Running a business not only requires a lot of hard work and dedication, it can also be a big financial commitment that often involves spending money from your own pocket.
As a business owner or freelancer that makes financial contributions to your business, it’s important that you know how to account for owner contributions, as well as how to record them in your invoicing software.
When would I make an owner contribution?
When you’re starting out with a new business venture, there are a number of different costs that need to be covered before you’re making a profit: deposits and down payments, basic equipment and supplies, and even building a website or creating a logo. It’s therefore pretty likely that you’ll use some of your own money to get your business up and running – even if you manage to get financial backing from a bank or investor.
It’s also common to put money into your business at a later date – perhaps to make an expensive purchase that you can’t quite cover with the money in your business bank account, or perhaps as a temporary solution to poor cash flow.
How to account for an owner contribution
From an accounting perspective, whenever an owner puts money into their business, there’s an assumption that this money will be paid back. Even if you’re happy to forget about the amount you put in, simply treating owner contributions as income gives a distorted picture of your finances and can give the impression that your business is generating more of a profit than it actually is.
Liabilities are categorised as either short term or long term. Short-term liabilities are settled within a year, whereas long-term liabilities take longer than a year to pay off. It usually takes much longer than a year to repay the money your put into your business, so owner contributions are considered to be long-term liabilities.
How to record an owner contribution in your invoicing software
Whenever you put money in or take money out of your business, you should make a record of this in your accounting and invoicing software. With Debitoor, you can record an owner contribution with just a few clicks.
To record an owner contribution in Debitoor invoicing software, you’ll need to create a new expense. Enter the description as something along the lines of ‘Owner contribution’, ‘Owner payment’, or ‘Owner deposit’, and then select the category ‘Owner payment’ (which you can find under ‘Bank & Financing costs’). Once you’ve entered the description, date, and amount click save!
Plus, Debitoor makes it easy to create a balance sheet, so you can easily check how your liabilities compare to your assets, whether you’re on track to meet your financial goals, and how much of your owner contribution is left to repay.