USA Reporting a Family Business on a Family's Balance Sheet

[salmichaels]

I am the chief finance officer for my family, whether I like it or not, and I've run into an accounting question.

I produce montly financial statements for our family--Balance, Income, CF. I've done this for a long time and find it quite useful.

My question regards our family business. I consider this a separate entity from the family, because it's easier to manage it that way, and we also have a partner. So if I put some family cash into that business, do I report that as CFI out for the family, and CFF in for the business? Then report the business on family balance sheet as an asset reported at cost (the amount put into it)?

Because we have to work in this business, I've been considering our "salaries" or "wages" at opportunity cost of working somewhere else, which until lockdown was fairly easy to determine. Anything the business made beyond that I considered a gain, which would be retained and reinvested, or drawn out the the family, and reported as CF in on the fam balance sheet. But is it OCF in? or CFI in?

Conversely, what if it loses cash? This is a tutoring business, and before lockdown we had quite a bit of deferred revenue in the form of pre-paid tuition from people. After lockdown we gave up our physical location, and went online. Thankfully no one demanded a refund. So we are working down that def. revenue. and the liability is nearly gone. In the mean time, the Business CF is negative, as it has to pay us our salaries. I know very well how to account for all that on the business side. But what about on the family side?

I came up with what seems like a silly solution but seems to make sense to me, an arm-chair accountant. To wit, whilst we work down the deferred revenue, in order to pay our salaries I have to invest family money into the business (FAM: CFI out, BUS: CFF in), and then pay the salaries back to us (FAM: OCF in, BUS: OCF out). Once this prepaid tuition mess is fixed, and the business is in positive CF, the BUS: OCF in will cover salary expenses and the miniscule other expenses it has, and the rest is profit over the oppcost of me working. And that--is it FAM: OCF in? Or CFI in?

Okay, my head is spinning and yours probably is too. I love accounting though, so I look forward to your thoughts!

 

[simply_slmn]

Lets break down answer to your question on point by point basis:

1. Firstly, accounting the business as a separate entity is a very good idea. Inflow of cash in the business can be treated as CFF in the for the business and CFF out from the family.
2. Considering the opportunity cost of salaries and wages, can be useful for decision making but not for the purpose of accounting.
3. However, if you truly wish to consider the opportunity cost for accounting purpose in the business entity, here’s a suggested approach:
   1. Book the desired salary as your expense in the Income Statement but do not show it as a cash out flow. Show it is a payable to you on the balance sheet
   2. CFI in and CFI out has to be done if and only if there is a cash inflow or an outflow respectively
   3. So, when you actually want to take out cash from the business for your family, reduce the payable and reduce the cash.
4. For the family side, accounting has to be just the reverse of what is being done for business side (Income receivable when salary is payable in business side and Cash received when the cash is actually withdrawn from the business)
5. If the above approach if followed, your books shall automatically be cleaned up showing you true profit from the business.

Hope this helps! If you need any further clarifications, do let me know.

 

[salmichaels]

Thank you for your reply, this is really helpful.

I wanna make sure I understand you correctly.

1. A lot of people I know use cash basis and don't separate family and business. I use accrual and separate, it's worked rather well.

2. I do think the oppcost usage is problematic. I guess I was thinking if I hire someone to work my hours (which I can do) I'd have to pay them X amt of dollars. And if I do it myself, I'm not working somewhere else for a very similar wage. Is there an alternative?

3. I don't quite understand this one, I need to grapple with it a bit longer. For your 2nd point "CFI in and CFI out" do you mean for the Family or the Business?

4. Yes, this is so obvious but I guess it wasn't obvious to me, thank you.