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Business money and personal money

Why a business needs a boundary between its money and its owner's, how to place any payment on one side of it or split it across both, and what that does to the month's profit.

Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.

1. What you will learn

You will decide, for any payment, whether it belongs to the business or to the household, split the ones that are genuinely both on a share you can state and repeat, and put what the owner takes out on its own line rather than among the costs of trading. You will also correct a month's profit once the drawings are taken out of its costs, and check that a sorted week adds back.

2. What you already have

You know that revenue, profit and cash answer three different questions, and that money the owner takes out moves the balance without touching profit. All three figures are built from records of what came in and what went out, and none can be right if the records contain things that were never about the business. This lesson draws the line that keeps them clean.

3. Words this lesson uses

4. Without a boundary, no number about the business is true

The first financial control a business needs is not a budget. It is a line between the business's money and the owner's, and not because a rule says so. Put a month's spending through one account and the costs come out holding the clay and the pitch fee alongside a present and a grocery shop. The owner asks is this worth doing? and the account cannot answer: the figure is the cost of trading plus the cost of living.

Money the owner takes out is not a cost of trading. It goes on a line of its own. A cost is what the business spent to earn what it earned; drawings come out of what is left over, and among the costs they make a working business look like a failing one.

A payment that is genuinely both is split, not guessed. A phone used for bookings and family calls is the common case. State a share — the fraction of the calls, the fraction of the miles — and use the same one next month.

5. The method, step by step, and how to check it

Open a separate account if you can. A business account, even a simple second personal account used only for the business, makes the boundary physical: sales go in, trading costs go out, and the owner pays themselves by transfer. Where that is not possible, the same boundary can be kept on paper, with each payment marked as it happens.

Test each payment. The counterfactual question decides it: would this money have gone if the business had never opened? Size does not decide it, nor does which card was to hand.

Split what is genuinely both. Choose a share from something observable — a week's call log, a month's mileage, the floor area of a room used as a workshop — write it down, and use the same share every month until the pattern changes.

Record drawings as drawings. When the owner takes money out, it goes on its own line, not among the costs. When a personal payment was made from the business account by mistake, it is not deleted; it is recorded as drawings, because the money really left.

Check the week adds back. The business total plus the household total must equal everything that left the account. If it does not, a payment has been missed or counted twice. Then read the business total on its own: it should look like the cost of trading that week, and nothing else.

6. What the rules require depends on where you trade

Taxes, permits, registration and the records a business must keep are set where the business trades, and they differ from one place to the next and from one year to the next. So this teaches the reasoning — what a figure is for, and how to work it out — with any rate or threshold given to you in the question as a number to use. The rate that applies to you is a thing to look up with the authority where you trade, and to check again each year.

So this lesson teaches the boundary and why it exists, not what any authority demands of you. What is true everywhere is the reasoning: records that mix two people's money answer nobody's question, and a clean boundary is easier to comply with anywhere.

7. Paying yourself on purpose

Once the boundary exists, the owner's own pay becomes a decision rather than a leak. Many owners find it steadier to move a fixed amount to the household account on a fixed day — every Friday, or the first of the month — rather than taking money whenever the household needs it. The fixed amount is set below what the business usually makes, so the business account keeps a cushion for slow weeks and large bills.

This does two things. It gives the household a predictable income, which is often what the owner wanted from the business in the first place. And it lets the business account show whether the business can afford that income: if the balance falls month after month while drawings stay fixed, the business is paying out more than it makes, and the owner learns it from the account rather than from a bill that cannot be paid.

In some legal forms the owner is paid a salary through the business instead of taking drawings, and the salary is then a cost. The boundary is the same either way: the owner's pay is visible, on its own line, and decided on purpose.

8. The hard cases, and how to settle them

Most payments sort themselves in a second. A few need a moment's thought, and the same test settles each of them.

Something bought for the business and used at home. A laptop bought for the books and used for films on the weekend is split on a stated share of use, like the phone. If the home use is trivial, record the share as small rather than pretending it is none.

Stock the owner takes for the household. Monica takes a bag of fruit home for the family. That fruit was bought by the business, so taking it is drawings — at what it cost the business — not a sale and not waste. Leave it unrecorded and the stall's waste figure rises for no reason anyone can find.

