When a business asset is also used privately

Picture a sole trader who runs a small design studio from the ground floor of her home. She drives one car to visit clients and to fetch the children from school. The car needs fuel, insurance and servicing.

The building needs electricity and upkeep. The phone in her pocket takes customer calls and family calls alike.

Every one of these costs is real, and each is paid for out of a mix of business need and ordinary living. None belongs wholly to the business. Accounting has a sensible way to deal with a cost that serves two purposes.

The problem a shared cost creates

Accounting treats the business as separate from its owner. A cost incurred to run the business and earn revenue is an expense.

Value that leaves for the owner’s personal benefit is drawings. The difficulty comes when one payment does both.

If the whole amount stays in expenses, the cost of trading is overstated and profit comes out too low. If it is all drawings, the accounts pretend the business used none of it, which is also untrue. A cost that serves both purposes cannot be forced entirely into either box.

Splitting a cost by use

The answer is apportionment: dividing one cost into the business share and the private share, according to how the asset is actually used. The business share is an expense in the income statement, set against the revenue the business earned.

The private share is recorded as drawings in the capital section, because it is the owner benefiting from something the business paid for. The proportion is a judgement based on real use, such as miles driven, calls made or floor space occupied. It is not a figure pulled from the air.

The car that does two jobs

Suppose the car’s running costs for the year are RM6,000. About two-thirds of the mileage is for visiting clients and the other third is family journeys. Then RM4,000 is a business expense and RM2,000 is drawings.

Only the RM4,000 reaches the income statement as motor expenses. The RM2,000 leaves through the capital section as a withdrawal and never touches profit. One bill, two destinations, decided by how the car was used.

The phone that answers to two callers

The mobile phone works the same way. There is one line and one monthly charge, but it rings for customers and for friends. Say the bill is RM1,200 for the year and about a quarter of the use is personal.

Then RM900 is a business expense and RM300 is drawings. The reasoning does not change with the size of the number or the type of asset. The private slice is lifted out as drawings, so the income statement carries only the cost of the calls that served the trade.

Premises that are also a home

Premises make the idea vivid, because the same walls shelter a household and a business. When an owner works from part of the house, costs such as electricity, water, insurance and upkeep cover living space and working space together.

If one room in four is used for business, a quarter of those running costs is an expense. The other three-quarters is the owner’s private living cost, recorded as drawings. The apportionment follows the share of space used by the business.

Where the private share lands

The private portion never touches the profit for the year. It is drawings, the owner drawing down their stake in the business, and it reduces closing capital.

This is the same idea as cash taken from the till or goods taken home. Value that leaves for the owner’s benefit reduces their investment, not the business’s measured performance.

Closing capital is opening capital, plus profit for the year, plus any capital introduced, less drawings. The private share of a shared cost lowers the owner’s stake like any other withdrawal.

Depreciation is apportioned too

The split goes beyond running costs. If the business owns the car, phone or equipment, it is a non-current asset that wears out. The depreciation charged each year is a cost like any other.

Only the business share of the year’s depreciation is an expense in the income statement. The private share is drawings.

The asset itself may still be recorded at full cost and carried at its net book value in the statement of financial position. The business owns all of it. What is divided is the annual charge that reaches profit.

Why the split is worth the trouble

When each shared cost is apportioned, three figures stay honest. Profit for the year is charged with only the costs the business bore in earning revenue. Drawings shows how much of the owner’s ordinary living was funded through the business. And the expenses in the income statement describe the business’s own activity, with no private costs leaking in.

The principle is the same for the car, the phone and the premises. The business is separate from its owner, so a cost that serves both must be shared in proportion to use.

Does your child freeze when one bill serves both work and home? One of our teachers can show how the business share becomes an expense and the private share becomes drawings. Book a trial class