Income Vs. Investment Capital
Learn how to keep your finances straight in the books.
Q: I've just started a real estate business where I will be purchasing properties to fix up, then sell or keep as rental properties. I've purchased Quickbooks, but I have a question regarding the accounting procedure for handling seed money. The source of the money is my personal account. Is this seed money considered income for the business or investment capital?
A: Congratulations on starting your new business. Your question is a common one for new business owners.
Your investment should be recorded in your accounting program as a credit to owner's equity and a debit to cash. Your balance sheet will reflect the seed money as your equity (ownership) in the company. It isn't income. Income is money that comes into the business as a result of sales or interest on invested money. Your seed money is investment capital, and you're the investor.
It's confusing because business and finance involve words we don't use in everyday conversations, such as capital and equity. I think accountants and bankers use these fancy terms just to keep folks like us from understanding what it is they do. Look for the glossary at my Web site, where I use easy-to-understand language to define accounting and financial words and phrases.
As a business owner, you need a working understanding of accounting and finance terms and methods. You don't need to be an expert. Expertise is what professional accountants and bookkeepers provide. You do need to know the basics so you can keep an eye on the score. In the game of business, the financial reports are the scorecards.
At my site, there's a column in the archives called How to Shop for an Accountant. Check it out. You'd be well-served to have a professional on hand as you figure out basic accounting methods. Accountants are great for tax advice; bookkeepers can be a big help with day-to-day entries. You might need a once-a-week or once-a-month visit from a bookkeeper to check up on your entries. And you might want to meet with an accountant twice or three times a year. Find a CPA who specializes in real estate and can help you take advantage of all the tax perks that industry offers. Look for one who invests in real estate personally.
I wrote an easy-to-read book that's a good primer for making sense of financial reports, Where Did the Money Go?, available on my Web site. Also read Robert Kiyosaki's books, Rich Dad, Poor Dad and The Cashflow Quadrant. Good luck!
Author Ellen Rohr nearly starved in her family's small contracting business-until she learned how to manage money. "Do what you love, certainly," she says, "but the money won't just take care of itself." Ellen's pricey college education didn't prepare her for real-world business. "Financial business basics aren't that difficult...but where do you learn them? Unfortunately, business literacy isn't taught in school. I teach the basics and take the mystery out of making money." Ellen's mission as an author, columnist and seminar leader is to help people make a living doing what they love.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.