Before I answer this question, let us examine the main goal of accounting. Accounting should provide useful information to stakeholders. This information should be useful for taking meaningful actions. This means you have to cost out your business as if nothing is received for free. In the long run, it is going to be impossible to run your business unless you can cover “all” costs. Using wrong cost information will also cause you to underprice your services. This sets a precedence for your customers to always expect low prices

Solution – Personal Assets

All personal assets you convert to business assets should be recorded in the books at fair value and depreciated over a reasonable life. This will increase your overhead which is what you want to happen. Your depreciation will show up on your income statement and give a true picture of your profitability. On the other hand, the asset will increase the value of your business.

Solution – Free Service

While the cost of free service provided by your relative (most likely your spouse) should not be added to your books because it is not an actual expense, it should be included in your budget at market rate. This is because someday you may need to pay your wife or hire someone else to get the work done. If you do not, you will have a hard time continuing your business once this free help does not exist. Also, including the market rate of free help in your budget, allows you to be prudent by charging based on your actual cost and not just cash outflow.

Keeping good track of expenses not just cash outflow is essential for long term survival.

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