Resolving Co-Mingling Issues in QuickBooks: A Guide for Small Business Owners

Navigating the intricacies of Accounting Software can be daunting, especially for those transitioning from traditional methods to digital platforms. A recent experience helped shine a light on common challenges faced by small business owners—particularly when it comes to managing finances that blur the line between personal and business expenses.

The Situation

I recently took on a project with a client who runs a gardening and landscaping business. After her long-time bookkeeper retired, she needed assistance setting up her finances in QuickBooks after a decade of hand-written records. Eager to dive into QuickBooks, I applied and soon found myself tackling a significant Accounting challenge.

As I delved into the business’s financial records, it became clear that the owner, Liz, had been using her business account for numerous personal expenditures. Among these were major bills such as her mortgage, utilities, gym memberships, and even contributions to her IRA. While legitimate business expenses like pest control supplies and fertilizing services appeared in the records, the infusion of personal costs raised a red flag regarding co-mingling funds.

The Breakdown of Expenses

Consider a typical month for Liz’s business, which included payments that looked something like this:

| Vendor / Service | Amount |
|———————————-|————|
| Bob’s Pest Control | $1,000 |
| Jill’s Fertilizing | $600 |
| Insurance Company (Home & Auto) | $3,000 |
| Ed’s Nursery | $2,000 |
| Chase Bank (Mortgage) | $3,500 |
| Comcast | $200 |
| AT&T | $200 |
| SIMPLE IRA | $4,000 |

While it’s easy to pinpoint which of these expenses are essential to the business, the integration of personal expenses within the business account was alarming. The lack of separation could lead to complications during tax season, potentially affecting the business’s deductions and financial accuracy.

What to Do About It

As I worked through this conundrum, several questions arose. Should I treat these personal expenses as “Owner Draws” in QuickBooks? How can I effectively address Liz’s confusion over why these distinctions matter?

It was evident that communicating the importance of maintaining separate accounts for business and personal finances was crucial. However, confronting the client with these questions proved difficult, as they seemed baffled