Asset or Expense?
gabrielmarquez484
Member Posts: 9
Hi! I have a new business and I'm just starting up my accounts. I can't seem to figure out how to account for my investments. I am investing cash, equipment, and tools (ex. cutlery, knives, other small kitchen tools).
All I know is:
1. Cash - debit cash (current asset) and credit capital contributions (owner's equity)
2. Equipment - debit equipment (fixed asset) and credit capital contributions (owner's equity)
I'm trying to figure out:
3. Tools
How should I account for tools that I'm giving to my business? These tools are valued lower than my capital limit, so they don't qualify as fixed assets. If so, then should I debit them as operating expenses? My next problem would be that I have no income yet, so my P&L statement would show a negative amount.
I believe these tools will last more than a year, so I can't place them under current assets either. What would you suggest I do?
Comments
@gabrielmarquez484,
Everything that is transferring to the business from personal should be placed on the books at cost and treated appropriately from there. So if you are transferring a laptop that you paid 1500 for, then it would go under assets at 1500 (credit owner equity). If you are transferring small items, the IRS has a safe harbor of $500, then you would expense as supplies or small tools (credit owner equity)
Thanks for your insights! May I ask, what do you mean by a safe harbor of $500?
Sure, it is an IRS regulation that allows companies that do not have audited financial statements prepared to expense items under $500 even if they have a useful life of greater than one year. In addition the company is required to have a written policy to that effect.
Thanks for that info! Is there a limit in $ to how much of these small items (in totality) I can put into my business? Is $5000 too much or is it up to me? Also, what would you suggest for my P&L statement if I have no income yet and only those expenses? Is there something I can have written that states I have no sales as of the moment?
In your opinion, would it be alright if my invested cash is lower than my invested equipment + tools?
@gabrielmarquez484,
Not really, they look at it from an individual item or a group of similar items. Many start ups have losses in their first year. It is not unusual. So long as you have a bank account and all business transactions are captured there, no written statements are needed. Yes it is fine to have more invested in equipment than cash. For example, let's say you re-titled your car in the business name that cost 25k but only invested $500 to cover office supplies and business cards etc.
Wow, that’s really helpful! What if I only put up a bank account after I registered my business? I have a copy of all the receipts/payments I made for applications and everything else to start my business, but those transactions aren’t reflected on my bank account (I used personal cash). What would be the best way to put these on my balance sheet?
By the way, thanks for all the help! And for being patient with me!
@gabrielmarquez484,
Sure, no problem. When you pay for items outside the business the following entry would be appropriate.
Debit (appropriate expense)
Debit (appropriate asset)
Credit Owners Equity
So let's say I bought some office supplies for $500 and a slicer for $750. I used my own credit card and kept the receipt, I paid for it with my personal account on October 15, 2019. My business started on 11/30/19 and I opened a bank account.
(Expense) Debit office expense 500
(Asset) Debit Equipment 750
Credit owners Equity or Loan 1250
(To record owner paid items prior to start of business)
Journal entry date would be 11/30/19
That’s a great example! Thanks again, I really appreciate it! I think I’ll be more confident now with my journal entries 😄