Reimburse Owner for Startup Costs

1

I invested about $3k in startup costs of my sole trader business a couple years ago. This was before I switched to Manager from using a spreadsheet. Although the business is profitable, it is a part-time venture right now and I haven’t had the need to take a salary or draw out any cash.

My Owner’s Equity is comfortably above my initial investment and I would like to reimburse myself for the $3k in startup costs. Only about $1k of those costs are shown in the Starting balance equity on the Summary Page (due to beginning inventory values). The other $2k invested came from misc. expense items such as small tools, office expenses, etc.

I was wondering how to make a one-time payment from the business to myself (vs. a salary) so that, going forward, the Owner’s Equity was an accurate representation of accumulated profits.

2

There are several issues buried in your question.

The first is wether some or all of the startup costs should have been capitalized and then amortized or depreciated according to IRS rules. That is well beyond the scope of this forum. Consult an accountant for advice on that.

Another is what is actually contributing to that Starting balance equity. There should only be a balance in that account if you transferred equity from a previous accounting system. You haven’t given enough information to know the actual situation. Depending on what makes up that balance, it would be nice to transfer it elsewhere to clean up the balance sheet. That may or may not be possible. But for example, if you made a deposit of the $3K to your business bank account after you started using Manager, there should never have been a balance. Or if you spent your own money buying office equipment, that should have been entered via an expense claim. The bottom line is that having a Starting balance equity is not unheard of, but a little unusual, and raises some questions, especially when users are new to accounting. (Of course, I know nothing of your expertise.)

Finally, to reduce Owner's Equity and pay yourself, just Spend money from a cash account and post the transaction to Owner's Equity. That was the easy question.

3

If you always intended to reimburse yourself (not leave the funds in the business), then the 3k should be shown as a loan to the business, not as equity. Then any repayment can’t be misconstrued as you drawing a salary.

Therefore your starting balances should reflect this
Asset - Inventory 1000 (debit balance)
Liability - Loan Acct 1000 (credit balance)

How was the other 2k funded (?)

  • if by depositing cash, then the deposits should get allocated to the loan account.
  • if by expense claims, then set yourself up as an Expense Claim Payer under Settings and use that name on the Expense Claims. Via Journal transfer the Expense Claims account balance to the Loan account.

If you have activated Capital Accounts, don’t use that member name on the expense claims.
If you have, just change the name on the expense claim from member to expense claims payer.

To repay the loan - Spend Money with the account= Loan Account

4

In @devan’s tax jurisdiction, this will not be an issue since he is a sole proprietor. The proprietor cannot, by definition, be an employee. And all money taken out would be considered a draw. The loan approach would be permissible, but an unnecessary complication. The tax man would still consider the loan payments as draws.

5

No, because the loan was never part of equity, therefore the repayment isn’t a drawing.

If the 3k was from a bank then the repayment wouldn’t be a drawing.
If the 3k was from a parent then the repayment wouldn’t be a drawing.
If one clearly establishes that’s it’s was a loan then the repayment wouldn’t be a drawing.

6

In some jurisdictions, what you say is probably true. But in @devan’s jurisdiction, the tax authority specifically requires what is called a “true debtor-creditor relationship” to exist before a loan is recognized as such. For sole proprietors, this is enforced via a number of measures.

Primarily, this is involves consideration of a sole proprietorship as merely an extension of the individual, not a separate legal entity. This treatment extends to single-member limited liability companies. Interest on a loan repaid by the business to the proprietor, even if it were deductible, would immediately become income to the individual. Yet loans at below-market rates result in tax on the forgiven interest, so concocting a zero-interest loan from oneself is pointless.

Further, the investment of the proprietor’s personal funds in the business has no tax consequence, so repayment of any loan principal likewise would have no impact. The result of all this is that owner’s equity in a sole proprietorship is merely a traditional construct that lets the owner keep track of how much money is in the right-hand pocket for business purposes versus the left-hand pocket for personal ones. The proprietor is taxed (in simple language) on the difference between revenue and allowable expenses, regardless of whether the money even changes “pockets.” This principle plays out further in such things as retirement contributions and health insurance premiums for the owner not being allowable business expenses; instead, they are paid from the proprietor’s personal funds and reduce individual taxable income. (All this discussion is highly simplified, of course.)

Thus, since owner’s equity is merely an accounting convenience, the easiest way to account for profits taken out of the business is to consider it a draw, either from a capital account or owner’s equity depending on the arrangement of the chart of accounts.

That takes me back to where we began this part of the discussion. For financial accounting purposes, categorizing the original startup investment as a loan would be permissible, but for tax accounting it would be meaningless. So why go through the work? There have been enough tax evaders caught at various schemes involving loans to themselves that such a thing would be a red flag for an auditor.

