sole proprietorship with respect to my PERSONAL books?

[Ian Konen]

I cannot speak for Paul, but I found your answer, as well as this whole
thread, quite helpful.   I'm in a similar situation (new to running my own
business and and not coincidentally new to using double entry bookkeeping
and GnuCash in particular).

Just to be clear, it doesn't matter if I have a separate checking account
or credit card with some bank in my business's name (previous posters in
this thread may disagree but I don't think you're disagreeing...I don't yet
have any business specific accounts with a bank, but whether I should is a
whole separate question outside of the limits of what accounting principals
can tell me.  It's a service business with few expenses and capital
requirements so it hardly seems worth it).  Keeping a separate record of
business and personal finances by using separate books is what will allow
me to judge how profitable my business really is (if I earn a huge windfall
and blow it all on caviar and Dom Perignon, my books should show that I run
a profitable business but am an irresponsible human being)

The part I'm still a little confused in is in each book, what kind of
account should represent the other entity (I also have a sole
propritorship, like Paul)?  I had set up an expense and income accounts in
my personal books representing my business (business expenses are generally
made using a personal credit card or cash, customer payments are either
cash or deposited into a personal checking account) but based on an earlier
answer in this thread, I'm wondering if the business should be represented
by an asset in my personal finances.  It wouldn't be hard to change now (as
I said, it's a new business).  The expense / income pair seemed to make
sense for a sole proprietorship because there is no legal separation from
my personal income and assets for tax or liability purposes, but the
business expenses are allowable tax deductions.  I don't really need to be
able to pull total business expenses out of my personal book for tax
deduction purposes, though, as long as that information is easy to get from
the business book.  In the business book I have the equivalent transactions
recorded as debits and credits to a "retained earnings" equity account
(it's a default account the GnuCash wizard setup for business books and it
sounded about right.  What can I say, I'm learning by trial and error :-)).


On a related question, my one important expense is driving.  I go to
customer locations so every "sale" of my service has a cost component for
the drive to and fro.  The U.S. tax code allows me to deduct $0.55 cents
per mile, which represents the cost of gas as well as maintenance and
depreciation.  It's also a useful approximation to judge how profitable my
business really is (understanding that real per mile cost could vary wildly
car to car, but it's also difficult to separate real operating costs into
business and personal contributions) In the business books I set up a
liability called "Accrued Car expenses" which I transfer funds from to a
"per mile driven" expense account every time I make a sale.  It seems to
have the desired effect on reported profits, and if N years down the line I
wanted to figure out how much driving my car for my business really cost me
(I do record gas, maintenance and asset price of the car in my personal
book, I would just have to figure out what mileage fraction came from the
business use) I could enter the correction as an adjustment...somewhere?.
 I realize this is more of a statement than a question, but my question
is...does this sound like I'm doing it right?  Any other tips / criticism?
 Would you do it differently even if my approach is technically valid?



On Thu, Feb 14, 2013 at 9:40 AM, jcard21 xxxxxxx
<jcard21+gnucash at gmail.com>wrote:

> On Wed, Feb 13, 2013 at 6:19 PM, Paul Elliott
> <pelliott at blackpatchpanel.com> wrote:
> >
> > I have separate bank accounts for business and personal.
> >
> > I keep track of both separately. That is why I have 2 separate
> > books.
> >
> > But reality is that I had to fund the business with personal
> > money. And that I intend to spend personally some of the money that the
> > business makes.
> >
> > Thus money has to flow between the entities.
> >
> > The question is, how to account for this, when I have 2 sets of books
> > like everyone recommends. No one would want to own a sole
> > proprietorship hermetically sealed off from the rest of one's
> > life. People create sole proprietorships to make money that they want
> > to spend.
>
> At the risk of making you more frustrated:
>
> • You are still THINKING of your personal finances and business
> finances as one entity (re-read your statements, above: "money has to
> flow", "No one ... hermetically sealed", the business makes money you
> personally want to spend); This is incorrect thinking.
>
> • Personal and Business Accounting is to be kept separate, in gnuCash
> AND in your thinking.
>
> • To help, try thinking of the business as SOMEONE ELSE's business.
>
> • Why are you PERSONALLY give this business money? a loan, an
> investment, are you buying a product, something else?
>
> • Why is the BUSINESS give you PERSONALLY money? A salary, a loan
> payback payment?
>
> • EVERY transaction between your PERSONAL and BUSINESS entities, no
> matter in which direction, you need to give a separate logical
> accounting reason for the transfer.
>
> When you can answer these questions (we cannot answer them for you),
> then you will know how to set up your gnuCash accounts to account for
> these transactions.
>
> I truly hope this helps you.
>
> --
> jcard21
>
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-- 
Ian Konen
iankonen at gmail.com
www.linkedin.com/in/iankonen
978-821-6498