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Profit and Loss Questions

Here are profit and loss questions emailed to me by small business owners and business bookkeepers. 

My answers are below each question.

These specifically relate to transactions affecting the profit and loss report, also called an income statement.

Profit and Loss Questions

Profit and Loss questions 1

I am working on a P&L.

If an item is rented (income) and you must refund "resolution" (deposit per say) back what is it coded as?  Is it a cost of goods?

Answer

This answer can also apply to deposits received from property tenants/renters.

Usually, when a deposit from a customer renting or hiring an item is initially received it should be recorded on to the Balance Sheet as a Liability called Security Deposit Returnable or something similar. 

It is recorded separately to the actual rental cost which is recorded as an income on the P&L.

If the deposit is paid back to the renter in full, the refund must be recorded against that same Balance Sheet account to reduce it.

A security deposit is not income because it is paid with the foreknowledge that it will one day be refunded to the renter, or it will be used to repair damages caused by the renter. 

Paying back the deposit is not an expense or a cost of goods sold and should have no affect on the profit and loss.

Are you able to find in the records what account the deposit was initially recorded against? If it turns out that the deposit was first recorded as Rent Income, then the deposit being paid back to the renter should be recorded against Rent Income also, to reduce the Income.

When paying for damages caused by the renter, the deposit must be transferred from the Security Deposit Returnable account on the Balance Sheet and put into the Repairs & Maintenance expense account on the P&L.

Profit and loss questions 2

We received a loan to use for business operating expenses. 

In that month we only earned $875.00. We used the loan for business expenses over about a 2 month period of time and also paid an old loan that we used for business expenses.

I am not sure how to record this since the loan is not income. If I only subtract the expenses from our earned amount I will have a negative number. I'm not sure if that would be the correct way.

Answer:

If your earnings are less than your expenses you will end up with a negative amount, which is commonly know as a loss (on the profit and loss report or income statement).

This is perfectly normal especially if you receive a loan (which isn't considered income) and use the loan to pay for business expenses.

This should eventually come right as your business grows and you start earning income and earn more than what you spend which will result in a profit.

In bookkeeping, all business transactions either end up on the profit and loss report, or end up on the balance sheet. 

Loans received and Loan repayments go on the Balance Sheet, they are not included in the profit and loss calculations. 

profit and loss questions 3

Can a trucker, whose wife is a shareholder but does not do any driving, record his wife's travel expenses while on the road with him?

Generally speaking you cannot claim your wife's travel expenses if she is not your employee and if she is not travelling for business purposes.

If she was employed in your business and if she was travelling with you to attend a business meeting for your trucking business, then it would be possible for her expenses to be deducted.

But if she is just along for the ride as your wife, even though she is a shareholder, then her costs cannot be counted as a reasonable business expense because she's not working to produce income for the business.

Here is some extra information on spouses in a business - there is a section further down about travel costs.

profit and loss questions 4

I have written a check to an employee to reimburse them for a part purchased to fix a piece of our equipment that we rent for income. How do I record that entry?

Answer:

You will record it to Repairs and Maintenance expense.

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