How Do You Calculate a Break-Even Analysis for Your Small Business?

By Randall Orser | Small Business

Money raining down on a piggy bank TNYou’re running a small business, or maybe you’re thinking about starting one. You don’t want to lose money, and you don’t want to go out of business. So, how do you find out how much you need to earn to break even? The answer is simple. You do a break-even analysis.

Don’t worry, a break-even analysis sounds more complicated than it really is. It doesn’t require a lot of math skills. It just requires some thought and a basic equation.

First, what is a break-even analysis? Very simply, a break-even analysis is the process of discovering your break-even point. What’s a break-even point? It’s exactly what it sounds like: it’s the point where your expenses are exactly covered by your income. It’s where you “break even”. Every sale above your break-even point is profit in your pocket.

Once you know your break-even point, you know exactly how much you need to earn to break even. You will also see whether or not you can realistically stay in business.

For example, if your break-even analysis shows you need to sell 1000 widgets every year just to cover your expenses, and historically you’ve only sold 200 widgets a year, then you’re going to have to do a lot of planning to get your sales up to 1000. You might need to dramatically lower your expenses or come up with a better marketing plan to break even.

So, how do you calculate your break-even analysis?

The first thing you do is add up all your fixed costs. This means all the expenses you have to pay whether you make any sales or not. Your fixed costs include your rent, utilities, and any salaries. Your business may have other fixed expenses like membership dues or insurance premiums. As an example, if you made widgets from home you might discover your fixed costs are $10,000.

Next, estimate the average price of your product or service. To continue the widget example, if all your widgets are sold for $100 each, then $100 is the average price of products. But what if your widgets have different prices? Then you find the average price. You find the average by adding up the different prices and dividing that by the number of products.

For example, say you offer 2 different widgets: one is $50 and the other is $150. To find the average price of product, add 50 + 150 and divide by 2. Your average price of products would be $100.

Finally, estimate the average cost of your product. In other words, how much does it cost you to produce each widget? Or, if you provide a service, how much does it cost you to provide that service (travel expenses, phone calls, etc.)? To conclude the widget example, let’s say your widgets cost $10 to produce.

Okay, now you know your fixed costs, the average price of product, and the average cost of product. You’re almost finished. All you have to do is plug these numbers into the break-even equation. This equation will tell you the dollar amount you have to make to break even.

The break-even equation is:

Fixed costs/ [1 – (average cost of product/average price of product)]

So, for the widgets example, take the fixed costs of $10,000 and divide that by 1 – (10/100). Remember, $10 is the cost of product and $100 is the price of product.

$10,000/[1 – (10/100)] = $10,000/.9 = $11,111

The equation shows that you must make $11,111 in order to break even.

Want to know how many widgets you’ll have to sell to get there? Easy. Just divide this number by the average price of product. For the widgets, divide $11,111 by $100 and you get 112 (round up to the next whole number).  So, in this example, you must sell 112 widgets every year just to break even.

Calculating a break-even analysis for your small business is the best way to find out how much you need to earn to stay in business. Once you know your break-even point, you can design marketing plans and control your expenses to maximize your earning potential.

Your break-even analysis will tell you exactly at what point you start turning a profit. Every sale above your break-even point will be money in your pocket, so take advantage of the break-even analysis to make better business decisions and increase your profits.

Why are my support payments taxable?

By Randall Orser | Personal Income Tax

Your Money Check Payment in Mailbox TNThere are two kinds of support payments: child and spousal. Child support payments are those payments that you and your spouse have agreed on, or are court ordered, to help cover the cost of raising the children by the one spouse. Spousal support payments are those payments that you and your spouse agreed on, or are court ordered, that cover that spouse’s own maintenance (living expenses). Generally, the agreement or order must stipulate whether the payment is a child or spousal support payment.

Your payment is considered a support payment if the following five conditions are met.

  1. The payment must be made under the terms of a court order or written agreement.
  2. If the recipient is the payer’s current or former spouse or common-law partner, the payer must be living separate and apart from the recipient at the time the payment was made because of a breakdown in the relationship. Otherwise, the payer must be the legal parent of a child of the recipient.
  3. The payment is made for the maintenance of the recipient, child of the recipient, or both, and the recipient has discretion as to the use of the amount.
  4. The allowance must be payable on a periodic basis. The timing of the payments must be set out in the court order or written agreement.
  5. The payments must be made directly to the recipient.

For tax purposes, child support payments are not taxable income to the recipient. However, they must be laid out in the court order or agreement as child support payments. If your order or agreement predates May 1 1997, then the recipient would have to include the payments as income, and the payer gets a deduction.

Spousal support payments are taxable income to the recipient, and a deduction for the payer. As with anything tax wise, there are exceptions. Child support has priority. If your court order or written agreement specifies child support payments and support payments for the recipient, priority is given to the child support.

This means that all payments made are first considered to have been made toward child support. Any amount paid over and above the child support amount is considered to be support payments for the recipient. All child support payable to a recipient must be fully paid before any amounts paid as support for the recipient can be claimed as a deduction. Any arrears in the amount of child support is carried forward and added to the next year’s support payable. The priority of child support does not apply when the child support and spouse or common-law partner support are payable under different court orders or written agreements and the recipients are different people.

