GAAP: Journaling the use of personal car for self-employed business purposes

Factual Questions
21

Let me clarify what this hypothetical question is about.

I am just curious about how the accounting would work for this particular transaction. I am not actually doing the accounting. I don’t need to keep formal books. Nobody is going to audit my accounting. I took several accounting classes in college and was just trying to figure out how this would work. I was scratching my head because it seems reasonable that use of an auto would be an expense, but I couldn’t figure out what asset would be credited.

I am not asking a tax question (see OP). I know how to do the taxes (although I am definitely considering @Broomstick’s advice, because I don’t know what I don’t know). I explained the setup and tax situation only as background to narrow the parameters of the question and because these types of questions are often not possible to answer with a completely boiled-down question.

22

Let’s pretend in @CookingWithGas 's world, everyone keeps a set of personal and business financial statements.

They have on their personal balance sheet a car they bought for $15k two years ago, and they are depreciating it over a 7 year period straightline, at $2,143 per year. The current net book value of their car is $10,714, and they have 5 more years to depreciate it.

They have begun to use their personal car for a small side gig business. They estimate that 10% of cars miles will be used in the business. So they transfer 10% of the value of the remaining value of the car ($1,071) to their business balance sheet as an equity contribution.

Personal financials
Investment in business $1,071
Car ($1,071)

Business Financials
Share of Car $1,071
Equity in Business ($1,071)

They continue to depreciate their car in their respective financials annually

Personal financials
Depreciation expense $1,929
Car ($1,929)

Business Financials
Depreciation exp $214
Share of car ($214)

Any expenses associated with the car (gas, repairs, etc.) that can be directly tied to the business or for personal use should be recorded on those respective books.

Of course no one does their personal accounting this way, but for CookingWithGas’s hypothetical world this is how it would most likely be done.

23

In your example, you’re merely trading one asset (cash) for another (pencils). If you carry office supplies as an asset, it’s not an expense. You’re merely swapping one asset for another.

When you expense the mileage, what other asset changes? I think you are confusing a balance sheet (assets & liabilities) and an income statement (income & expenses).

24

In my example I did not bother to carry pencils as an asset because typically, office supplies are expensed immediately upon purchase, rather than booking them as an asset then expensing them each time you use up a pencil or a ream of paper. The entry for the pencils was for an expense–if you read again you will see that I explicitly identified it as such.

The proper way may be to do it with two concurrent journal entries:

Credit cash (asset)
Debit office supplies (asset)

Credit office supplies (asset)
Debit office supply expense (expense)

But my point was in response to your comment “You don’t credit an asset.” Well, yes you do.

That is exactly my question. If you have an expense for automobile use, what asset is credited? (I think it has been answered.)

I am not confusing them at all. Those are statements, which has nothing to do with my question, which is about journal entries. The journal and T accounts have assets, liabilities, income, and expenses, which are all recorded before you ever get to the point of generating the statements.

25

When you have an expense, there is no asset to credit. Nobody carries office supplies as an asset. If you stay at a hotel on a business trip there is no asset to credit. When you take a client to lunch, there’s no asset to credit. When you expense mileage on your car, there’s no asset to credit. The offsetting entry is that now you have less cash and no asset to show for it. And yes, nobody else carries office supplies on their balance sheet. Since you debited office supplies, it appears that’s what you were trying to do.

26

Of course there is. You credit the cash you used to buy lunch.

I am not an accountant but I have taken accounting at the graduate level. With double-entry accounting every time you book an expense it corresponds to crediting an asset (like spending cash, or writing off a debt you’re owed), or something like capturing asset depreciation in a contra-account, or crediting a liability.

27

I think that you’re using terminology that most people are not familiar with. In my mind, a “credit” is something that you receive. In other words, when you get paid for doing a job, THEN you would credit your “cash” category, because you received money. But when you pay for something, you would debit your “cash” category, because you have reduced the amount of cash on hand.

28

You’re right that most people don’t use the terms the way @CookingWithGas is - but it’s also true that most people don’t use double-entry bookkeeping for their household or even very small business records. Most people see a “credit” to their bank account as increasing their balance - but from the bank’s point of view ( and it’s the bank keeping the record ) the credit to your checking account is increasing the bank’s liability. CookingWithGas is trying to determine how to keep these records in accordance with Generally Accepted Accounting Principles - which is something that is not relevant to most people but is to some.

This thread explains it more.

29

@doreen is correct. The terms I am using are accounting terms and this question is directed to people with knowledge of accounting. Most people are used to seeing “debit” and “credit” on their checking account statements and get them backwards because these terms are used from the point of view of the bank’s bookkeeping. If you actually had your own bookkeeping and received cash, you would debit the cash category and credit it when you pay for something.

In double-entry accounting, the standard for GAAP, a debit is an increase in the amount of an asset, or a decrease in the amount of a liability. A credit is the opposite. Every time there is a transaction, there are two entries: a debit and a credit, and they net each other out. If you make a $100 bill payment, you credit cash for $100 because you are reducing an asset. You debit $100 against the bill because you are reducing a liability. (This is rather simplified but the point is to explain the terms debit and credit.)

30

If you’re imagining your musical side gig to be a business of some sort, I think the other side of your hypothetical entry is to credit something like a due to/from owner account. In essence, the business owes the owner for the use of the owner’s personal car.

31

My confusion is trying to understand your original question which I now interpret as: If I go on a 200 mile business trip and use my personal car, the IRS allows a $117 expense deduction. How does that affect the balance sheet of the business. You could submit an expense report to the business & have the business write you a reimbursement check for $117 and credit cash. Your other choice is to credit a liability of “Money owed to CookingWithGas for expenses” for $117. In either case, you’ve reduced the company’s equity by $117.

32

That is my question, and I think that is probably the right answer from an accounting perspective. But I wonder if there really has to be a check written from me to myself. This is not a company, it’s me acting as self-employed. I could create an LLC but I don’t really need to.