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How to Account for Startup Costs with Online Businesses

Mary F. is reading Accounting for the Numberphobic and she wants to know how to account for development costs for her startup business. Here’s her question:

“I am reading your book Accounting for the Numberphobic and love it. Do you have a recommended resource for how to account for online businesses such as that of a life coach or a business that offers software as a service? So many accounting books always use merchandising businesses as a example and don’t provide examples of how to account for virtual products and I am looking for answers to problems such as how to account for the research and development of an ecourse or how cost of goods sold fits into the regular costs of delivering an ecourse after it is developed. Hopefully you can offer some direction. Thank you in advance!”
You mention two types of “costs” with e-commerce, the first is development costs, which is like Research and Development for pharmaceutical companies. Depending on accounting standards, this might be a cost that is amortized over time which is the equivalent of depreciating an asset that has a long life. Sometimes these costs can be substantial, like when you’re building a new website, which we’re doing here at Best Small Biz Help.com.
These development costs are sunk costs; whether you sell one or a million courses, the time and effort to develop them is absorbed by the business. Your accountant can better tell you the best way to handle these costs to your tax advantage when it comes time for filing your taxes.
He or she will look at whether it’s a one time charge or if it’s ongoing. They will probably also look at how large the cost is relative to your income to determine if it makes sense to write it all off in one year or spread (amortize) the cost over several years.
Last, the cost to deliver a course is a direct labor cost. My guess is, your accountant will handle THIS cost differently. In a service environment, this cost is the cost (or value) of your time and expertise. It would be the equivalent of your cost of sales (or in a product business your Cost of Goods Sold). It’s important you know how much TIME you’re investing to deliver the course and what an hour of your time is worth.
Then I’d correlate your registration price to take the course and your time to deliver the course to make sure you’re getting an adequate gross profit on each course you deliver.
Regarding consulting or coaching work, the thinking is very similar. I’m wrestling with this as well, since I too do coaching. The key here is the contract cannot be fixed for the client with your time open-ended. Accounting for the Numberphobic brings this up in the early chapters. You want the time you’re investing and your compensation to be directly correlated. If the client wants more of your time, then they have to pay you for it.
The key with consulting is the client has to have a positive economic incentive not to waste your time.
This is a great question, Mary. Thanks for reaching out to ask it.
This article was originally published by Best Small Biz Help
Published: April 27, 2015

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Dawn Fotopulos

Dawn Fotopulos is the founder of BestSmallBizHelp.com, a site dedicated to helping struggling solopreneurs. The site is home to an array of valuable tools for small business owners that will guide you through all the steps necessary to develop a successful small business. Dawn also serves as Associate Professor of Business at The King’s College in NY. She’s a frequent commentator at MSNBC’s “Your Business,” the NY Times Small Business Summit, the Kaufmann Foundation’s Fast Track Program, and Forbes.

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