A Business Start-Up

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Quite a few of us have a dream of working for ourselves. It goes something like this – I will leave my job and take my idea into the world and achieve great success. But so many just dream. In order to make our dreams come true we need to take action, starting today. So just where do you start? At the beginning of course.

Just what does it take to become your own boss and take your ideas and dreams to the level termed as success? It takes an all consuming passion combined with hard work and long hours. If you think working for yourself will be easier than working in your present job, no matter what you do now, you are wrong. You will work longer hours, give up your present life style, sacrifice life’s extras and keep on keeping on long after you thought you could. Sound like fun? It is and it is also rewarding in ways you can not imagine.

First let’s break down some of the sacrifices you will be making for your dream. If you now work an eight hour day, five days a week, realize your new business will take a commitment of 10 to 12 hours a day every day of the week. Any many new business owners work even longer hours to get started. Is this hard? Not if you have a driving passion to succeed.

Your current life style probably needs some adjustments. If you are putting in all these hours, you will not have time to hang out with your friends, occupy the couch watching television. If your hobbies are shopping, club hopping, sport participation or watching then you will be getting a new hobby – it’s called your new business. Although any activity that allows you to get some exercise on a solo basis (such as walking, running, etc) will bring multiple benefits. While you are getting healthy or staying healthy, you can be running ideas through your head – ideas that put into action will make your business succeed.

If you don’t have any responsibilities now except yourself – keep it that way for awhile. While having a mate and/or children doesn’t make success impossible, it will make it harder for both you and them. Family members will need to be onboard with your plans, as they will be making sacrifices as well. Money will be tighter and you will have less time to spend with them. But please do not sacrifice the ones you love for this dream, if it can’t be done now, you can plan for the future now. Or you can take it slower than you would if you were single. However, do sit down and talk this out with your family (include the kids as well). Perhaps they have talents that can be of help. And if you are all working together towards a common goal, they will feel a part of your life, not excluded from it. Also, as much as I love pets of any kind, they also require your attention and care. And you are better off not taking on any kind of responsibility at this time in your life if at all possible. You may need to travel; you will be working long hours. Giving a pet the care it needs and deserves will be problematic. So if you don’t have a pet, now is not the time to get one. If you do, than line up some friends or family members that can pitch in when you can’t. And remember you are not going to have the extra money to pay for pet care in the beginning unless Uncle Harry left you a fortune or you were lucky enough to win the lottery.

About this time you are probably thinking that your job isn’t all that bad. But if your dream is still beating strong within you, then know that the rewards that come from the sacrifices are wonderful. Should you succeed you will not only be rewarded with more money and a better life style, but also the unbeatable feeling of winning against all odds.

In the next chapters, we will be covering planning for your new business, financial issues, legal and tax matters, marketing and once you have gone through the start-up phase how to continue to grow.

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Prepaid Expenses

Copyright 2006 Bookkeeping R Us All Rights Reserved

Prepaid expenses belong on the balance sheet and can encompass costs such as rent, insurance, advertising, and any other cost that normally would be expensed on your income statement but is paid in advance of the period in which it is owed. Prepaid expenses differ from deposits as they will be used up within a specific period (usually within a year) as a deposit could be carried until the end of a contract when ever that might be. For example, prepaid rent would be an upfront prepayment of the yearly rent, but a rental deposit would be tied in with certain contract obligations and not be an actual expense until the end of the contract.

Should you, for example, pay for your yearly insurance premium in one lump sum then you would charge this premium to an account called Prepaid Insurance. The entry would be:

Debit: Prepaid Insurance Expense $(amount of yearly premium)

Credit Accounts Payable or Cash $(amount of yearly premium)
(Depending on method of payment)

Each month a general journal entry would be made expensing one month’s premium cost. This entry would be as follows:

Debit: Insurance Premium Expense $(1/12 of yearly premium)

Credit Prepaid Insurance Expense $(1/12 of yearly premium)

Handling prepaid expenses in this way assures you are following the rule of matching revenue with expense. You can see if you were on a calendar fiscal year ending December 31st, and your insurance premium was due on November 1st to expense the entire premium in November would be inappropriate.

Although, an insurance premium is the most common prepaid expense, there are several others that you might come across. Anytime you pay an expense, no matter what type, that will have a timing effect on your books; you should consider using a Prepaid Expense account on your balance sheet for that expense.

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Is It a Fixed Asset?

Copyright 2006 Bookkeeping R Us All Rights Reserved

I often am asked this question by bookkeepers and business owners alike. The Internal Revenue Service defines a fixed asset as property used in a trade or business or in an income producing activity that wears out or becomes obsolete and it must have a determinable useful life substantially beyond the tax year. This might include tangible real estate property and personal property and what is referred to as intangible property.

Examples of tangible real estate property would be of course buildings and the land they sit on as well as any improvements made to the property. And while land is considered a fixed asset, the IRS rules do not allow the value of the land to be depreciated. Therefore, with real estate property the value of the land is kept in a separate balance sheet account from the value of the building. Often in real estate transactions there are closing costs and legal fees. The IRS may consider these expenses to be part of the cost of buying the building and will expect those costs to be added to the value of the building and depreciated over the life of the building. Check with your tax preparer for further clarification.

If you rent space to operate your business in then the rent is an expense that can be written off in the accounting period it is paid or accrued. However, should you make improvements to your rental space then that expense is considered to be Leasehold Improvements and if your lease extends beyond a year then those improvements would be looked at as fixed assets. Be careful with this one as some business leases might go from year to year but if you are staying beyond the term of the one year lease (renewing your lease that is) those improvements could be looked at having a life that meets the definition of a fixed asset.

Some examples of personal tangible fixed assets are equipment, tools, office furniture, computer equipment, vehicles, etc. All purchases of these types of assets must be considered as fixed assets unless there will be no residual value to them after one year. When considering the cost of an asset include all costs involved in putting that asset into use. For example, if you purchase a computer system the fixed asset cost would include the CPU, monitor, and printer as well as any additional equipment purchased with the computer that defines its use.

Intangible property could include copyrights or patents that would expand beyond a tax year.

Remember the key to defining whether an item purchased is a fixed asset or an expense is the answer to this question: “Will this item have a monetary value after being used beyond one year?”. And while a $5.00 screwdriver might have value to you far beyond one year I doubt you would be able to sell it hence it has no discernable monetary value. While making this decision think of the use of the item and the cost of purchasing the item. Usually items costing less than $500.00 have no residual value after a year’s use. And of course should you have any question at all, check with your accountant or tax preparer.

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