Income Vs. Investment Capital Learn how to keep your finances straight in the books.
Q: I've just started a realestate business where I will be purchasing properties to fix up,then sell or keep as rental properties. I've purchasedQuickbooks, but I have a question regarding the accountingprocedure for handling seed money. The source of the money is mypersonal account. Is this seed money considered income for thebusiness or investment capital?
A: Congratulations on starting yournew business. Your question is a common one for new businessowners.
Your investment should be recorded in your accounting program asa credit to owner's equity and a debit to cash. Your balancesheet will reflect the seed money as your equity (ownership) in thecompany. It isn't income. Income is money that comes into thebusiness as a result of sales or interest on invested money. Yourseed money is investment capital, and you're the investor.
It's confusing because business and finance involve words wedon't use in everyday conversations, such as capital andequity. I think accountants and bankers use these fancy terms justto keep folks like us from understanding what it is they do. Lookfor the glossary at my Web site, where I use easy-to-understandlanguage to define accounting and financial words and phrases.
As a business owner, you need a working understanding ofaccounting and finance terms and methods. You don't need to bean expert. Expertise is what professional accountants andbookkeepers provide. You do need to know the basics so youcan keep an eye on the score. In the game of business, thefinancial reports are the scorecards.
At my site, there's a column in the archives calledHow to Shop for an Accountant. Check it out.You'd be well-served to have a professional on hand as youfigure out basic accounting methods. Accountants are great for taxadvice; bookkeepers can be a big help with day-to-day entries. Youmight need a once-a-week or once-a-month visit from a bookkeeper tocheck up on your entries. And you might want to meet with anaccountant twice or three times a year. Find a CPA who specializesin real estate and can help you take advantage of all the tax perksthat industry offers. Look for one who invests in real estatepersonally.
I wrote an easy-to-read book that's a good primer for makingsense of financial reports, Where Did the Money Go?, available on myWeb 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 smallcontracting business-until she learned how to manage money."Do what you love, certainly," she says, "but themoney won't just take care of itself." Ellen's priceycollege education didn't prepare her for real-world business."Financial business basics aren't that difficult...butwhere do you learn them? Unfortunately, business literacy isn'ttaught in school. I teach the basics and take the mystery out ofmaking money." Ellen's mission as an author, columnist andseminar leader is to help people make a living doing what theylove.
The opinions expressed in this column arethose of the author, not of Entrepreneur.com. All answers areintended to be general in nature, without regard to specificgeographical areas or circumstances, and should only be relied uponafter consulting an appropriate expert, such as an attorney oraccountant.