Payments made after the death of the recipient are not deductible by the payer. Whether the payments are made to the estate or the children, these payments would not meet the conditions of a support payment. Payments made by the estate of a payer to the recipient are neither deductible nor taxable. The amounts do not meet the conditions of a support payment because an estate cannot have a spouse or common-law partner.

If you have to claim support payments you received, then it’s because they are for spousal support. Check your agreement or court order to ensure you are doing this correctly, and keep track of your child support payments as you may not have to claim the support payments if the child support is not paid in full.

I Want To Hire Someone, But They Want Cash

By Randall Orser | Small Business

Broken Piggybank Shows Financial Deposit TNYou may be wondering why I used the word ‘hire’ in the title as to whether I mean an employee or subcontractor. I’m going to be talking about both situations. You basically hire someone whether it’s an employee or subcontractor. Cash is a sticky situation, and while it’s not illegal to pay cash, it’s how you treat the transaction that could make it illegal. In the employee situation, are you legitimately taking off deductions and then paying cash? In the subcontractor situation, are you paying off an invoice and it includes applicable taxes?

For our purposes here, a subcontractor refers to anyone you hire that is not an employee, whether it’s hiring someone to help you with your business work, or to do a website, or just to clean the office.

Employees

There is nothing wrong with paying cash to an employee, as long as you’ve taken off the deductions and are giving them their net pay. That is totally acceptable. You should also give them a paystub, and have a copy that they sign and date as receiving the pay. By having them sign a copy of the paystub, that you keep, you ensure the employee doesn’t come back saying he never was paid.

Now, if it’s a situation where someone wants to do some work for you, and get paid cash without you deducting the appropriate taxes, then you just have to say no. This situation will definitely come back and bite you in the posterior region.

I had a client that was paying employees cash, not doing the proper deductions, and not getting any kind of signed receipt that they actually received funds. By the time the client came to me it was too late, and we had a year-end to complete. Needless to say the client was screwed. All monies paid to these ‘employees’ could not be taken as a deduction for the company, and the client had to claim all these funds as a draw. The client ended up having to claim most of the funds as personal income, and owed thousands to CRA at personal tax time.

Subcontractors

Again, it’s not wrong to pay a subcontractor with cash as long as you get a receipt and pay the applicable sales taxes (unless of course the subcontractor is a small supplier and thus not registered for the GST/HST). Whenever you’re dealing with someone who you’ve hired as a subcontractor, you must get them to invoice you, and charge applicable taxes; whether you’re paying cash or not.

A problem arises when the subcontractor insists on only cash, and then won’t give you an invoice or receipt. If this happens, then don’t do business with that subcontractor, it’ll only come back to haunt you. Canada Revenue Agency always requires you to provide proof of any deductions you claim against revenues, and in this situation you have no proof. With no proof, there’s no way you can claim a deduction.

Let’s go back to the client we discussed in the Employee section above. This client had some dealings with a subcontractor who refused to provide a receipt and would only take cash. By the year-end they had paid this subcontractor tens of thousands of dollars over the course of several jobs. With no proof that the client had paid this subcontractor, all monies paid this subcontractor were considered to be draws taken by the client. These monies were also added to the client’s income.

This scenario involved two people in a corporation; so all monies drawn were divided evenly between the partners. In the end the two partners ended up having to claim tens of thousands of dollars as personal income, and thus ended up owing a lot of money to the government on their personal taxes. Fortunately, the client took these draws as employment income, so the corporation did end up with a deduction.

When you’re in business, or deciding to start a business, it’s imperative that you set a policy when it comes to paying cash. I recommend to clients to never pay cash, and either writes a cheque or some kind of transfer from their bank that can be traced to the recipient. And, remember that subcontractor may not be considered a subcontractor by Canada Revenue Agency, so be careful.

What are child and family benefits?

By Randall Orser | Personal Income Tax

Piggy Bank Family Shows Planning And Protection TNThe Government of Canada has through our taxation system derived benefits for those taxpayers with spouses and children. These benefits are: Canada Child Tax Benefit (CCTB), Universal Child Care Benefit (UCCB), GST/HST Credit, Working Income Tax Benefit (WITB), Children’s Special Allowances (CSAs) [these are payments given to a government agency that protects and cares for children and we won’t cover that here], and various Provincial and Territorial programs.

Information you provide on your income tax and benefit return is used to calculate your child and family benefits payments. Make sure you file your income tax and benefit return on time every year, even if you have not received income in the year. If you have a spouse or common-law partner, they also have to file an income tax and benefit return each year.

Canada child tax benefit (CCTB)

The Canada child tax benefit is a tax-free monthly payment made to eligible families to help them with the cost of raising children under age 18. The CCTB may include the National Child Benefit Supplement and the Child Disability Benefit.

The national child benefit is a joint initiative of the federal, provincial, and territorial governments that will:

  • Help prevent and reduce the depth of child poverty;
  • Promote attachment to the workforce by ensuring that families will always be better off as a result of working; and
  • Reduce overlap and duplication of government programs and services.

In July 1998, the Government of Canada enhanced the Canada child tax benefit (CCTB) by introducing the national child benefit supplement (NCBS). This supplement is the federal government’s contribution to the national child benefit initiative.

