Accounting for the SMALL Businessperson

ACCOUNTING is all about…

Keeping the books involves income, sales, estimated, and self-employment taxes; making a living, financial statements like the income statement and the balance sheet; rules for classifying you as a “hobby” or a “business”; getting a business license; other types of licenses; a definition and explanation of the Books; accounting terms used by sole proprietors and their proper order; the difference between cash basis and accrual basis; how often you need to track assets, liabilities, and equity; what the well-organized record box contains; the length of time such records are generally required; and, various methods for keeping records.

The three major reasons to keep track of artwork you have created; the 20+ categories of minutiae, which I’ve found very handy for last minute entries; computer database programs—the minuses and pluses; a sample data tracking form to get you started; quick information about filing for a copyright; credits for…; what’s needed to validate insurance you may be carrying on your artwork; creating a mailing list; and, just plain being prepared for anything…

Discusses Schedules A & C, Home Office, Personal Property and the types of deductions; details most of the deductions—allowable and unallowable; the percentage allowed for each deductible and the exceptions; cautions you about tracking iffy deductions; a long list (I’m sure it’s still incomplete) of IRS forms, publications, and bulletins; how to determine what percentage of your home is office space and what to do about it; surprising (and scary) information about your need to issue 1099s; a sample expenses sheet for your perusal; revelations about the Owner’s Draw and the Owner’s Contribution; how you record your using your own money to buy things for your business; and, the opposite, how to record using business money to buy something for yourself that is not a business expense.

Setting up a system to track income; definition of income; avoiding paying too much in taxes; examples of income statements and balance sheets; what the practical purpose is of income statements and balance sheets; trick for keeping a paper trail; spreadsheet examples of monthly and annual income statements and a balance sheet; definition of a balance sheet; pointers about a simple check-and-balance;…

When to collect and when not to; where to learn exactly what you must collect in sales taxes right down to the city, county, and state; issues to consider when doing mail order or out-of-state sales; nexus; how to treat barters or trades; when to collect on layaways, on spec, and credit sales; which parts of the sale are taxable and which are not; and, the many ways in which individual states differ in their expectations…

Every city or county seems to have extra percentages in the form of district improvements tacked on to the usual state or county sales tax rates:…

Fiscal records is about keeping you out of trouble and the IRS happy…well, as happy as they can be. Dealing with business and personal papers and their primary objectives; lists of those records which must be kept and for how long (2-years, 3-years, 4-years, 5-years, etc.); a delineation of what is considered income and expense; lists of periodic fiscal and documents records; and, payroll record requirements.

Downloadable Forms from ACCOUNTING for SMALL Businesspersons

Create your own inventory tracking form as well as editable, Excel-produced spreadsheets for your own income and expense statements and balance sheet.

• Data Tracking Form
• Monthly Income Statement
• Year-Ending Income Statement
• Monthly Expenses Statement
• Balance Sheet

From Chapter 5: Expenses

Chart of Accounts

The information for your balance sheets and income statements comes from your Chart of Accounts (while asset, liability, equity, and income are a part of a Chart of Accounts, expenses takes up the majority of such a chart).

The major categories, also known as individual accounts, in a Chart of Accounts are assets, liabilities, equity, revenue, and expenses. Naturally, depending upon your business, each major category can be broken down into sub-categories.

Table 3 (below) goes into detail on the various accounts in the Chart of Accounts including Advertising, Bank, Inventory, Office Supplies, Travel, etc.; anything that pertains to your business. Each asset/liability/equity/income/expense can be assigned a code (identifier) which is used in various types of analyses.

Table 3. Typical expense categories for the artist

Account / Category	% Deductible	What Goes Under This Category…
		The itemization is intended to give a sense of what to put where; it is not complete.
ASSETS (100–199)		See “Terms for a Sole Proprietor” on page 9
Fixed Assets Also known as, Business Assets	See “continued Depreciation / Amortization” on page 27	For most artists, these things are expensive relative to our income so they would need to be depreciated. If the purchase is low enough, it could be an expense.
		Air compressor Air purifiers Carts, Elfa baskets Cash registers Chairs Computers (must be used in your studio / place of business Credit card terminal Darkroom equipment Delivery / Freight charges for business assets Display fixtures Fax machines	Furniture – chairs, tables, cabinets (filing, printer, tower, etc.), desks Humidifiers Microwave Modem Phones Postage meters Stereo system or television VCR system (may have to depreciate) Typewriters Vacuum cleaners Window shades and blinds
		See “Terms for a Sole Proprietor” on page 9
LIABILITY (200–299)		Paying off a loan (A loan is not income, not an expense, and not deductibel although interest paid is deductible (see “Interest” on page 31). Mortgage for Building and/or Land (this includes a “Home Office”
EQUITY (300-399)		See “Terms for a Sole Proprietor” on page 9
INCOME (400-499)		See “Terms for a Sole Proprietor” on page 9
EXPENSES (500-599)		See “Terms for a Sole Proprietor” on page 9
Advertising	100%	Promotions Flyers Brochures Catalogs Photography Portfolios Show costs Mailing list rentals and purchases Minor, routine, and on-going design costs	Graphic and package design costs such as logos, letterhead (unless a lot of money is involved – then depreciate it) Web pages

