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Question Of The
Month What's the best way to handle costume funds?
Q: I’m wondering, from both a business and tax perspective, what is the best way to flow costume payments through my business. Should those funds be put into the business account, or should I have a separate costume account? —Betsy
A: There are two simple ways of handling costume funds, assuming that the checks are made out to the studio. Which one you use depends on the bookkeeping/accounting system you are using. As long as your books and records properly reflect all costume-related income and expenses, it doesn’t matter which method you choose.
The first method may depend on the volume of the costume deposits. Some businesses establish a separate checking account or money market account to hold the deposits until the costume payments are due to the vendor. This ensures that you do not spend these deposits as part of your daily operating expenses and that the funds will be available when the payments are due. Additionally, you may be able to earn a moderate amount of interest on this account while you are holding the monies. (Caution: Many money market accounts usually allow only three checks per month to be written on the account.) Other considerations are the added costs and time to maintain one more checking account for your business.
A second method is to deposit the payments into the business’ regular operating account. If you are like most dance studios, you receive several monthly payments from your clients until the costumes are paid in full. If the funds are in your regular business operating account, you must be able to refrain from spending this money even if you have an operating cash-flow problem. You most certainly want to have the funds available when the bill comes in for the costumes.
Regardless of which method you choose to handle the deposit of the funds, it’s advisable to maintain a separate costume-fund journal to track who has paid and who has not.
Since you are a businessperson, it is not uncommon to make a profit on the sale of the costumes and other related products. However, whether or not you are making a profit, you need to maintain proper accounting records to accurately reflect your income. Also note that you may have state sales tax issues that pertain to the sale of costumes in your business. Because these laws vary greatly from state to state, you should consult a tax advisor.
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