7

Yes, but this topic isn’t about making a loan to oneself. Your comments regarding interest considerations are fairly generic where loans are structured between entities.

But not applicable to sole proprietors as you noted above “the investment of the proprietor’s personal funds in the business has no tax consequence, so repayment of any loan principal likewise would have no impact” - including interest consideration (charging to and paying to oneself)

Does an Expense Claim, private money for business expense, create that relationship, as an expense claim is a loan - money advanced on behalf of the business.

@devan is yet to disclose how the 2K was taken up in the accounts but if it was via expense claims then don’t transfer any balance to a loan account - just repay the expense claims account balance as the funds become available - if that reimbursement was the intention from the beginning.

8

I guess I agree with what you are saying about loans and their consequences for tax accounting, but it also seems like you are agreeing with me. I was just trying to reiterate the point that the work of treating the investment as a loan wasn’t worth it because there is no benefit. But we’ve probably beaten that dead horse enough. :slight_smile:

As for expense claims, for the sole proprietor I see them as useful for two purposes:

  1. A convenient way to enter transactions that unexpectedly are made with personal funds.

  2. For allowances such as auto mileage for a personal vehicle, meals per diem, etc., where the tax authority allows a deduction but no money actually changes hands, so a cash receipt or payment doesn’t work.

Although in Manager the expense claim sits as a liability for a short time if you use Expense Claims Payers, that’s really just a parking spot until it can be reimbursed or cleared to equity. And if you use capital account Members, it goes directly to equity. In other words, expense claims are a convenient entry mechanism. I don’t think they really establish a true debtor-creditor relationship. But I still like to clear all expense claims before the end of an accounting period just to keep things neat.

9

Thanks Tut & Brucanna for your help - each of you had some great points to consider. I just returned from out of town and need some time to digest your recommendations.

The breakdown of the $3k in startup costs paid using my personal funds are:

a) $1.0k in inventory is reflected in Manager through the use of “Starting balance | Inventory cost”.
b) $0.5k shows as “Starting balance equity” from money deposited to my PayPal cash account for “some” of the initial costs.
c) $1.5k spent on expenses which include various small hand & power tools (under $200), supplies such as labels for printing postage, containers used to for organize supplies & inventory, fuel for jeweler’s torches, LLC license fees, etc. NONE of these expenses are recorded in Manager.

Each of the inventory and expense items were recorded in my initial accounting system (a simple spreadsheet) and were reported on my first IRS Schedule C Form. The IRS allows businesses to deduct up to $5K in startup costs. Only the remaining costs must be amortized.

I began using Manager last year, but entered no expenses incurred or paid in previous years (other than inventory - COGS). So, I do not have any Expense Claims at this time. I merely entered the $500 starting balance in my PayPal cash account so the balance in Manager matched that of PayPal. I also entered the average cost and starting balance for all relevant inventory items. I suspect (hope) that my situation might not be too unusual for some beginning Manager users migrating from a spreadsheet or similar.

Tut was on right on target with his statement that [quote=“Tut, post:6, topic:8367”] a sole proprietorship [is] merely an extension of the individual, not a separate legal entity. This treatment extends to single-member limited liability companies. …

Further, the investment of the proprietor’s personal funds in the business has no tax consequence … owner’s equity in a sole proprietorship is merely a traditional construct that lets the owner keep track of how much money is in the right-hand pocket for business purposes versus the left-hand pocket for personal ones.
[/quote]

Although I completed a semester’s worth of accounting classes at a university, it was not my major. Something I did learn is that the subject can be exceedingly complex, which is why I have so much respect for the developers and knowledgeable contributors here.

As Tut stated, the tax authorities treat my sole proprietorship as an extension of my personal taxes. So, this isn’t a critical issue. But since my professional background is engineering, it would really bug me if I thought I wasn’t doing something correctly.

To summarize my question for anyone lost by now, I’m basically asking how, in Manager and as of a late adopter of the software, I can or should reimburse myself for the expenses I paid to get my sole trader business going. My only purpose is so that the Equity section reflects only the accumulated profits of the business. The answer may be in the responses above - I just need to carefully go through them some more to see how they would best apply in my situation.

10

@devan, it sounds like you are running a part-time jewelry business, probably out of your home. If we ignore accounts payable and receivable, unless you have capitalized any fixed assets with remaining book value, your owner’s equity at the transition to Manager should be represented by the net of your cash accounts, plus inventory value. Since the purchases you mention occurred before the transition, they are already reflected in the cash account balances. So there is no need to enter them now.

If you want owner’s equity to reflect only retained profits, one way is to simply withdraw your original investment from a cash account and set up your starting cash account balances to reflect the reduction. This might mean delaying your Start Date in Manager. The withdrawal won’t be taxed as income, because Schedule C income is the difference between reported revenue and allowable expenses. Draws themselves are never reported. In fact, you pay tax as an individual whether you take the money out of the company accounts or leave it there.

