The Business End of Your Writing Business
by E.C. Henning

It's tax return time again. If you file Schedule C, Profit or Loss From Business, with your 1040, you should consider doing your own bookkeeping. Why? The IRS expects it and the accountant will have less to do, therefore, it will cost you less. Where do you start? Here's a three step plan:

Step one, cash verses accrual.

I suggest you record your income and expenses using the cash basis of accounting, which is simpler to learn. For cash basis, you record income when received and expenses when paid, just like your personal check book. For accrual basis, you record income when earned and expenses when incurred.

Step two, gather your source documents.

If you don't have a business bank account, open one for this year. Only business income and expenses (not personal), will go through this account. Then scavenge last years personal check book, receipts, credit card statements, etc., for all of your business income and expenses. Now, how do you record it all?

Step three, categorize and record transactions.

If you don't have a bookkeeping software then buy a columnar pad with 13 columns. The first two unnumbered columns are for date and description. Titles on columns 1 through 3 should be: Deposits; Payments; Bank balance; just like your personal check book. Columns 4 through 11 are titled with the most active categories, the least active on columns 12 and 13. I suggest the following categories for columns 4 through 11:

(4) Income
Advances, royalties, flat fees, speaker fees.

(5) Office Expense
Computer paper, ribbon, diskettes, postage, envelopes, stationary, photo copies.

(6) Outside Services
Typing service, critique service.

(7) Professional Dues & Subscriptions
SCBWI dues, writer's magazines.

(8) Professional Development & Education
SCBWI conference fees, writing classes, computer classes.

(9) Supplies
Art supplies, low cost tape recorder and camera, books.

(10) Travel, Meals & Entertainment
For travel out of your metro area: plane ticket, lodging, etc. and bona fide business meals and entertainment.

Column 11 will be titled Furniture & Equipment; Loan Deposits & Payments; Owner Draws & Contributions.

These items are accounted for differently than your other payments or deposits. Furniture & Equipment are high priced items with long useful lives such as computer equipment, cameras, and office furniture. Owner draws are payments to you that are not reimbursements for expenses. Owner contributions are monies you give to the business.

Column 12 will contain descriptions of your least active categories and column 13 the dollar amount of the category described in column 12 such as:

· Auto - parking, reimbursements for local travel.
· Advertising - business cards.
· Equipment Rental or Lease.
· Interest - on loan repayments, credit cards.
· Legal & Accounting.
· Repairs & Maintenance.
· Utilities & Telephone.

Record transactions
Categories known, now you have to record each transaction.

For example: On line one, you record the date, description (Advance, ZZ Publishing, for "Babies") and deposit of advance monies, say $1,000. Your bank balance is $1,000 and you also spread the deposit amount (record it) to column 4, Income.

On line two, you record the date, description (check# 101, postmaster), and payment of $32.00 in postage. Your bank balance is $968.00 and you spread the payment amount to column 5, Office expense.

Recording deposits for owner contributions, loans and expense reimbursements, is slightly different. The amount from the bank deposit column is spread to the appropriate category in column 4 through 13, but record the amount in brackets (100).

When the first page is full, total columns 4 through 13, at the bottom, carrying the balance forward to line one, of page two. Columns 10, 11 and 13 should be totaled by category, (i.e., for travel, make a notation T=$150).

In columns with brackets, you will add the amounts without brackets and subtract the amounts with brackets. Your total may have a bracket, indicating more deposits than payments. Continue recording, then totaling, until all your source documents are gone.

Recording finished, your approximate net profit or loss is calculated this way. Add column 4, (Income), subtract columns 5 through 10 (using only one half of the meals & entertainment total), and column 13. If your number is positive, you may have a net profit. If your number is negative you may have a net loss.

I say may have because the categories Travel, Meals & Entertainment and Furniture & Equipment have special rules to determine what is deductible.
First, travel, meals & entertainment categories require detailed substantiation. For each transaction you must write down: the amount, the date (departure and arrival for travel), the place, the business purpose (business reason or business benefit gained or expected to be gained), and business relationship (for meals and entertainment).

Fifty percent of your bona fide (and substantiated) meals & entertainment expenses are deductible but travel costs will need to be reviewed with your accountant. There are specific rules to determine what portion of the total cost is business and what portion is nondeductible as personal travel.

Furniture & Equipment costs will be capitalized, recorded as assets,
then a portion expensed (depreciated) annually. Your accountant will help you decide how much you can expense.

If you have recorded everything, column 4 minus columns 5 through 13 will equal your ending bank balance. If it doesn't, review your totals, then check your transaction amounts against the deposits and payments columns.

If you aren't a numbers person and bookkeeping depresses you, I understand. But with a little time and effort, bookkeeping will become habit, just as your writing techniques have become habit.