The Child Disability Benefit (CDB) is a tax-free benefit for families who care for a child under age 18 who is eligible for the disability amount. A child is eligible for the disability amount when a qualified practitioner certifies, on Form T2201, Disability Tax Credit Certificate, that the child has a severe and prolonged impairment in physical or mental functions, and the CRA approves the form.

Universal Child Care Benefit (UCCB)

The UCCB is designed to help Canadian families, as they try to balance work and family life, by supporting their child care choices through direct financial support. The UCCB is for children under the age of 6 years and is paid in installments of $100 per month per child.

To receive the UCCB, all the following conditions must be met.

a)     You must live with the child, and the child must be under the age of 6

b)    You must be the person who is primarily responsible for the care and upbringing of the child

This means you are responsible for such things as supervising the child’s daily activities and needs, making sure the child’s medical needs are met, and arranging for child care when necessary. If there is a female parent who lives with the child, CRA usually considers her to be this person. However, it could be the father, a grandparent, or a guardian.

c)     You must be a resident of Canada

d)    You or your spouse or common-law partner must be:

o   Canadian Citizen

o   Permanent resident

o   Protected person

o   Temporary Resident

Generally, you should apply for the UCCB as soon as possible after:

  • Your child is born;
  • A child starts to live with you; or
  • You become a resident of Canada.

GST/HST Credit

The GST/HST credit is a tax-free quarterly payment that helps individuals and families with low or modest incomes offset all or part of the GST or HST that they pay.

You are eligible for this credit if, you are a resident of Canada for income tax purposes in the month prior to and at the beginning of the month in which the GST/HST credit is issued and at least one of the following applies:

  • You are 19 years of age or older before the month in which we make a quarterly payment;
  • You have (or previously had) a spouse or common-law partner; or
  • You are (or previously were) a parent and live (or previously lived) with your child.

If you will turn 19 before April 1, 2015, you can apply for this credit on your 2013 tax return.

To receive the GST/HST credit, you have to apply for it, even if you received it last year. To apply, you have to file an income tax and benefit return for 2013, even if you have not received income in the year. On page 1 of your return, check the “Yes” box in the GST/HST credit application area and enter your marital status in the Identification area.

Working Income Tax Benefit (WITB)

The working income tax benefit (WITB) is a refundable tax credit intended to provide tax relief for eligible working low-income individuals and families who are already in the workforce and to encourage other Canadians to enter the workforce. This also includes income earned from being self-employed.

You can claim the WITB on line 453 of your 2014 income tax and benefit return. However, eligible individuals and families may be able to apply for the 2015 advance payments. You can apply for the advanced payments when you file your income tax return.

To qualify, your working income must be over $3,000 for the year, you must be a resident of Canada throughout the year, and over 19 years of age as of December 31st for the year you apply. If you are under 19 years of age, you may still be eligible for the WITB, if you have a spouse or common-law partner or an eligible dependent on December 31st.

You are not eligible for the WITB if:

  • You do not have an eligible dependent and are enrolled as a full-time student at a designated educational institution for more than 13 weeks in the year;
  • You are confined to a prison or similar institution for a period of 90 days or more in the year; or
  • You do not have to pay tax in Canada because you are an officer or servant of another country, such as a diplomat, or a family member or employee of such person.

If you are eligible for the WITB and the disability amount, you may also be eligible to claim an annual disability supplement. To be eligible for the disability supplement, your working income must be over $1,150 and we must have an approved Form T2201, Disability Tax Credit Certificate on file with CRA.

As you can see the federal government have various credits that can help low-income families with relieve from various financial pressures they incur day-to-day. Always ask your tax preparer whether or not you qualify for these credits, and why you don’t. The CRA will inform you once you’ve filed your taxes whether or not you qualify, too. Below we are talking about the various (and there are many of them) programs to help low-income families.

Provincial and Territorial programs

Alberta family employment 
tax credit (AFETC)

The AFETC is a non-taxable amount paid to families with working income that have children under 18 years of age.

BC family bonus (BCFB)

This program provides non-taxable amounts paid monthly to help low- and modest-income families with the cost of raising children under 18 years of age. The amount is combined with the CCTB into a single monthly payment.

BC low-income climate action tax credit (BCLICATC)

This credit is a non-taxable amount paid to help low‑income individuals and families with the carbon taxes they pay.

New Brunswick child tax benefit (NBCTB)

The NBCTB is a non-taxable amount paid monthly to qualifying families with children under 18 years of age. The New Brunswick working income supplement (NBWIS) is an additional benefit paid to qualifying families with earned income who have children under 18 years of age. Benefits are combined with the CCTB into a single monthly payment.

Newfoundland and Labrador child benefit (and mother baby nutrition supplement)

This benefit is a non-taxable amount paid monthly to help low-income families with the cost of raising children under 18 years of age. The mother baby nutrition supplement (MBNS) is an additional benefit paid to qualifying families who have children under one year of age. Benefits are combined with the CCTB into a single monthly payment.

Newfoundland and Labrador harmonized sales tax credit (NLHSTC)

This credit is a non‑taxable amount paid to help low-income individuals and families who may be affected by the HST. Under this program, individuals or families with adjusted family net incomes of $15,000 or less receive an annual amount of $40 per adult and $60 for each child under 19.

