of ETB 20,000 this year, and he didn’t take any dividends, his new retained earnings would be ETB 50,000+20,000−0=ETB 70,000. If he took ETB 5,000 as a dividend, his new retained earnings would be ETB 50,000+20,000−5,000=ETB 65,000.