Small business - takings by owner and taxes.

[Henry Bremridge]

On Wed, Apr 19, 2006 at 02:38:10PM +0800, Wouter van Marle wrote:
> On Wed, 2006-04-19 at 01:26 -0400, Derek Atkins wrote:
> > You misunderstand me.  This is just a reduction in equity.  It
> > has no bearing on Income or Expense.
> 
> OK fine, but now I've a seriously negative equity. I don't think that's
> so much the idea either. Account tree (part):
> - Equity (initial investment minus takings)
> - Bank account (bank)
> - Expenses
> 
> Now I make transfer from bank to equity. And then the equity of the
> company goes negative, as the capital takings decrease the equity. Is
> that sound? Or do I have to channel profits back to equity?
> 
> What is the meaning of "equity" really, anyway? (I'm not a native
> English and certainly not a bookkeeper).
> 
From a newbie: (and beware this is counterintuititive)

Balance Sheet

-   Equity is the amount owed BY the company TO the owner
    =   Capital contributed + Net Profit of the company
-   Liability is the amount owed BY the company to other persons
-   Assets is the amount owed TO the business (customers who have not
    paid their bills) and the amounts owned BY the business (eg
    computers)

    Therefore (equity + liability) = total assets

Profit and Loss

+   Net sales (self explanatory or can be equal to total cash received)
-   Total Expenses (can be total cash spent)
=   Net Profit

Therefore if you are withdrawing money from your business there are two
places it can be shown

1/  As a reduction of equity. In which case the accounting is 
    Dr Bank (Asset, assuming you have money in your bank account)
    Cr Equity (Equity is a liability and hence by adding the withdrawal
    to negitive balance you are reducing it)

2/  As an expense of the business ie a salary. 

Also have a look at http://en.wikipedia.org/wiki/Shareholders'_equity
    

> Wouter.
> 
> > 
> > -derek
> > 
> > Quoting Wouter van Marle <wouter at squirrel-systems.com>:
> > 
> > > On Wed, 2006-04-19 at 01:14 -0400, Derek Atkins wrote:
> > >> Checking -> Expenses:Capital Withdrawal
> > >
> > > The problem in this is that capital withdrawal is not an expense. It
> > > should not be deducted from the profits before tax.
> > > Or do I misunderstand you?
> > >
> > > Wouter.
> > >
> > >>
> > >> -derek
> > >>
> > >> Quoting Wouter van Marle <wouter at squirrel-systems.com>:
> > >>
> > >> > Hi all,
> > >> >
> > >> > As small business owner, I want to take some of the profits now and then
> > >> > for own use. In accounting terms, this is not a salary (as what I pay to
> > >> > my employee - this I can book directly as an expense), though it is
> > >> > taken out of (usually) the bank account of the business, but it is not
> > >> > an expense.
> > >> >
> > >> > How to book these transactions properly?
> > >> >
> > >> > Then I've a small issue with last year's tax. The 2005/06 tax year has
> > >> > just ended (the fiscal year starts on 1/4); but I only just got the tax
> > >> > payable over the '04/05 tax year. That should be an expense for the
> > >> > previous year, however the payment will be done in this year of course.
> > >> > Any easy way to correctly do this?
> > >> >
> > >> > Wouter.
-------------- next part --------------
A non-text attachment was scrubbed...
Name: not available
Type: application/pgp-signature
Size: 191 bytes
Desc: Digital signature
Url : http://lists.gnucash.org/pipermail/gnucash-user/attachments/20060419/9bd68350/attachment.bin