Newfoundland and Labrador seniors’ benefit (NLSB)

This program provides a non‑taxable annual amount of $1,036 for a single senior (65 years of age or older at any time during 2014) or a married or common-law couple with at least one senior whose adjusted family net income is $28,654 or less. Seniors will get part of this payment if their adjusted family net income is between $28,654 and $37,522.

Northwest Territories child benefit (NWTCB)

This benefit is a non-taxable amount paid monthly to qualifying families with children under 18 years of age.

Nova Scotia child benefit (NSCB)

This benefit is a non-taxable amount paid monthly to help low- and modest-income families with the cost of raising children under 18 years of age. These amounts are combined with the CCTB into a single monthly payment.

Nova Scotia affordable living tax credit (NSALTC)

This credit is a non‑taxable amount paid to make life more affordable for Nova Scotian households with low and modest incomes. The credit offsets the increase in the HST and provides additional income for these households.

Nunavut child benefit (NUCB)

This benefit is a non-taxable amount paid monthly to qualifying families with children under 18 years of age.

Ontario trillium benefit (OTB)

The Ontario trillium benefit (OTB) is the combined payment of the Ontario energy and property tax credit, the Northern Ontario energy credit, and the Ontario sales tax credit.

Ontario energy and property tax credit (OEPTC)

The Ontario energy and property tax credit (OEPTC) is designed to help low- to moderate-income Ontario residents with the sales tax on energy and with property taxes.

Northern Ontario energy credit (NOEC) 

The Northern Ontario energy credit (NOEC) is designed to help low- to moderate-income Northern Ontario residents with the higher energy costs they face living in the north.

Prince Edward Island sales tax credit

This credit is a non‑taxable amount paid to help offset the increase in the sales tax for households with low and modest incomes.

Saskatchewan lowincome tax credit (SLITC)

This credit is a non‑taxable amount paid to help Saskatchewan residents with low and modest incomes.

Yukon child benefit (YCB)

This benefit is a non-taxable amount paid monthly to help low‑ and modest‑income families with the cost of raising children under 18 years of age. These amounts are combined with the CCTB into a single monthly payment

A Straightforward Explanation of a Company’s Income Statement

By Randall Orser | Small Business

Income Statement word cloud TNWhen companies want to track their financial performance over a given week, month, quarter or year, they turn to the information provided through their income statement. Sometimes referred to as an “operating” statement, a “profit and loss” statement or even an “earnings” statement, this financial reporting structure aims to define a company’s performance in terms of its revenue, the changes in its inventory values, its product’s COGS (cost of goods sold), its gross profit on sales, its expenses, and most importantly, its net profit for the period in question. We’ll review the income statement by taking a straightforward look at the activities of a company during a given month.

The Income Statement

The income statement is but one of the three key financial reporting structures for all enterprises. The others include the balance sheet and cash flow statement. However, while the balance sheet is viewed as a snap shot in time, and the cash flow statement tracks incoming versus outgoing cash from the business, the income statement is seen more as a time based representation of the company’s activities. While the income statement itself can be quite complex, ours will be simplified by focusing on the transactions of a company over a single month. In order to do that, we’ll outline the income statement by defining the relationship between a company’s sales, COGS, gross profit, expenses and net profit.

Sales, COGS, Gross Profit, Expenses and Net Profit

Gross profit is simply sales minus COGS. When thinking of COGS, think of those costs that go directly to making a given product. Determining the company’s net profit simply involves taking the gross profit and deducting the company’s expenses. When thinking of expenses, think of the cost of doing business. Expenses are costs that the business must absorb regardless of how many products it makes.

There is a simple approach to determining COGS and how they can be represented on an income statement. In our income statement, the company’s starting inventory values are added to that month’s new inventory purchases. This total is then subtracted from that same month’s unused inventory values. The calculations to determine COGS, gross profit and net profit are summarized below:

A) COGS = Starting Inventory Value + New Inventory Purchases – Ending Inventory Value

B) Gross Profit = Sales – COGS

C) Net Profit = Gross Profit – Expenses

Our income statement is a summary of the company’s activities for the month of July 2011. The company had revenue of $20,000.00 for the month. At the beginning of July, the company had $1,000.00 left over in unused inventory that wasn’t used or sold in the previous month of June. This is represented by the “starting inventory value” ($1,000.00) in the income statement. In the month of July, the company purchased additional inventory, which is included under the section “new inventory purchases”, the total of which is $10,000.00 ($2,000.00 + $2,000.00 + $4,000.00 + $1,000.00 + $1,000.00). At the end of July, the company had used up all but $3,000.00 of its inventory. This $3,000.00 is the company’s “ending inventory value”.

A) Here is the calculation to determine “COGS”.

COGS = Starting Inventory Value + New Inventory Purchases – Ending Inventory Value

COGS = $1,000.00 + $10,000.00 – $3,000.00

COGS = $8,000.00

B) Here is the calculation to determine gross profit.

Gross Profit = Sales – COGS

Gross Profit = $20,000.00 – $8,000.00

Gross Profit = $12,000.00

C) Here’s the calculation to determine net profit.