11

You are correct regarding the business type and the books are fairly simple now with no capitalized fixed assets. In working through your last paragraph suggestions using a test copy of my db, it appears as though the numbers are coming out as I’d hoped. Thanks!

12

Therefore to start in Manager you need to reflect the Balance Sheet side of that system as the start up balances in Manager so that any Asset, Liability and Equity account balance in that system has an EXACT matching account balance in Manager. There shouldn’t be any Starting Balance Equity account balance

The Profit & Loss Statement balance would become the Retained Earnings balance.

Besides the PayPal (.5k) contribution you didn’t disclose how the other 2,5k was funded - how was that funding recorded in the Balance Sheet.

My this I mean the debit side of those 2.5k transactions went to Inventory, small tools, supplies, license fees etc. Where did the credit side for those transactions go.

I am assuming however that your spread sheet system was double entry and not just listings.
If they were just listings, then we need to generate an entry so Manager can start balanced.

Once all this is clearly understood, then the reimbursement and process become self evident.

13

All inventory and expenses were funded by personal checks or credit cards.

In hindsight, I realize it was a mistake, but I was using a single entry spreadsheet. It allowed me to accurately complete my tax returns for a single member sole proprietorship, but the business took off faster than expected and the system just created too many complications. I also initially couldn’t justify the expense of paid software at the time. I did try several free solutions, but they were either too rudimentary to bother with or had no inventory module. Then I found Manager.

Most of the Starting Balance Equity comes from funds deposited into a PayPal account. The rest is from a few inventory items purchased earlier. (All PayPal and bank accounts shown in Manager are dedicated business accounts.)

I’m open to any recommendations on how to clear out the Starting Balance Equity. Some is caused by the starting value of inventory, which will be sold in the weeks to come, but I’m not sure how to clear the beginning PayPal balance.



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14

It is tough to know exactly how to transition from a simple listing of income and expenses to a true double entry accounting system. But the advantage may be that you don’t have a prior balance sheet you have to match. There are some unusual approaches (I hesitate to say tricks) you could use. For example, rather than set up a starting balance in the PayPal account, which would have to be balanced elsewhere, you could just Receive money, treating the PayPal account as if it was opened the day the business started, since you only use it for business. Allocate the receipt to equity. Now that transaction would be in balance.

I might question whether you need inventory for things like wire. You aren’t going to sell wire as an end item. It’s cost is low, and it gets used quickly. You might consider expensing it as a consumable. The example I use frequently is that a carpenter would not try to maintain inventory on nails.

1 Like
15

Perfect! I unchecked the “Starting balance” field for the PayPal Cash Account and did a Receive money allocated to Owner’s Equity instead. A simple solution that actually helps document my initial cash outlay to the business.

Regarding the wire … In any other situation, I might agree, but in this case it’s basically my product. This particular inventory item is 11 gauge (2.3mm wide), dead soft, sterling silver half-round wire. This is the type of material, along with some assorted faceted gemstones, that make up the bulk of my inventory. With just 2-3 inches of this particular silver wire and a dab of solder, I can make a simple ladies ring with a traditional domed / half-round profile.

Since I have over two dozen various shapes, sizes and patterns of sterling and fine silver wire (some costing $7 per inch), having inventory helps me see at a glance where I am low on a particular type and helps immensely in pricing the final product. The inventory module is a fabulous part of Manager and something that many similar accounting apps just don’t have or implement poorly.

16

Actually there was no need for any tricks at all to fake a result, it was just that you hadn’t taken up the starting balances correctly, which should have been by recording all the known actual Balance Sheet factors.

PayPal 401.75 Debit
Inventory 1000.00 Debit
Retained Earnings (P&L Balance @ 31.12.16) nnn.nn Credit for a profit, Debit for a Loss

Then putting the nett sum of those to Owners Equity - being either a Debit/Credit - and Manager is balanced.
That was the meaning behind “generate an entry” so Manager can start balanced

However, the Starting Balance Equity account shown above has a balance of 501.63 and PayPal only makes up 401.75 - so the other 99.88 is still unresolved. So the trick hasn’t addressed or resolved the accounting issues.

In addition you haven’t revealed where the proceeds from sales went but I am assuming PayPal.

Could you please post a screenshot of the Report - Starting Balances.
It 's actually quite simple to get this situation right if one sticks to the basics

17

The Starting Balance Report now only lists most of my inventory items. A detail view of one item is shown in the last screenshot above. The 99.88 you mentioned was the total of the Value on Hand of the inventory items I carried over from my single entry spreadsheet system.