Money the owner puts in. When the business is short and the owner pays a supplier from the household account, that is the owner putting money into the business. Record it as money in from the owner, not as a sale and not as a loan from nowhere, so that the cost still shows among the costs and the owner's contribution is visible.

A meal with a client. It depends on why the meal happened: a meal that would not have taken place without the business belongs to the business; lunch the owner would have eaten anyway does not. Local rules on which such costs can be claimed differ, but the test for the records is the same one: would it have happened without the business?

9. In the world: a freelance designer's first year

A graphic designer starts freelancing and, for the first six months, runs everything through her personal account: client payments in, software, rent, groceries and holidays out. At the end of the year she tries to work out whether freelancing was worth it and cannot. The account shows 41,000 of money in and 43,500 out, which looks like a loss, and she nearly takes a salaried job.

Going through the statements line by line, she sorts every payment. Client payments were 41,000. The costs that exist because she freelances — software 1,300, a new computer 2,100, her share of the phone and internet at 60 percent of 1,200, a co-working desk 1,800, accountancy 450 — come to 6,370. Everything else, 37,130, was her living costs and a holiday: drawings.

So the business made 41,000 − 6,370 = 34,630 of profit, and she took out 37,130, which is why the account fell. The business worked; she had simply taken out more than it made. She opens a separate account, pays herself a fixed 2,700 a month, and at the end of the next year can read the answer in an afternoon instead of a week.

10. In the world: why banks and accountants ask

Lenders assessing a small business usually ask for its bank statements, and accountants preparing its accounts ask which payments were personal. Both questions are easier, cheaper and more convincing to answer when the boundary was kept from the start — and a business whose figures cannot be separated from its owner's is harder to lend to, to value and to sell.

11. Where this goes wrong

It is all my money anyway. True about ownership, irrelevant to measurement. The boundary is there so the figures mean something.

It came out of the business account, so it is a business cost. Which account a payment came from is a fact about the account; where it belongs is a fact about the payment.

What I take out is a cost like any other. Drawings come out of what the business made, and costs come out before there is anything to take. Put drawings in the costs and a profitable business reads as a loss-making one.

A split can be guessed each month. A share that moves with the owner's mood makes every month incomparable.

It is too small to matter. Small and frequent is how a record stops being readable. Size never decides which account a payment belongs to.

Keeping one account is simpler. It is simpler for a week and harder every month after, because every personal payment must later be found and taken back out before the business's figures mean anything.

12. Maya pays for a kiln repair and a holiday in the same week

1. Test the kiln repair of 240.

   $240 \Rightarrow \text{business}$

   The kiln makes what she sells.

2. Test the holiday deposit of 300, paid from the same account.

   $300 \Rightarrow \text{household}$

   Personal, and in the wrong place.

3. Record the holiday as drawings rather than deleting it.

   $\text{drawings} = 300$

   The money really left; a record that hides it is worse.

4. Find the week's cost of trading.

   $\text{costs} = 240, \text{ not } 540$

   Two lines, two meanings.

5. Check both add back to what left the account.

   $240 + 300 = 540$

   Every dollar is on exactly one side.

13. Bright Home Cleaning and one phone

1. Write the bill.

   $\text{phone contract} = 45 \text{ a month}$

   Used for bookings and for calling her mother: genuinely both.

2. Read a month's call log for the share.

   $\text{business calls} \approx \tfrac{2}{3}$

   A share you can state, from something observable.

3. Find the business part.

   $45 \times \tfrac{2}{3} = 30$

   A business cost.

4. Find the household part.

   $45 - 30 = 15$

   Drawings, or paid from the household account.

5. Write the share beside the figure.

   $\text{phone: } \tfrac{2}{3} \text{ business, from the call log}$

   The split is recorded, not recalled.

6. Review it when the pattern changes.

   $\text{new log next year} \Rightarrow \text{new share}$

   Changing a share on evidence is fine; on mood it is not.

14. Northside Repairs finds a month that was not a loss

1. Read the month as recorded.

   $\text{sales } 4200; \ \text{costs } 4500; \ \text{loss } 300$

   The records say the month lost money.

