Relationship or transaction between people who act in their separate interests. Related people are those, individuals connected by blood, marriage, common-law, partnership, or adoption, are not considered to be dealing with each other at arm’s length.
Relationship or transaction between persons who are related to each other.
An asset generally is considered to become available for use and is eligible for capital cost allowance (CCA):
- At the time the property or equipment, related to business use, is first used to earn income.
- The time when the asset is made available and is capable of producing saleable product or service.
The capital cost of an asset is usually the total of:
- the purchase price (in case of property the land is not depreciable)
- the cost of legal, accounting, engineering, installation and fees that relates to buying or constructing property.
- Cost of any additions or improvement to property after it was purchased.
CAPITAL COST ALLOWANCE (CCA)
The deduction you can claim over a period of several years for the cost of the asset. Assets that wear our or becomes obsolete over time, like, equipment, furniture, building that you use in your business or professional activities.
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Your business is your baby. This very idea can leave you inspired and liberated. But there is also an edge, how do you get some cash to either advance your idea to the point of attracting investors or make your business profitable.
1- Asset sale.
If you have assets, such as car, RV, jewelry, rugs, motor boat, motor bike or second property. They can be turned into cash. Most people’s biggest asset is a home and a car. If you own a late model car, you can sell it and replace with a lower model car with no down payment. This will free up cash and leave you with a low monthly payment.
2- Borowing against your home.
This is an old trick. It’s also the best because you are in control of the money borrowed. The interest rate will be the same as your mortgage and the payment will be added to your moetgage payments. Keep in mind at tax time the interest portion of the business loan is an expense for the company. In that case ask your banker to keep a separate statement to show how much interest and principle you paid for your home as well as your business loan
Once your business gets off the ground and you are able to take a salary, start making monthly payments toward the loan. This way it will be paid off faster instead if having the same amortization as your mortgage.
3- Insurance policy.
Most of us pay into health insurance, life insurance, auto and home insurance. You can borrow against life policy insurance. Most life policies have some cash value after three years. Call or write your insurance agent and get details on how you can access these funds.
4- Try friends and family.
Your typical friend and family investor is someone who is in business and will help because he wished someone had helped him those early days. If you go this route make sure there is a written agreement in place. There is nothing worse than hearing “you never said that.”
I hope Money for Dummies was beneficial. You can always ask a question.
Small business for dummies; an overview
Owning Your Own Small Business Small businesses are the backbone of our economy. Many individuals dream of owning a small business. Accounting for dummies will lend a hand on the following topics: 1. Start-ups 2. Where do I get money 3. Financial statements Start-up You’re starting a business from scratch because you have a dream. To bankers, a “start-up” is a business that has been in operation for more than two years. Five start-up tips for small business: 1. Create a business plan. 2. Know your business by doing your research well. No business fails because the owner knows too much. 3. Drive, dedication and commitment are important qualities to make your business succeed. 4. Know your market.
5. Meet your banker. Even if you don’t need to borrow money now, your relationship can be invaluable. Seriously consider online marketing (
Internet Marketing: Integrating Online and Offline Strategies) Buying a business or franchise Most small business owners in the start-up phase already know what their business will be. If you’re less certain or unsure of the commitment you want to make in getting a new business off the ground, you could look at buying a business or buying into a franchise system. In a franchise the business idea is already established; contract with suppliers, inventory, and profit margins. Both routes have advantages and disadvantages that accounting for dummies has set up the following: - Buying an existing business can cut down on some of the risk associated with starting a new business. However, you may also be paying for the intangible of goodwill – the business’s reputation and customer base – an expense a new business does not carry. - You have a chance to review the history of the business you’re looking to buy and assess its stage in the life cycle – start-up, growth and maturity. With help of a lawyer, be sure there are no liens against the company and review any on-going contract the company may have. - You can buy only the assets of the company or, if it’s an incorporated company, the shares. This type of purchase also includes taking over the liabilities of the company as well as assets or shares. - Franchise are for individuals who like to work in highly structured environment in which expectations are clearly set out and ongoing support is usually available. However, there is not a lot of room for entrepreneurship in a franchise. If you are looking to spread your wings and try out your own ideas, a franchise may limit you. - It’s a good idea to spend a week at the premises and see the operation. Talk to customers; make sure the volumes are truly as stated. Some people prefer to focus on business and leave the paper work to others. In that case I strongly suggest shoeboxed which offers online bookkeeping services at: Secure your receipts at Shoeboxed Starting a business from scratch There are many important issues to consider as your business is starting up. One of them – the team of experts you’ll be putting together to advise you on particular issues. Growth Many small business owners are seeking independence that owning their own business can give them. Hiring people is the last thing on their mind. Running a business can be stressful enough without the responsibility of being able to afford paying someone else. That’s why in the beginning the owner is the manager, the doer, creator and the strategist. Soon you will be in the growth phase and are contemplating hiring employees. How much new business can these employees generate? Can I increase the number of clients sufficiently to cover the cost of my new employees? Hiring an employee will allow you to improve your lifestyle, give you the chance to take a holiday or spend more time with your family. When do you know it’s time to hire an employee? Well, when your partner doesn’t recognize you anymore or, your business plan can also help you work through this question. Review your goals and reassess what you want to achieve – independence, control and a better work-home balance. Think about whether you should be growing. Calculate where the business cycle is. Address all these issues, when you review your size and your decision to grow.
Where do I get money?