Net Profit = Gross Profit – Expenses

Net Profit = $12,000.00 – $3,000.00

Net Profit = $9,000.00

Putting the Income Statement Together

The first step is to define the time period of the income statement. Our example is for a company’s activities during July 2011. The second step includes the company’s revenue for the month, which in our example is $20,000.00 in sales. The third step includes stating the starting inventory values for July. This is inventory that was not used or sold in the previous month of June. Don’t be confused with the beginning inventory value. This is inventory the company wasn’t able to sell during the previous month. The fourth step includes accounting for the new inventory the company purchased in the month of July. Why would a company purchase more inventory when it already has inventory from the previous month? Simply put, companies often have large product portfolios, the likes of which forces them to purchase large amounts of inventory. All companies carry some amount of inventory from one month to the next. The fifth step includes summarizing the unused inventory, or better put, the “ending inventory value” for July. The sixth and seventh steps include determining the COGS and gross profit. The eighth step includes itemizing the company’s monthly expenses. The ninth is to add up the expenses and finally, the tenth step determines the net profit. All ten steps are highlighted in bold  in the income statement below.

Income Statement (1) July 2011
  (2)    Revenue $20,000.00
Starting inventory value  (3) $1,000.00
New inventory purchases  (4)
aluminum $2,000.00
nuts $2,000.00
epoxy $4,000.00
steel $1,000.00
copper $1,000.00
Ending inventory value       (5) $3,000.00
COGS    (6) $8,000.00
Gross Profit  (7) $12,000.00
Expenses   (8)
advertising $1,000.00
equipment maintenance $750.00
insurance $500.00
rent $250.00
office supplies $500.00
Total Expenses (9) $3,000.00
Net Profit   (10) $9,000.00

Notice how the net profit is at the bottom of the income statement? That’s why it’s called the “bottom line”. By no means is this the only way to depict the income statement. For instance, it’s not uncommon for companies to simply sum up their COGS separately. However, the basic premise remains. To determine gross profit, take the sales and subtract COGS. To determine net profit, take the gross profit and deduct the month’s expenses.

What does the tax rate really mean?

By Randall Orser | Personal Income Tax

Pig Energy bar TNIn Canada we work on a marginal income tax system, or marginal tax rate, so the more you make the more you pay, however, you’re taxed in brackets. By that, you only pay the higher rate on the income earned in that bracket. You have a Federal rate and a Provincial rate. The Provincial rate varies widely from Province to Province, with Alberta having a flat rate of 10%, and Quebec having the highest rates (up to 25.75%).

The current Federal income tax rates are:

  • 15% on the first $43,953 of taxable income, +
  • 22% on the next $43,954 of taxable income (on the portion of taxable income over $43,953 up to $87,907), +
  • 26% on the next $48,363 of taxable income (on the portion of taxable income over $87,907 up to $136,270), +
  • 29% of taxable income over $136,270.

For example, John, who lives in British Columbia, makes $175,000 per year. Here’s how his marginal tax is figured out:

Federal

15% level        $ 6,592.95

22% level           9,669.88

26% level        12,574.38

29% level        11,231.70

Total Tax        $40,068.91

Provincial (BC)

5.06% level   $ 1,902.86      on first $37,606 of taxable income

7.70% level    2,895.74      on the next $37,607

10.50% level    1,169.81      on the next $11,141

12.29% level    2,274.14      on the next $18,504

14.70% level    6,635.87      on the next $45,142

16.80% level    4,200.00      on the amount over $150,000

Total               $19,078.42

Total Tax        $59,147.33

In the example above, the marginal tax rate is 45.8%, which is the addition of the top tax brackets of the Federal and Provincial rates in which your income falls, in this case 29% Federal and 16.8% Provincial. The average tax is 34% ($59,147.33 divided by $175,000 of total income). Average tax is the percentage of tax paid based on your total gross income and reflects the total tax you are paying. It is the total amount of tax you will pay through all the brackets divided by total income and will mathematically always be lower than the marginal tax rate.

Of course, the above just reflects the tax you’d pay if you didn’t have deductions, such as RRSPs, childcare expenses, etc., or your non-refundable tax credits, such as the basic personal exemption, spousal amount, employment credit, etc.

In this article we’re just talking about income taxes, however, there are many taxes that we as Canadians pay. Some of these taxes are: Carbon taxes, property taxes, sales taxes, fuel taxes, liquor and tobacco taxes, medical premiums, and more. Oh, and don’t forget about Canada Pension Plan & Employment Insurance (yes those are taxes). It would probably boggle the mind to figure out exactly how much we do pay.

If you looked at all the taxes that the average Canadian pays, it would probably end up being between 40% or 50% of your income going to some form of government. I don’t necessarily agree with that, however, until we figure out what government should really be doing for us, and not wanting government to do it all for us, we’re stuck with this high rate of taxes.

A Straightforward Explanation of a Company’s Balance Sheet

By Randall Orser | Small Business

Balance Sheet Word Cloud Concept in red caps TNA company’s balance sheet is one of its three main financial reporting methods. The other two include the company’s income statement and its cash flow statement. However, if ever there was one way to describe a balance sheet, it would have to be that a company’s balance sheet is simply a snapshot in time and must always be in “balance”. What exactly does this mean? Well, it means that both sides of the ledger must be equal to one another. It is a single moment in the company’s history that summarizes the company’s assets, liabilities and owner’s equity. In fact, to make sure the balance sheet is in balance, it must follow one simple rule; the company’s assets must equal its liabilities and owner’s equity. We’ll review this simple rule and show how a company must ensure that its balance sheet is a true representation of its assets, liabilities and owner’s equity.

