Tackling Co-Mingling of Funds in QuickBooks: A Guide for Small Business Owners

Navigating the world of Bookkeeping can be overwhelming, especially for small businesses that have relied on traditional methods such as hand-recorded ledgers. Recently, I took on a project to assist a local gardening and landscaping business transitioning to QuickBooks after the retirement of their long-time bookkeeper. What I discovered was both surprising and somewhat concerning regarding their financial practices.

The client, who I’ll refer to as Liz, has been operating her business with a blend of business and personal expenses all being paid from a single business account. For instance, alongside legitimate business payments for services like pest control and fertilizers, we also found personal expenses like mortgage payments, utilities, gym memberships, and even the cable bill. This arrangement raises significant compliance and Accounting issues that need addressing.

Understanding the Scope of Co-Mingling

Co-mingling occurs when a business owner mixes personal and business finances, which can lead to complicated situations when it comes time to prepare taxes or assess the business’s financial health. Here’s a snapshot of their typical monthly transactions:

| Vendor | 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 payments for pest control and nursery supplies can be categorized as legitimate business expenses, payments related to personal life—like the mortgage or cell phone bills—create a piquant problem. Even Liz’s SIMPLE IRA contributions, which should be business-related if made from a company account, turned out to be personal contributions.

Finding a Solution in QuickBooks

As I began transferring the records into QuickBooks, it became evident that addressing the mixture of expenses was essential. Simply treating all the personal payments as “Owner Draws” in the Accounting Software may not be sufficient to clarify the company’s financial picture.

So, what steps should be taken?

1. Separate Accounts: The fundamental step is to establish separate accounts for personal and business expenses. This will simplify record-keeping and prevent future co-mingling issues.

2. **Categorize Expenses