From Chapter 7: Financial Statements

Balance Sheets

A balance sheet is a snapshot picture of your business since the very beginning. You will use this anytime you apply for a business loan or at year’s end when you want an idea of how good a year it’s been for the company in terms of equity, assets, and liabilities.

Table 3. Spreadsheet displaying example of a Balance Sheet

(One of the editable, download samples)

The “Opening Entries” is your initial inventory (stash of fabrics, tools, equipment) — what you brought into the business when you first started. “Income” and “Expenses” are what happens after you start your business/hobby. As the plus (+) and minus (-) symbols indicate below the column headings, that’s how you add or subtract the information in that column to arrive at the + or – figure under “Balance as of …”.

There is a built-in fail-safe to check your math:

1. Add the entries across the columns and total the column under “Balance”
2. Then add up each column totaling the column totals across to see if it all adds up to the same total balance

A balance sheet gives you an overview of where your money actually goes as well as from whence it comes. This can help you to target problem areas. Maybe you’re buying too much fabric…(as if !)… Perhaps you’re not selling as many reproductions as you’d thought. Possibly, the teaching and lecturing is paying most of the bills… The balance sheet can help you determine where you need to concentrate your efforts and where you should cut back. I kinda feel like I should have a Balance Sheet for Time!!

From Chapter 8: Collecting and Recording Sales Tax

Also known as, Gross Receipts Tax; Use Tax; General Excise Tax

Each state seems to have its own word grouping to describe a sales tax hence they are also known as: gross receipts tax, use tax, or general excise tax. Every time I called to find out about collecting sales tax, it seemed as though that pencil pusher would be deliberately obtuse (maybe they were just plain stupid…nahhh…) when I called or wrote to ask about their sales tax policies. Be persistent. You would think that their being in the business of collecting revenues, they would have some clue if you contacted them about sales tax. Instead, develop a collection of words to help you penetrate their fog.

Determine your sales tax collection requirements:

•    City
• + County
• + State
• = Total Sales Tax

A sales tax is a percentage of the amount of a sale and is a tax imposed by your home state/county/city on certain types of sales, which you, the seller, must collect from the buyer. As usual, exceptions abound. Sales to a government agency, religious or charitable organization, an out-of-state sale or a fee-for-service are considered “wholesale” and generally not subject to sales tax. Each state has different priorities, policies, and rates. For additional or more detailed information from a state(s), see the Federation of Tax Administrators’ website. This site has a map and you can click on the region of the country that you need. This will show the member states for that region and will route you through to the state’s official website where there are a ton of contact numbers for more things than you can imagine. Check the city and the county for all the figures as a city will only give the sales tax required by the city; the county will provide the figures, which they require.

The rate to be collected will vary by state, county, and, sometimes, by city. In my case, I live in unincorporated Arapahoe County in Denver, Colorado and they require that I collect 2.9% of in-state sales for the state’s sales tax plus 0.25% for county sales tax, the Regional Transportation District (RTD) sales and use tax is 1.0%, the Metropolitan Football Stadium District (MFSD) and the Scientific and Cultural Facilities.

District (SCFD) sales and use tax is 0.1% each for a total 4.17%. If I lived in the city of Denver, a home rule city 1, which is also Denver County, I would collect a general sales tax of 3.62% plus RTD, MFSD, and SCFD taxes of 1.2% plus the state tax, 2.9%, for a total of 7.72%; Jefferson County is 5.1% (5.03% if you live in Lakewood); Boulder is another home rule city and you would collect 7.161% (if you are based in Old Town Niwot or Cottonwood, add another 1.0% and collect 8.161%).

In Colorado, you don’t have to collect sales tax on sales under 17¢, wholesale, government agency, religious or charitable organizations, service sales, or out-of-state sales.

Do break it down by each city/county/district/category/??? as they usually ask for this information separately on the sales tax report.