Q: I've just started a realestate business where I will be purchasing properties to fix up,then sell or keep as rental properties. I've purchasedQuickbooks, but I have a question regarding the accountingprocedure for handling seed money. The source of the money is mypersonal account. Is this seed money considered income for thebusiness or investment capital?
A: Congratulations on starting yournew business. Your question is a common one for new businessowners.
Your investment should be recorded in your accounting program asa credit to owner's equity and a debit to cash. Your balancesheet will reflect the seed money as your equity (ownership) in thecompany. It isn't income. Income is money that comes into thebusiness as a result of sales or interest on invested money. Yourseed money is investment capital, and you're the investor.
It's confusing because business and finance involve words wedon't use in everyday conversations, such as capital andequity. I think accountants and bankers use these fancy terms justto keep folks like us from understanding what it is they do. Lookfor the glossary at my Web site, where I use easy-to-understandlanguage to define accounting and financial words and phrases.
As a business owner, you need a working understanding ofaccounting and finance terms and methods. You don't need to bean expert. Expertise is what professional accountants andbookkeepers provide. You do need to know the basics so youcan keep an eye on the score. In the game of business, thefinancial reports are the scorecards.
At my site, there's a column in the archives calledHow to Shop for an Accountant. Check it out.You'd be well-served to have a professional on hand as youfigure out basic accounting methods. Accountants are great for taxadvice; bookkeepers can be a big help with day-to-day entries. Youmight need a once-a-week or once-a-month visit from a bookkeeper tocheck up on your entries. And you might want to meet with anaccountant twice or three times a year. Find a CPA who specializesin real estate and can help you take advantage of all the tax perksthat industry offers. Look for one who invests in real estatepersonally.
I wrote an easy-to-read book that's a good primer for makingsense of financial reports, Where Did the Money Go?, available on myWeb site. Also read Robert Kiyosaki's books, Rich Dad, Poor Dad and The Cashflow Quadrant. Good luck!
Author Ellen Rohr nearly starved in her family's smallcontracting business-until she learned how to manage money."Do what you love, certainly," she says, "but themoney won't just take care of itself." Ellen's priceycollege education didn't prepare her for real-world business."Financial business basics aren't that difficult...butwhere do you learn them? Unfortunately, business literacy isn'ttaught in school. I teach the basics and take the mystery out ofmaking money." Ellen's mission as an author, columnist andseminar leader is to help people make a living doing what theylove.
The opinions expressed in this column arethose of the author, not of Entrepreneur.com. All answers areintended to be general in nature, without regard to specificgeographical areas or circ*mstances, and should only be relied uponafter consulting an appropriate expert, such as an attorney oraccountant.
FAQs
Key Points. Earned income is the money you make in salary, wages, commissions, or tips. Investment income is money you make by selling something for more than you paid for it. Passive income is money you make from something you own, without selling it.
What is the difference between a business and an investment? ›
Investments involve putting money into something with the expectation of receiving a return on that investment at a later time, whether it be from interest or dividends. Business opportunities, on the other hand, involve taking an active role in creating a profitable venture.
Is it better to be a business owner or investor? ›
Starting a business of your own has less risk than investing money. If you start especially a small business, the worst thing that can happen is for it to fail, and if this does happen, then all of the work you put into starting up will be worth nothing, so there are no big losses involved with starting on your own!
What is the relationship between income and investment? ›
Investment is often modeled as a function of interest rates, given by the relation I = I (r), with the interest rate negatively affecting investment because it is the cost of acquiring funds with which to purchase investment goods, and with income positively affecting investment because higher income signals greater ...
What is the difference between income and capital? ›
Capital includes all assets (cash, investments, buildings, machinery etc.) that have value. Income is money that is earned. It can be earned by capital (interest on a bank account, profit from a business, dividends from stock), or by labour (payment for work done).
What is the difference between investment and capital? ›
Investment vs Capital: Key Differences
Investments are made with the expectation of generating long-term growth, while capital is used to fund ongoing business operations. Additionally, investments can come in various forms, while capital is typically represented by cash or other assets used to generate income.
Do investments count as business income? ›
Investment income.
Income such as interest and dividends from bank accounts, stocks, and bonds are generally not considered business income for a sole proprietor, even if you think of them as reserve funds for business downturns.
Is a business considered an investment? ›
Business. The money put into starting and running a business is an investment. Entrepreneurship is one of the toughest investments to make because it requires more than just money. By creating a product or service and selling it to people who want it, entrepreneurs can make huge personal fortunes.
What counts as business investment? ›
An investment is always purchased with the hope that its future payoff will exceed its original cost. Business investment specifically refers to accounting assets that are purchased in the hope of making money on their own, as opposed to something like a delivery car for a restaurant.
What is a good income for a business owner? ›
The typical salary range for a small business owner is between $83,178 to $126,515. By comparison, the average wage index for Americans overall is about $63,795, according to 2022 data from the National Average Wage Index.
The greatest wealth is held by investors and business owners. Not only do they hold the majority of the wealth in the world, but they also enjoy more freedom even at lower levels of wealth because other people's efforts are working for you.
Can you be self employed as an investor? ›
Self-employed persons may be involved in a variety of occupations but generally are highly skilled at a particular kind of work. Writers, tradespeople, freelancers, traders/investors, lawyers, salespeople, and insurance agents all may be self-employed.
Which asset is the most liquid? ›
Cash is the most liquid asset possible as it is already in the form of money. This includes physical cash, savings account balances, and checking account balances. It also includes cash from foreign countries, though some foreign currency may be difficult to convert to a more local currency.
What is the best investment to get monthly income? ›
Best Monthly Income Plans You Should Consider
- Post Office Monthly Income Scheme.
- Long-Term Government Bonds.
- Corporate Deposits.
- Monthly Income Plans.
- Pradhan Mantri Vaya Vandana Yojana.
- Life Insurance Plus Saving.
- Systematic Withdrawal Plans.
- Equity Share Dividends.
Here's a look at a dozen income-generating sectors and specific ways to gain exposure to them.
- U.S. Dividend Stocks. ...
- International Dividend Stocks. ...
- Energy Pipelines. ...
- Utilities. ...
- Telecoms. ...
- Convertible Bonds. ...
- Real Estate Investment Trusts. ...
- Mortgage Securities.
Gains from investments held for less than a year are usually considered short-term capital gains, and taxed as ordinary income (which is usually a higher tax rate than long-term capital gains). , so not reporting it correctly can cause you to pay too much or too little tax.
Does investment income count as income? ›
Often, investment income includes interest and dividends. The income you receive from interest and unqualified dividends are generally taxed at your ordinary income tax rate.
Is investment income an income? ›
Investment income is the profit earned from investments such as real estate and stock sales. Dividends from bonds also are investment income. Investment income is taxed at a different rate than earned income. The profits from the sale of gold coins or fine wine could be considered investment income.
What qualifies as investment income? ›
According to the Internal Revenue Service (IRS), investment income includes interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are considered passive activities, such as a silent ...
