Accounting is boring. It's a painfully dull, complicated discipline that seems completely unnecessary, and on a lot of levels it is. In the last few years, good software has eliminated a great deal of human labor and error, but with the software came new problems that bookkeepers and CPAs have to deal with. It can be extremely frustrating to someone trying to be his own boss.

As a facility owner or someone else higher up in the business side of the fitness world, why should you care? There are many important reasons—some of them involving legality.

Unfortunately, in order to justify their existence, government officials make new tax laws, new procedures, and more complicated processes almost every year--sometimes several times per year. These things become laws, and you can lose your business, your home, and possibly your freedom if you don't follow them. Either you have to keep current on these things or you must hire someone to do it for you.

I want to make a distinction for the layperson:

  • A bookkeeper is someone who works more with a business' day to day dealings. Think of bookkeepers as worker bees. They process payables, receivables, sales, etc. on a daily, weekly, or monthly basis.
  • A CPA, or a certified public accountant, deals with the bigger picture. This person or persons will file most of the "big" taxes, such as year end returns, corporate taxes, etc.

Interestingly, in my experience, CPAs and bookkeepers have a lot of trouble doing each other's jobs. They just do things differently. Bookkeepers are far more thorough, as they are intimately involved with the business.

Now, let's say Joe Gymrat purchased a facility. He found a good attorney to get the appropriate entity type for him (limited liability corporation, S-Corp, Inc., etc.). He leased all of his equipment and has a couple of people working for him. Let's explore exactly what this means in the bookkeeping world.

In most cases, the most important document in the accounting world is the balance sheet (BS). This document shows exactly how a business is doing at any given time. It's a general overview, or a snapshot of a business's worth at a specific date. Generally, the most important balance sheet is at year's end, but business owners should be familiar with it at all times, as well as its parts.

First, the BS covers Joe's assets:

1. Joe's facility is an asset, more specifically a fixed asset. Fixed assets are not fluid. They include things like the building, land, and leasehold improvements (such as adding a locker room). Fixed assets can be considered long-term, as they will not be consumed (like the protein bars Joe bought to sell) or converted to cash.

One thing to remember about fixed assets is that they go down in value over time from wear and tear and a variety of other reasons. Hopefully, Joe will stay in business for many years. Say it's 10 years. Each year, the accountant will adjust the value of the facility through depreciation, which is just accounting-speak for lowering the value. An example:

Original facility price: $100,000

Subtract the depreciation: - $10,000

Facility's net worth: 90,000

Accountants generally assign depreciation with schedules, as in X number of dollars depreciated every year. If you don't understand why the accountant gave an amount, ask. Most likely, it's due to industry norms. Buildings, for example, have different depreciation schedules than equipment, vehicles, etc.

Depreciation sucks, but it also lowers your tax burden (since it lowers the asset's worth), so it's not all bad.

Note also that assets can appreciate, meaning gain value. Adding EFS equipment will build up your facility's value, as will purchasing more land, adjacent buildings, etc.

2. Current assets are cash, accounts receivable, product inventory, and other assets that are fluid, meaning they'll turn to cash, be bartered or otherwise added or subtracted to during the year. Your business's operating (bank) account, for example, is a current asset. To define these terms:

a.) Cash: this includes cash on hand (petty cash), stocks, bonds, and anything you have in the bank. If somebody pays you a membership fee for the month, it adds to your current assets.

b.) Accounts receivable, or prepaid expenses: think of this as anything you send with an invoice or otherwise sell. If you sell a year's worth of personal training sessions, it becomes a current asset. As the customer pays it down, it becomes the above current asset, cash. Accounts receivable can become incredibly complicated if customer's don't pay, or if an entity grows continuously. This is why many companies will employ individuals to perform tasks applicable only to receivables.

c.) Inventory: protein bars, Surge workout drinks, hoodies, etc.--these are all part of inventory. This number is constantly changing. A balance sheet's inventory for one day may differ from the next day--as it should if things are selling.

One other current asset type is a loan to or from owners or partners, as well as officer draws. This simply means money that you take from the business for non-business related (personal) expenses that you intend to repay, and/or money you put into the business to build the business up, pay its bills, etc. Generally, loans will be paid back, but draws will not. If your business is doing exceptionally well, you may want to take $5,000 for yourself. This is an officer draw.

Be careful with draws; tax laws differ in most states and it may not be worth the burden to take out the money. Also, prior to removing money, consider the time of year and whether or not the business can actually take the hit. I've seen way too many people take huge sums out during the busy season and then have nothing left with which to pay their bills during off times. Damn those entitled people...

3) The last asset type - the intangibles. Like love, these can't be touched and are sometimes hard to explain. These include:

a) Non-compete contracts: if you bought a business from someone, you may want to set this up so the person doesn't open a similar establishment next door and drive you out the door. (If you bought a Planet Fitness and got rid of everything inside, no worries.)

b) Intellectual property: this is basically research and development. If you spend large amounts of money, by hiring someone, for example, on business development, this is an intangible asset, as is the knowledge derived from these activities. Josh Bryant, Zach Even-Esh, Joe DeFranco, and others have spent a lot of cash on developing their training methods. It would severely impact the business if competitors found out their secrets.

c) Intellectual property: copyrights, patents, and trademarks. This can also be brands. If somebody opened up another EliteFTS somewhere, Dave Tate could sue pretty quickly.

If you have any questions at all about assets, please ask via the Q & A. I've been doing this for many years, and I'd be happy to help.

Stay tuned for Part 2: Liabilities