Need a little accounting help

Discussion in 'Homesteading Questions' started by snoozy, Jun 1, 2005.

  1. snoozy

    snoozy Well-Known Member Supporter

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    In order to raise capital for my fledgling tea business, I have begun offering "Tea Bills" -- ($1,000 investment, yielding 5% interest at the end of 3 years.) I have "sold" a few to people who know me and know my work & reputation.

    My question is, how do you account in the books for the investment? In essence, a "Tea Bill" is a loan of $1,000, and as I understand it, a loan is not income and repayment of the capital is not an expense, right? The interest is an expense, being basically the "rental" for the use of the money, right? (And it is an actual loan for a definite timeframe, not like an investment where the investor is getting a piece of the business, complete with risk of loss and/or percentage of the profit.)

    How do I do the accounting for it?
     
  2. painterswife

    painterswife Sock puppet reinstated Supporter

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    It becomes a long term Liability and the money in the bank an asset. As you pay out or record interest owing they are expenses. The liability is a balance sheet item the interest is an income statement item.

    Jill
     

  3. snoozy

    snoozy Well-Known Member Supporter

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    Thank you, painterswife -- that is very clear!
     
  4. Ross

    Ross Moderator Staff Member Supporter

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    Snoozy do you have your website handy? I had it but lost it in my "organization"
     
  5. snoozy

    snoozy Well-Known Member Supporter

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    It isn't quite up yet, unfortunately,...the webguy is having health problems. After trying and trying to find someone around here who could build it, I finally gave up and posted the project on elance.com, where I received 26 bids in 16 hours, and 39 in total after posting it for a week. From all over the world. Only one company looks likely, and I am in e-pong with mock-ups with them as I write this. However, the address will be www.TeaboyExpress.com , when it is finally up. If you go there, it will direct you to the tea survey page.

    If anyone would like any gourmet whole leaf teas, just drop me a PM and let's see if I have what you want.
     
  6. Scott Roth

    Scott Roth Member

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    My wife does web design from our home. Check her out at: www.symmetrywebdesign.com. She may be able to help you out getting your site up and running in no time.
     
  7. Sedition

    Sedition Well-Known Member

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    You are muddling tax and accounting issues somewhat. I recommend that you buy a copy of “Accounting and Finance for Your Small Business”. This will help tremendously. For accounting purposes, the transactions are different than they are for tax purposes because of IRS rules for “accrued interest” – which must be calculated at least annually. Most small business only due tax-basis accounting, and ignore financial accounting. However, because you are doing long-term accrual loan here, you are forced to do financial accounting under IRS regulations to pay taxes on it. I am sure that this statement makes perfect sense to you :confused: . The IRS is out to help you, and that why people like me spend half a decade in college just to learn the basics to earn our CPA and work with small businesses for accounting and tax questions.

    This is easier to show you with what are called T-Accounts. But here is a basic overview of what to do.

    A number is a debit, a (number) in parenthesis is a credit. Debits mean either more cash, or more expenses. (Credits) mean either a liability/debt or income.


    When you “issue the note”, you record:
    100 Cash 1,000
    200 Tea Note Payable (1,000)

    At the end of each year, you need to post this transaction:
    500 Interest Expense – Tea Note 50
    201 Interest Payable – Tea Note (50)
    300 Net Capital 50
    500 Interest Expense – Tea Note (50)

    At the end of three years, the accounts will look like this:
    100 Cash 1,000
    200 Tea Note Payable (1,000)
    201 Interest Payable – Tea Note (150)
    300 Net Capital 150
    500 Interest Expense – Tea Note 0

    Your “pay-off” transaction would be:
    200 Tea Note Payable 1,000
    201 Interest Payable – Tea Note 150
    100 Cash (1,150)

    But for tax purposes, each of the three years, you need to issue a 1099-INT to each “Angel” that has lent you money. This 1099 should be for the amount of “interest earned” for that year - $50, and they need to report it on their 1040, Schedule B as accrued interest income. You need to deduct the expenses from your 1040, Schedule C as Interest Expense.

    You also run into “under-market loan” regulations at only 5%, but because these are micro-loans (less than $100,000) you should be ok.