Whether you are starting up a business or have been in business for many years, the primary source of cash for your undertaking will be you. When you start, you have to put some of your own assets to work – cash, equipment, home office or inventory. Loans Most of us have borrowed money for house or a care and are familiar with financing the purchase through a trust company, bank or credit union. These are also the companies you should have and get to know as your team when borrowing money for your business. Operating line Is also known as lines of credit. This type of credit will allow you to draw money as you need it for day to day expenses such as: payroll, rent or inventory. This credit is to cover a short-term need while you are waiting for money to come in from your customers. Second mortgage Your house or other property can act as a source of cash. Taking out a second mortgage is the cheapest way to borrow money for your business. The interest rate on a second mortgage can be lower than line of credit or business loan. Leasing By leasing equipment, cars and office or factory space – you’re not spending large amounts of cash leaving yourself short to cover supplies, payroll and marketing, not to mention your personal expenses. Credit cards Majority of the small business owners use credit cards. When you pay for purchase with a credit card, the suppliers you deal with can be assured they will receive their payment. Because banks realize the importance of small business owners, some now offer business credit cards. You can borrow a rate equal to your line of credit and still have the 26 day grace period with no interest. Partners If you decide that you don’t want to go to a bank or use any of the above methods of raising cash, you might consider taking on a partner. Not only will your partner bring cash, this person will also bring an extra set of hands, eyes, fresh ideas and new network to your business. Talk to your lawyer for the best way to set up a partnership agreement.
In addition to having a solid business plan, you also need to find a good way to measure your success – you want to know if your plans and your action did what you expected them to do. Measuring success can be done by rating customers and employee satisfaction and your personal satisfaction. You can measure it by the increase in customers. Your financial statements are another tool you can use to see if you’re doing the right thing for yourself and your customers. How often you review your financials is up to you, but it should be done at least once every six months. Financial statements are created every time you or your bookkeeper puts an entry into the ledger. First, though, accounting for dummies has a list of advantages to keeping good records: - To identify the source of income. - To save money, including income tax. - To recognize where you’re loosing opportunities or money. - To keep you better informed about your business. - To help you get loans and other credits. Business structure and tax reporting Sole Proprietorship – is an unincorporated company you are simply an individual carrying on a business activity. You make all the decisions for the business and entitled to all the benefits deriving from the business. You are also responsible for all the costs, losses and obligations that your business undertakes. There is no distinction between the personal assets of the owner and those of the business. Another words, you personally owe what the business owes and you personally own what the business owns. As a sole proprietor you have to register for GST/HST if your worldwide taxable income is more than $30,000. You will report your income or loss from the business on your personal income tax. Partnership – A partner relationship is between 2 or more individuals usually created by contract agreement. It is important to have a contract, to set out the exact nature of the relationship between the partners. With a written document there is less chance of dispute. A partner by itself does not pay income tax and does not file an annual income tax return. Each partner has to file their own income tax and show their share of the income or loss from the company. Each partner must have a GST/HST number if each individual partners world wide income is more than $30,000. Incorporation – The concept was created to respond to large companies that need a way to create large amounts of capital through many people. The most significant feature of the incorporation is that it becomes a separate legal entity from its shareholder and separate from the people who own shares in it. The shares represent each individual’s interest in the corporation and can be bought or sold, so shareholders can buy and sell shares without affecting the day to day operations of the corporation. As a single entity, a corporation has to pay tax on its income and must file an income tax separate from its shareholder. It must also register for GST/HST if its worldwide taxable income is more than $30,000. Anatomy of a financial statement A set of financial statements consist of the following three elements. 1. Balance sheet 2. Income statement 3. statement of cash flow Balance Sheet – will show you what your business owns and what is owes, whether the difference is a positive or negative. A balance sheet shows you your net worth or your equity in the business. The balance sheet is a useful tool because it helps you assess your projections and where you’d hoped to be. It shows your assets are make up of: - Receivables (customers owing you money) - Cash in bank - Value of equipment and property The balance sheet also shows your liabilities and they are as follows: - Accounts payable (suppliers you owe money to) - Tax obligations - Loan or credit card payments The difference between the assets and liabilities is your equity. Balance sheet is a report usually done as of a certain day each year; it gives you a realistic or reasonable comparison from year to year or month to month. The accounting equation is: Assets – Liabilities = Equity $100,000 - $70,000 = $30,000. (This is the owner’s equity in the company) Income statement – Also called a profit and loss statement. This is a statement showing the profit or loss made during that year by comparing revenues with expenses undertaken to generate those revenues. The income statement is set up with the revenue at the top, followed by the cost of goods sold. A manufacturing company includes cost on inventory items sold and labour to process the inventory into finished goods. Ex: your company purchased 5000 bags of coffee. The bags cost you $25,000. (5000 x$5. per bag) You will sell those 5000 bags of coffee and double your money. Your revenue less your cost of goods and labour is your margin. Ex: Sales are $25,000; less cost of goods sold and wages $15,000. = margin $10,000. From the $10,000. margin comes off the administrative costs. Administrative costs – It does not matter what type of business you’re operating, the administrative costs are the same. They include such things as: - Accounting fees - Advertising - Office supplies - Utilities - Telephone - Insurance - Bank service charges - Vehicle expenses Take the above example with net margin of $10,000. Ex: Margin - Admin costs = Net profit or loss $10,000. - $6,000. = $4,000. (This is your profit) Statement of cash flow – When you review your balance sheet and income statement it doesn’t show you what your cash flow is. Cash flow is recording money coming in from customers and money paid out to suppliers, rent, bank fees etc. Some estimation is required for this statement, because you’re not sure how much money will be collected from customers in a given month. But, when you have been in business for a while, your estimation will be more accurate. Fixed expenses are those that come every month, such as loan payments, lease payments, rent, insurance and any auto debit you have set up with your bank. These items should come off your cash flow at the beginning of the month. Variable expenses are those that vary each month. Such as office supplies, advertising, wages and any other small expenses that pop up during the month. Ex: Cash collected – fixed expenses – variable expenses = cash in bank $50,000. - 15,000. - $30,000. = $5,000. Good luck, Shin