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Chartered Management Accountant, Certified Practising Accountant

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Accounting for a Hand Made Business

Posted on 10 February, 2014 at 20:05
With the handmade revolution growing all the time more and more people are making products to sell. With the wealth of talent out there handmade products are growing in popularity, anything from jewellery to art, cards to clothes, and candles to candies. While many people make their products just for themselves or as gifts for their friends and families, a growing number of hand makers are now selling their products. With the growth of such online market places as Etsy and Felt and the increasing number of physical designer and hand craft markets the opportunity to sell is increasing.

However, once someone starts selling their products on a regular basis, be it online, at a market, or even via a shop or gallery, they are no longer enjoying a hobby, they are conducting a business and this needs to be properly accounted for.

As someone who makes and sells jewellery under the name of Shazzabeth Creations this is something I have had to deal with. Fortunately of course I have the advantage of also being an accountant and so this hasn’t been a problem for me.

When accounting for a handmade business it is easy to overlook some of the costs that can be claimed against sales. While some may be obvious, others may be less so. There are two categories of costs, direct and indirect.

Direct Costs

The most obvious direct costs are material costs, the raw materials that you actually use to make your products. For most people selling hand made products this may well be the only specific direct cost that there is. However, you need to ensure that you are accounting for the whole material cost, and that not only includes the actual cost of the material but could also include:

  • Shipping/Freight Costs to get the material to you
  • GST/Import Duty potentially charged by customs if the materials have come from overseas
  • Exchange Rate charges imposed by a financial institution (again for overseas purchases)

All of these add together to create the TOTAL material cost.

If your order contains several different items then the easiest way to handle this is to pro-rata the additional costs (freight etc.) against the items in your order in order to then give you a total cost for each individual item.

The other potential direct cost that hand makers could have is salaries. This would be if the business has grown enough that you are now paying one or more people to help you make your products.

Indirect Costs

Some of the indirect costs could be fairly obvious. There are some which more directly relate to the handmade business as a whole and it would generally be easy to recognise these. These would include:

  • Listing Fees (online market sites)
  • Market Stall Fees
  • Business Cards
  • Website Design and Hosting Fees
  • Packaging
  • Postage (when posting products to customers)
  • Display equipment (More about these later)
  • Paypal Commission
  • Hire of an Eftpos machine
  • Tools (More about these later)

There are however some other costs that may more easily be overlooked and which can quite legitimately be applied against the handmade business. These include (but are not necessarily limited to):

  • Mileage for driving to markets, the post office or retail outlets
  • Car Parking (relating to any of the above)
  • Internet Costs (If you are selling online you can claim a percentage of your internet costs as being business related)
  • Computer costs (again if you are selling online a percentage can be claimed)
  • Home Office / Studio costs (see earlier post on Home Office Costs)
  • Any design related fees (logo, website, business cards etc.)
  • Subscriptions to industry related magazines (i.e. Metal Clay Magazine, Quilting Magazine etc.)
  • Any tutorials purchased (either individually or in books and/or dvds)
  • Any classes attended
  • Stationery
  • Accountants Fees

Assets– Tools and Display Equipment/Materials

The one area that you have to be careful with is the cost of tools and display materials. Whether these are tables or display racks for market stalls, or sewing machines, pliers etc. used for making your products, if the useful life for these items is expected to be more than one year then the items have to be capitalised and depreciated. You can’t claim back the total cost of these items in the year of purchase.

Of course the easiest way to ensure that you are accounting for your handmade business properly is to employ an accountant, specifically if possible an accountant who understands handmade businesses.

Categories: home business

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