The Balance Sheet Rule: Assets = Liabilities + Owner’s Equity

Understanding assets, liabilities and owner’s equity

In order to understand the balance sheet, it’s important to define these three aforementioned criteria. A company’s assets include its cash, inventory, equipment and machinery in addition to any real estate holdings. It is found on the left side of the balance sheet. A company’s liabilities are a summary of what it owes to in notes payable and a summary of owner’s equity. The liabilities are always found on the right side of the balance sheet. We’ll take a systematic approach to defining all three of these criteria within the balance sheet by approaching it from the mindset of a company that is just getting started. Along the way, we’ll fill in the gaps in the following table and outline exactly how the balance sheet must always be in balance.

Assets Liabilities
cash notes payable
inventory owner’s equity original investment
equipment and machinery
total assets: total liabilities:

Your first week of operation!

Let’s assume you’ve decided to pursue a new business venture. You have $1,000.00 of your own money to invest in your business. However, you need more. Therefore, you secure an initial loan from a private investor. That initial loan totals $5,000.00 and is money you can use to get your business off the ground. However, that loan isn’t cheap by any means. That investor will easily charge you interest to borrow the money. After all, they’re in it to make money as well! Therefore, you now have $6,000.00, which is made up of $1,000.00 of your own money and a $5,000.00 loan. This $6,000.00 in cash should go on the left hand side of your ledger under “assets”. However, you also have a loan that should go under the notes payable section of your liabilities side, in addition to your own original investment of $1,000.00 that should go under the owner’s equity portion. These changes have been included below and are in blue. The balance sheet is now in balance. Looking at the table below, it’s easy to see how the balance in the balance sheet is maintained. You have cash holdings of $6,000.00 and liabilities of $6,000.00. We’ll consider this balance sheet a representation of your first week of operating a business.

Week 1: Balance Sheet

Assets Liabilities
cash $6,000.00 notes payable $5,000.00
inventory owner’s equity

  • original investment $1,000.00
equipment and machinery
total assets: $6,000.00 total liabilities: $6,000.00

Your second week of operation

In your second week, you move forward with purchasing inventory and equipment in order to get your business off the ground. When thinking of inventory, think of supplies for your business. It’s the same thing. You decide to purchase raw materials that total $4,000.00 in order to make your product. You also purchase a computer system for your new business that costs $1,000.00.

These aforementioned amounts come directly from cash in assets. This means you must place the above amounts under the inventory and equipment portion of the assets side of the ledger. Since you’ve spent this money, you must deduct it from your cash. Therefore, you now have $1,000.00 in cash, $4,000.00 tied up in inventory and $1,000.00 in equipment.

Does the liabilities portion of the balance sheet change? No. You still owe your original loan and still have your original investment of $1,000.00. All you’ve done in this step is account for the inventory and equipment you’ve purchased. The table below is a representation of the balance sheet for the second week of operation.

Week 2: Balance Sheet

Assets Liabilities
cash $1,000.00 notes payable $5,000.00
inventory: $4,000.00 owner’s equity

  • original investment $1,000.00
equipment and machinery: $1,000.00
total assets: $6,000.00 total liabilities: $6,000.00

Your third week: making a sale!

Up to this point, you’ve simply allocated your expenditures in terms of inventory and equipment. Now you’re ready to start making some sales. In this case, you need to determine your product’s “COGS”, which is simply an acronym for “cost of goods sold”. Your new company is able to make 100 units of your new product from the inventory you’ve purchased. Therefore, your COGS are $40.00 per unit which is simply the $4000.00 of inventory divided by the 100 units that can be made from that inventory.

After doing some market research, you determine that you should be able to sell each product for $55.00. Your gross profit is simply your sales total of $55.00 minus the $40.00, giving you a gross profit of $15.00 for each unit sold. In the first week of operation, you manage to sell 60 units for a sales total of $3,300.00 (60 units multiplied by $55.00 per unit). Your total costs are 60 units multiplied by the $40.00 in COGS, which is $2,400.00. This means you’ve generated a gross profit of $900.00, which is simply the sales revenue of $3,300.00 sales minus your total costs of $2,400.00.

For this transaction, we have to add the $3,300.00 of sales revenue into the cash portion of the balance sheet. Our new total in cash is now $4,300.00. Our inventory has been reduced by $2,400.00, which now leaves us with a total of $1,600.00 in inventory. Unfortunately, if we were to stop here, the assets would be larger than the liabilities, and that simply can’t be the case. Remember, both sides must equal each other and must be balanced. So, we add a new category to the liabilities of the ledger portion to include the gross profit we generated for the sale of 60 units in your first week of operation. This new category must go under the owner’s equity portion of the liabilities side. Here is a representation of the entire transaction.