I’m hearing that there shouldn’t be any Starting Balance Equity account balance. That leads me to ask why I was allowed to a starting balance, at least for inventory, in the first place (as shown on the last screenshot). I was thinking that it would be reduced as I sold inventory, but that doesn’t appear to be the case.

To answer your other question, about 60% of my sales proceeds are held in PayPal. The remainder goes to my business checking account due to credit card transactions.

18

Something doesn’t sound right about that statement. The Starting Balance Report should only have “one” inventory reference - Inventory On Hand, not a list of inventory items - and why “most” and not “all”.

In your opening post you stated “Only about $1k of those costs are shown in the Starting balance equity on the Summary Page (due to beginning inventory values)” but now you are saying “the 99.88 you mentioned was the total of the Value on Hand of the inventory items” Which is it?

Anyhow based on the original values provided the Starting Balance Report should look like this - the Capital Contributions and Retained Earning figures I created

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The Starting Balance Equity account is there to provide a cross check to ensure that all the Starting Balances have been entered correctly - if that account has a balance, then there is a error in the Starting Balances entered.

If set up correctly it should, therefore without knowing your actual process its hard to comment further.

If those Credit card transactions are saying in the business checking account when received then you have been in effect getting reimbursed. Or to put it another way - you put up 3k in start up funding from the business checking account, if you subsequently receive 3k in credit card transactions back into the business checking account - then you have been reimbursed unless those funds are getting transferred back to the PayPal account.

To be accurate, in the business accounts the provided start up funding should have allocated to a BS Asset account called “Jewellery Business Funding”, then the Credit Card receipts would also be allocated there - then any balance equals the unreimbursed funding.

Then in the Jewellery Business you would have a BS Liability account called “Other Business Loan” which would have received the start up funding and reflect the payments for the credit card sales. As it’s a business to business funding arrangement.

Those two accounts would always have a matching balance - one being debit and one being credit.

If it assists to provide clarity but maintain privacy, send any screenshots via private message then I can answer the issues from a fully informed position.

19

[quote=“Brucanna, post:18, topic:8367, full:true”]

Something doesn’t sound right about that statement. The Starting Balance Report should only have “one” inventory reference - Inventory On Hand, not a list of inventory items - and why “most” and not “all”.

[ First - I greatly appreciate your help. Technically, you are correct - the report gives a single value for “Inventory on hand”. I was referring to the inventory items that make up that value and are displayed when the value is selected. (see images below) Those 12 inventory items are the ones for which I entered a starting balance in the Inventory module. I said that they represented most, but not all of my inventory since I purchased about 8 new items since the beginning of this year. ]

In your opening post you stated “Only about $1k of those costs are shown in the Starting balance equity on the Summary Page (due to beginning inventory values)” but now you are saying “the 99.88 you mentioned was the total of the Value on Hand of the inventory items” Which is it?

[ I can see how that was confusing. I tried to clarify in a later post, but to be more precise - about $1k of my startup costs were due to inventory paid out of my personal account in an earlier year. Each inventory item purchased that way was recorded in a single-entry spreadsheet system. Most of that inventory was used up in sales before this year. The inventory remaining was shown in Manager as Starting balance equity valued at 99.88.]

To summarize… I had a Starting Balance for both my PayPal Cash account and my Inventory on hand. Apparently, I shouldn’t have a Starting Balance Equity account balance. Thanks to assistance provided by you and Tut, I was able to resolve the PayPal Starting Balance issue, but was left with a Starting Balance solely due to my Inventory items carried over from last year’s single-entry spreadsheet system. Each of those items were paid for using my personal funds, before setting up a dedicated business bank account.

Along with the use of a spreadsheet, last year I installed Manager in order to evaluate and learn the software. It wasn’t used for the entire year and not all transactions were recorded. That’s why my Starting Balance Report doesn’t reflect that a double entry system was used. However, I ditched the spreadsheet at the beginning of this year and began to record each inventory item used for every sales transaction in Manager. The software has been a great help since my inventory is now being accurately updated with each sale and my cash balances in both PayPal and my business banking account match to the penny.

As far as I know, the only remaining issue is what to do with or how to balance my remaining Starting Balance (from inventory carried over from the spreadsheet and paid for using personal funds), since it appears that having such a balance is not good practice.

My updated Starting Balance report is below. The 99.88 has been changed to 172.88 after discovering some inventory I missed when initially entering them in Manager.

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20

@devan, I won’t reinsert myself into your ongoing discussion with @Brucanna. But I could not overlook your remark that you started experimenting with Manager but did not make all entries. I cannot emphasize enough that after your start date, all transactions must be entered. Only unpaid invoices predating your start should be entered to set opening balances for A/R and A/P. Anything else is probably going to have consequences. All other carryover balances are defined when establishing accounts. So if you had prior transactions, a new business would be the right course of action.