Okay, break over. Time to get back to bookkeeping basics.
After assets comes liabilities. Those are money that you owe to people. Most artists bootstrap their businesses and aren’t going to have a whole lot in the way of liabilities because we usually pay for things as we go, whether it’s show fees or bills for supplies.
If you have payroll, then taxes you take out of employees’ checks is a liability because it’s money due to the government. However, most artists who have people helping them (like for mailing of packages, virtual assistance — wouldn’t that be nice! — or assistances who help set up and take down at shows) probably hire these people as contract labor and issue a 1099 if necessary rather than dealing with payroll issues. A word of warning: there’s a rather scary situation coming down the pike regarding 1099’s if Congress doesn’t repeal it. Right now, I’m sitting in the camp of hoping for a fix rather than even imaging the complexities of what’s coming. Yes, it’s scared me into denial. If you want more information, check out this article from CNN. After all, do you buy more than $600/year in supplies? I’ve seen booth fees this high too. Wow!
Another case where you might have a liability is for unearned revenue — this would be a commission that you haven’t finished yet. Until the product is delivered, you haven’t earned the commission money. It’s a liability.
Sales tax you’ve collected is also a liability. A lot of artists that I talk to at shows don’t have a sales tax number, but I’ve found that it really is easier to have one. Be sure you understand the sales tax laws of your state, even if you don’t have your own permit number, and this also includes how the state handles Internet sales. Another warning: it is only a matter of time before all Internet sales are taxed. Personally, I think there should be a federal Internet tax. The way I have my books set up, I set up, I know what states my customers are from so it’d be easy to report how many dollars of product was purchased by customers in each state. Of course, I know that it’ll never be that simple.
If you’ve set up a credit card for your art business, charges to the credit card are a liability. I’ve mentioned QuickBooks financial software before so I’ll add here that I really like their way of entering credit card charges and reconciling statements. When I first started using QuickBooks, I didn’t use this feature, but I have figured it out (not that it was hard) and I can’t imagine doing it any other way now.
A mortgage on a studio might be another example of a liability, but not a typical one for most artists.
Keep an eye on your liabilities to make sure they stay as low as possible. While they are necessary (like with sales tax because that shows you are making sales!), it’s easy to get yourself in trouble. Liabilities show instantly how much debt you’re in. Unlike an expense which is a debt that’s already been paid for, this is money you really have. Don’t go there if you don’t have to.