Week 3: Balance Sheet

Assets Liabilities
cash $4,300.00 notes payable $5,000.00
inventory: $1,600.00 owner’s equity

  • original investment $1,000.00
  • earnings: $900.00
equipment and machinery: $1,000.00
total assets: $6,900.00 total liabilities: $6,900.00

From this point on, you’ll continue to invest in your business. Perhaps in your fourth week of operations you’ll start advertising or marketing your product to new prospects. If so, those expenses will come directly from your cash holdings on the asset side and be deducted from your earnings portion on the liabilities side. Over time you’ll want to pay off your loan under your liabilities. Each time you do, you’ll reduce the left side of the ledger by the same amount. Remember the rule with respect to the balance sheet: The right side must always equal the left.

GST/HST Credit for Individuals

By Randall Orser | Personal Income Tax

piggy bank

The GST/HST credit is a tax-free quarterly payment that helps individuals and families with low or modest incomes offset all or part of the GST orHST that they pay. Many of the Provinces also participate in this credit and add to it or supplement it in other ways.You are eligible for this credit if, youare a resident of Canada for income tax purposes in the month prior to and at the beginning of the month in which the GST/HST credit is issued and at least one of the following applies:

  • You are 19 years of age or older before the month in which we make a quarterly payment;

oIf you will turn 19 before April 1, 2014, you can apply for this credit on your 2012 tax return.

  • You have (or previously had) a spouse or common-law partner; or
  • You are (or previously were) a parent and live (or previously lived) with your child.

To receive the GST/HST credit, you have to apply for it, even if you received it last year. To apply, you have to file an income tax and benefit return for 2012, even if you have not received income in the year. On page 1 of your return, check the “Yes” box in the GST/HST credit application area and enter your marital status in the Identification area. If you are using a tax preparer, they will automatically tick this box (at least they should).

If you have a spouse or common-law partner, be sure to complete the information concerning your spouse or common-law partner in the Identification area on page 1 of your return. Include his or her net income, even if it is zero. Only one of you can apply for the credit. No matter which one of you applies, the credit will be the same.

What if I didn’t apply for the GST/HST credit when I filed my 2012 income tax return? Is it too late to apply now?

No. You can simply complete and send Form T1-ADJ, T1 Adjustment Request, or write a letter, to your tax centre stating you would like to apply for the GST/HST credit. Please include your social insurance number and, if applicable, your spouse’s or common-law partner’s social insurance number and net income, even if it is zero. You can also call the Individual income tax enquiries line to ask for an adjustment to your income tax return. You will receive a Notice of Reassessment in about eight weeks. Soon after, you will receive separately a GST/HST credit notice of determination and payment (if applicable).

How do I get the credit after a separation?

You should advise Canada Revenue Agency (CRA) in writing of your separation. Either use Form RC65, Marital Status Change, or send a letter to your tax centre giving CRA your new status and the date of the change. Also tell CRA that you are now applying for the GST/HST credit. After they receive this information, and, if you qualify you can start getting the credit for yourself.

Note: You are separated if you have been living apart from your spouse or common-law partner for 90 consecutive days or more because of a breakdown in your relationship, and you have not reconciled. Do not advise CRA of your separation until you have been separated for more than 90 consecutive days.

CRA calculates your GST credit for the benefit period of July 2014 to June 2015 based on:

  • The number of children for whom you have registered for the Canada child tax benefit or the GST/HST credit; and
  • Your family net income for 2013.

If you are single, your family net income is the amount from line 236 of your income tax return, or the amount that it would be if you filed a return. If you have a spouse or common-law partner, their net income is added with your net income to get your family net income.

Please note the Universal Child Care Benefit (reported on line 117 of your tax return) and registered disability savings plan (reported on line 125 of your tax return) are not included as part of your family net income for the calculation of your GST credit. However, if you are required to repay any part of the Universal Child Care Benefit (reported on line 213 of your tax return) and registered disability savings plan (reported on line 232 of your tax return), CRA will include these amounts as part of your family net income.

What happens if a GST/HST credit recipient dies?

An individual is not entitled to the GST/HST credit after he or she dies. However, CRA may send out a payment after the date of death because they are not aware of the situation. If this happens, please return the payment to the tax centre that serves your area, and give CRA the date of death so they can update their records. CRA will go after the estate for any funds paid out that should not have been, and they can be relentless.

If you owe CRA money for other taxes, they will take your GST/HST credit and apply it to any balance owing. As well, they will take your GST/HST credit for any balances owing from other organizations with which they have a shared agreement. That means they share information with that agency as well as collect payments for it.

Whenever you file your taxes, ensure that you check the box for the GST/HST credit, even if you think you may not qualify. It’s another way for the government to help out those who are lower income or have children under 18.

Starting Your Own Business – What It’s Not!

By Randall Orser | Small Business

Piggy bank and success concept TN

Although starting a business may be a dream for many people, the reality can be a jarring contrast. If you’re considering your own business, a hard look at what it really entails can help you to prepare yourself and your family for the sometimes-unexpected twists and turns of a new business.

