About accountrainTestimonialsServicesTools & TrainingContact UsWhat's NewHome

e-ccounting
April 2008

in this issue

Business Scenario
- Business use of Home Expenses

Answer

Accounting Tip

Did You Know ?

Definition

Sandy's Recommendations

Next Issue - Business Use of Car Expenses


 

about e-ccounting

e-ccounting is a monthly newsletter focusing on accounting tips and solutions. Our mission is to educate our clients, students and readers by offering these resources in response to your ongoing questions.

It is our objective to gather information and provide easy access for your current and future needs.
Back-issues are available on the accountrain website.

These tips are not complete answers to complex questions. We therefore recommend, when in doubt, contact the professionals or government agency.

about accountrain

accountrain simplifies the client / accountant relationship.

accountrain offers a unique combination of knowledge and people-skills to solve all your accounting needs.

accountrain specializes in the how's and why's of accounting.

Is accountrain the right accounting team for you? Find out more....


Pass It On !

Please forward this to anyone you feel may benefit from some free accounting tips. They'll be glad you did.



Sandy's Question Corner

Do you have an accounting question? Send it to us at accountrain



UPCOMING WORKSHOP

Understanding How to Read Financial Statements
An interactive workshop reinforced with examples. Quoted testimonials from the Nov 2007 session "fun & informative" and "You made it easy with your simplicity of explanation".


    LEARN:
  • The five key sections of the Financials
  • Who's interested in your reports and why
  • Why there's more to the Income Statement than just the "bottom line"
  • What's so important about the Balance Sheet
Tuesday, May 13th - Ottawa
8:30am - noon
Regular price $199 (if you mention e- ccounting, $149) Location details will be provided upon registration

Limited seating, for more information or to register: accountrain@magma.ca


  • Business Scenario
    - Business use of Home Expenses
  • I have a home-based business, what can I write-off?

    Before we begin, let's just re-word the question. What you actually should be asking is: What can I expense? When accountants hear the word write-off it usually pertains to transferring an aged (old) receivable to a bad debt.

  • Answer
  • The first step is deciding the percentage of home costs that the business will expense.

    There are two methods:
    (1) a room count or (2) an actual count of square footage .
    In either case it's based on the space used for the business versus the space of the entire house. Two examples:
    You are using a bedroom as an office. (the house has 3 bedrooms, 2 bathrooms, a livingroom, dining room and kitchen). Therefore you are using 1 of 8 rooms or 12.5%.
    Or you are using a 150 square foot room out of a 1,500 square foot apartment or 10%.
    There is no right amount, as long as you feel you can justify the percentage. Note: for a small business (operating from home) the average is between 10% to 20%.

    Once the percentage has been established, these are the items you can expense:

  • Rent or Mortgage Interest (not principle)
  • Utilities (heat, hydro, water and sewer). Usually not cable, unless it pertains to generating income for your business
  • Repairs & maintenance
  • Insurance
  • Property Taxes

    How does one record Home Expenses on their Income Tax?

    The business portion of home expenses is recorded on your General Tax Return, in a specific section of the T2124 (Statement of Business Activities) form.

  • Accounting Tip
  • Although we tend to think of internet and phone as utilities, DO NOT include these expenses with the ones noted above.

    Instead, tally up the totals of these two expenses and apportion them at a higher percentage.
    For example: If you are using your home phone for business, then calculate the business portion up to 50% (not including long distance calls). For long distance charges, highlight the items specific to the business and expense that total.

    For internet, it may be the opposite. Chances are you're using your home internet account for your business. If this is the case, then choose an amount that makes sense.

    Just remember, these expenses are extremely individual, so do what makes sense for your family and / or home.

  • Did You Know ?
  • Once you determine the percentage it should be the same every year, unless there is a change in how much space is being used or you move and the room configurations change. If you move part way through the year, do each address separately for the appropriate months.

    For more Did You Knows?
  • Definition
  • GAAP

    Generally Accepted Accounting Principles There are seven principles (or rules). The reason I am introducing this term with this topic is as mentioned above, once the percentage has been decided, there is no reason it should change from year to year.

    This follows the Consistency Principle

    Text Book Definition: "This principle states that in recording events, there must be consistent applications of standards and procedures from one accounting period to the next. This is essential so that the financial statements for successive periods are reasonably comparable." (taken from the 3rd Canadian Edition of Intermediate Accounting by Welsch, Zlatkovich, Harrison, Nelson, and Zen).


    For more definitions ...
  • Sandy's Recommendations
  • Unless you're producing monthly and / or quarterly reports, it is not necessary to record these home expenses until year-end.

    I recommend you keep the details on a spreadsheet.
    Add each expense, ie. hydro, let's say the total for the year was $1,060 (including gst), take this and multiply by the business percentage, ie. $1,060 x 12 1/2% = $132.50 (don't forget if you have a GST account, to record the GST separately).

    Bookkeeping Entry:
    As these are household expenses, I am assuming the expenses were paid for on your personal bank account, therefore:
    debit: Rent Factor *
    debit: GST (if applicable)
    credit: Owner's contribution / draw

    *Rent factor is an account all the home expenses can be coded to. However, coding each separately is also done, including Rent, Insurance, Utilities, etc.

    Remember to keep the receipts as backup.

  • Next Issue - Business Use of Car Expenses
  • The questions for expensing your car are the same as for you home.

    Learn:

  • How to calculate the portion that is applicable
  • What expenses are included
  • Why some expenses should be calculated separately
  • When and how to handle the bookkeeping aspect
  • How to apply this information to your Income Tax return.
  • 613-789-2623


    accountrain | 160 George Street | Suite #901 | Ottawa | ON | K1N 9M2 | Canada