As business owners and freelancers, we pay a lot of different vendors for a lot of different things. Most of these payments wind up on our Profit & Loss / Income Statement as expenses. But there are a few that do not. And these are usually the ones I get asked about. “Why isn’t that payment showing up on my P&L, I paid it? How can I track how much I really made if that payment isn’t showing up?”
There are three types of Expenses that aren’t truly expenses, and instead of being included on the Profit & Loss / Income Statement, they are on the Balance Sheet.
1. Purchase of Equipment or Furniture. You replace your hand me down office furniture with all brand-new furniture from a catalog and pay for it all in-full from the business bank account. This very large deduction from your account will not show on your Income Statement as the furniture is an asset, not an expense. It is something tangible that is owned by the business, will be useful for more than a year, and will still have value at the end of the year.
2. Liability / Loan Payments. You’ve purchased a new business vehicle and have financed the purchase. The loan payments will not appear on your Income Statement. The total cost of the vehicle is posted as an asset, and the loan itself is a liability. The loan payments are split into two pieces: a) the reduction of the total loan or the principle payment which will reduce your Total Liabilities on your Balance Sheet, and b) the monthly interest payment on the loan which will be posted to Interest Expense on your Income Statement. The total loan payment itself is not an Expense, but a combination of the liability reduction and interest expense.
Business Credit Cards are also a liability. The payments to the credit card company are not expenses, they are a reduction of a liability. The individual charges made on the card are the expenses, unless you made a large equipment or furniture purchase as described above, then that would be posted as a new asset. Any interest charges on the credit card balance is, however, an expense.
3. Payments to Yourself. If you are a Sole Proprietor, Freelancer, or a Single-Member LLC you probably don’t get what we would think of as a paycheck, with payroll taxes taken out on a weekly or bi-weekly basis. You most likely just withdraw money from your business on a semi-regular basis or even just when you need it. These withdrawals are not considered expenses as they are not paying for something related to the business, but instead are a reduction in your Equity in the business. These also appear on the Balance Sheet under the Equity section, usually as a negative number as you are reducing the equity in your business.
All three of these types of expenditures either add or reduce the overall net worth of the business, not just the profit or bank balance. If you are unsure if you have correctly accounted for these types of transactions a conversation with your bookkeeper or your tax preparer will make sure you remain on track.
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