It’s Not Lucrative–At First

Anyone considering starting a business should take considerable time researching and calculating the expenses required for an adequate start-up. Your idea may require purchasing equipment, renting a business facility, buying inventory, and investing in a major advertising campaign or hiring a sales team. If you have a hefty bank account of savings, you may not require financing of your new business. However, most people must go to the bank and secure a business loan or line of credit to provide funds for the initial expenses. Many people use the equity in their homes as collateral to secure a loan. Others borrow funds from family members. Others rely on financing combined with the income from a working spouse to get them through the early months until they are able to secure a regular income. However, as the year’s pass and your business become established, you will find that you are able to garner a good income from the profits and a number of benefits.

It’s Not Easy Hours

Starting a business requires a complete commitment of time and energy to put together the diverse elements that makes any business succeed. In the early years, a business essentially takes over your life. You will find that you, your spouse and even your children begin to breathe, eat and sleep the business’s many details. You can expect to put in long hours organizing your business physically, financially and legally. You may have to consult with professionals about tax and legal matters. You may have to find and train your new employees. It is likely you will spend long hours designing a marketing plan to find new customers. You will spend time on human resource and insurance concerns. You will attend local conferences and business events to get your business known. You may have deal with small surprises you didn’t expect. In the process, you will come to know your business and yourself better, but it will often feel like you have become a work machine. But soon, your business will take on a life of its own, and you will be able to enjoy the rewards of a job well done and financial benefits of careful organization and planning.

It’s Not Fun For the Family

Although you may have visions of your spouse and children cheerfully working to help the business grow, be aware that they may not appreciate the time and energy spent on growing your business. You may spend long hours away from them planning for your business’s future. You may be distracted and stressed when you’re at home. Your spouse may have work and activities of his or her own, and they may resent time spent on your business. In truth, it is sometimes easier for families when parents work a regular 9-to-5 schedule with plenty of paid time off. A business sometimes requires working weekends and holidays to keep up with a growing customer base. Vacations can be interrupted and family events missed. However, as the business grows, it is likely that you will have a manager or other person in charge to allow you and your family to get away more often.

It Doesn’t Allow You To Do Whatever You Want

Many people start a business expecting it to free them from the constant monitoring from supervisors or bosses. Having your own business entails a different type of “accountability.” Taking care of your customers becomes a major concern. Finding and keeping good employees becomes an ongoing effort. Government regulations, taxes and legal matters become more pressing concerns. You will never quite be free of these types of oversight, but you will learn to integrate them into your business decisions.

Although, the demands of starting one’s own business can be daunting, millions of people embark on this great adventure every year. If you have the enthusiasm to implement your dream of owning your own business, and have the drive to do whatever it takes to grow it, you are highly likely to find success in your venture. Of course, don’t forget all the government regulations, taxes, etc. you must be up on, or at lease hire the right person to keep you up on them.

They’re back! Emails from Canada Revenue Agency.

By Randall Orser | Personal Income Tax

Taxes On Calculator Shows Income Tax ReturnWell, they never actually seem to leave really. It seems once tax time rolls around people start getting an email from Canada Revenue Agency (CRA). Since CRA never uses email, these are always fraudulent. Question any email you get from CRA, and report it to them, so they can stop these scammers. Of course, be diligent throughout the year too.

The Canada Revenue Agency (CRA) warns all taxpayers to beware of telephone calls or emails that claim to be from the CRA but are not. These are phishing and other fraudulent scams that could result in identity and financial theft.

You should be especially aware of phishing scams asking for your information such as credit card, bank account, and passport numbers. The CRA would never ask for this type of information. Some of these scams ask for this personal information directly, and others refer the taxpayer to a Web site resembling the CRA’s, where the person is asked to verify their identity by entering personal information. Taxpayers should not click on links included in these emails. Email scams may also contain embedded malicious software that can harm your computer and put your personal information at risk.

Examples of recent email scams include notifications to taxpayers that they are entitled to a refund of a specific amount, or informing taxpayers that their tax assessment has been verified and they are eligible to receive a tax refund. These emails often have CRA logos or Internet links that appear official. Some contain obvious grammar or spelling mistakes.

To better equip taxpayers to identify possible scams, the following guidelines should be used. The CRA:

  • NEVER requests information from a taxpayer about a passport, health card, or driver’s license.
  • NEVER divulges taxpayer information to another person unless the taxpayer provides formal authorization. Such as a T1013 or RC59.
  • NEVER leaves any personal information on an answering machine or asks taxpayers to leave a message with their personal information on an answering machine.

When in doubt, ask yourself the following:

  • Am I expecting additional money from the CRA?
  • Does this sound too good to be true?
  • Is the requester asking for information I would not include with my tax return?
  • Is the requester asking for information I know the CRA already has on file for me?
  • How did the requester get my email address or telephone number?
  • Am I confident I know who is asking for the information?
  • Is there a reason that the CRA may be calling? Do I have a tax balance outstanding?

For information on scams, to report deceptive telemarketing, and if personal or financial information has been unwittingly provided, go to the Royal Canadian Mounted Police Web page at: www.rcmp-grc.gc.ca/scams-fraudes/phishing-eng.htm

Heartbleed Bug

Though this doesn’t have anything to do with email scams, I thought it prudent to warn you that there was some social insurance numbers compromised, approximately 900. CRA is contacting all those that are affected via registered mail, not telephone or email. If your SIN was compromised you will get this registered letter, or probably have already gotten one. To fine out more information go to http://www.cra-arc.gc.ca/gncy/sttmnt2-eng.html.

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