2. Test each cost line and find the owner's rent at home.

   $800 \Rightarrow \text{household}$

   Paid from the business account, but a cost of living.

3. Find a split: the van, used a quarter for family trips, cost 240.

   $240 \times \tfrac{1}{4} = 60 \text{ household}$

   The household share of a payment used for both.

4. Move both to drawings.

   $800 + 60 = 860$

   Money the owner took out, on its own line.

5. Find the true costs of trading.

   $4500 - 860 = 3640$

   What the business spent to earn its sales.

6. Find the true profit.

   $4200 - 3640 = 560$

   The month made money.

7. Compare the two readings.

   $-300 \text{ as recorded}; \ +560 \text{ with drawings apart}$

   Without the boundary, a working business read as a failing one.

15. Your turn: Northside Repairs, three payments on one Friday

1. Five replacement screens from the supplier, 90 dollars. Place it.

   $90 \Rightarrow \text{business}$

   The screens go into jobs; it would not be spent without the bench.

2. 200 moved to his own account for the rent at home. Place it.

   $200 \Rightarrow \text{drawings}$

   The owner taking money out, not a cost.

3. Your turn: work this step out. Its working is at the end of the packet.

   Find the day's cost of trading.

16. Guided practice

Four payments. Put each one where it belongs: the business account, the household account, or split between the two.

17. Guided practice

Complete the worked solution: in one week a stall owner paid, all from one account, $102$ for stock, $57$ for the pitch, $16$ for a present, $108$ for groceries, and a phone bill of $120$ that is used three quarters for the business. Sort the week.

1. Find the business's share of the phone.

   $120 \times \tfrac{3}{4} =$ _p

   A payment used for both is split on a stated share.

2. Add the business payments.

   $102 + 57 + (\text{phone share}) =$ _s

   Stock, pitch and the business part of the phone.

3. Add the personal payments.

   $16 + 108 + 30 =$ _h

   The present, the groceries and the household part of the phone.

4. Check the two add back to the whole week.

   $(\text{business}) + (\text{household}) = 403$

   Every dollar that left is on exactly one side.

5. Label the household side.

   $(\text{household}) \text{ on the drawings line}$

   It is money the owner took out, not a cost of trading.

18. Guided practice

Bright Home Cleaning's phone contract costs $75$ dollars a month, and the phone takes both bookings and family calls. A month's call log shows that $2$ calls in every 3 are business. How many dollars of the bill are a business cost?

Answer:

19. Practice

At Monica's Market Stall: two hundred dollars moved to the household account to pay the rent. Which account does this payment belong in?

• The business account, because the payment was made in order to trade and would not have happened otherwise
• The household account, because the money was spent on the owner's own life and not on trading
• Either, as long as it is written down somewhere
• Neither, because it is too small to matter

20. Practice

Draw the money map for a business with two accounts. There are four places money can sit and one thing money does: it gets paid from one place to another. Draw every payment that happens, and none that does not.

This task has no paper form; do it on a device.

21. Practice

Maya's month shows sales of $3216$ dollars and costs of $3238$, so her records say the month lost $22$. Reading the costs, $948$ of them is money she moved to her household account to pay the rent at home. What was the month's real profit, in dollars?

Answer:

22. Somewhere new

A food truck's business bank statement for one week shows five payments: gas for the generator, $59$ dollars; a deposit on a family holiday, $380$; paper cartons and napkins, $69$; the owner's gym membership, $66$; and the pitch fee for the weekend market, $74$. What were the truck's business costs for the week, in dollars?

23. Lesson test

Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.

24. Test question

Five payments Monica made this week, all of them out of the same account. Say which account each one belongs to, then give what the business account should have paid this week, in dollars.

25. What you can do now

You can place a payment in the right account, split a shared bill, and correct a month's profit for drawings. Tell someone why putting what the owner takes out among the month's costs makes a working business read as a failing one. Next: writing a day down — the five things that make one entry, and the three different figures a trading day produces.

Working for the steps left to you

15. Your turn: Northside Repairs, three payments on one Friday, step 3