This post originally appeared on Cowgirl Runs.
Disclaimer: While I am a designated accountant, I am not your accountant. If you have any specific questions, I recommend you discuss those with a designated accountant. Don’t know one? I recommend me!
I also suggest a refill on your cup of coffee, because we’re about to dive into some accounting lingo and concepts, and you’ll want to be on your a-game.
And, finally, if you have any questions, leave me a comment, or shoot me an email. After I talk about taxes for Canadian bloggers, I’ll be preparing a FAQ post, so if you have an accounting-related question let me know and I’ll get it answered for you!
Accounting for Bloggers
The health of any business is determined by the following factors:
- Revenue – the amount you’ve earned through selling your product (whatever your product may be)
- Expenses – costs incurred as a result of selling your product
- Profit/Loss – the difference between the amount you made and the amount you spent
- Assets – property owned by your business
- Liabilities – amounts owed by your business
- Equity – the difference between assets owned, and amounts owed, by your business
For the purposes of this post, I’m going to focus on the revenue, expense, and profit items, but if you have questions about the asset, liability or equity items, please let me know!
Before I dive into how to track your income and expenses, I want to talk about an extremely important concept that I see many bloggers getting wrong in their income reports. The reason this concept is important is because you’re actually required to report your tax income this way.
In the world of accounting, there are two ways you can account for things: cash and accrual.
Cash accounting is just that, you record things when cash comes in, or cash goes out.
With accrual accounting, you record items when you have earned it (when talking about revenues) or when you owe it (when talking about expenses); the timing of when the money changes hands isn’t as important.
To help illustrate this, I have two examples for you. The first is revenue, and the second is expenses.
Ad Network Revenue
I receive my revenue from my ad network 90 days after the revenue has been earned. In March, I deposited the cheques for my ad revenue earned in October 2015 and November 2015. Using the cash basis of accounting, I wouldn’t record anything until I received the cheques. Using the accrual basis of accounting, I recorded the October revenues as earned in October, and the November revenues as earned in November.
The Canada Revenue Agency (CRA) requires income to be reported when earned, but not necessarily paid. Thus, for tax purposes, you would record this as income earned in the 2015 taxation year, although it was paid in 2016. (American friends, I’m planning on reaching out to a US CPA friend to see if she can help me with some US-specific tax queries.)
Another way to think about this would be matching the ads to the month. The ads that earned me that money ran on my blog in October and November 2015, thus the payment relates directly to my performance in those months, and must be recorded against those months.
When I signed up to host my site with SiteGround (learn how easy it is to move webhosts) I received a significant discount if I paid for 3 years of hosting up-front, and so that’s exactly what I did. This payment resulting in a large sum of money going out all at once, and then no payments for the following 3 years.
Using the cash basis of accounting, I would record this great big payment all at once showing a huge loss in the first month, and then nothing for 3 years. Using the accrual basis of accounting, you would effectively smooth the payment over the course of your hosting. You’d take the total amount of your payment, divide it by the number of months of hosting and that would be the expense you’d record each month.
It may help to think about this as matching what you’re receiving (hosting) with the payment. You’re receiving the benefit of hosting over an extended period of time, so the expense should be recorded against that benefit.
I understand the concept of accrual accounting can be one that’s really difficult to grasp. I’ve been living in the world of accrual accounting since 2004, so it really is second nature to me, so if you don’t understand, or have specific questions on how to apply it, please let me know!
Tracking Income and Expenses
When it comes to tracking your income and expenses, there are a few different routes you can take. You can go out and purchase accounting software to help track your income and expenses, but, to be honest, you’ll probably get overwhelmed and frustrated with the software and stop using it after a few weeks.
If you only have a handful of expense items and a handful of income items, using an excel sheet is probably the best way to track. While I pay a few items on a monthly basis, the amount doesn’t tend to change month-over-month, so I can easily fill in those items ahead of time and adjust as needed.
If you’re charging GST on your sales, then you might want something a bit more sophisticated than excel since you’re going to need to track the GST you’ve collected and the GST you’ve paid separately. Remember from last week, you only need to worry about GST (for non-Canadians it’s a value added tax charged on the purchase and sale of most goods) if you’re selling/making more than $30,000 from your blog.
If you’re looking for an already formatted way to track your income and expenses, click the link to download MY income and expense tracker.Accrual accounting?! HUH?! Let Ange break it down for you #blogging #businessClick To Tweet
Spend some time this week filling in the necessary items from 2015 and come back next week where we’ll talk about how to file your taxes as a blogger, and items you should include as income and expenses on the return. I know, super exciting stuff here!
What do you use to track your income and expenses?
Did you know about accrual accounting before today?
Accounting for Bloggers: How to Structure Your Business
Accounting for Bloggers: How to Track Income and Expenses
Accounting for Bloggers: Filing Your Taxes (sole proprietorship)
Accounting for Bloggers: Filing Your Taxes (corporation)
Accounting for Bloggers: Frequently Asked Questions