Navigating Client Co-Mingling Issues: Accounting for Personal Expenses in QuickBooks

In the realm of Accounting, understanding the finer details of your client’s financial practices can be a daunting task—especially if they’ve been managing their Bookkeeping manually for years. Recently, I took on the challenge of helping a friend whose assistant/bookkeeper had retired after a decade of keeping their accounts by hand. Although I was eager to jump into QuickBooks, I quickly found myself confronting a significant issue: the co-mingling of personal and business expenses.

Understanding Co-Mingling of Funds

In this particular case, my client, Liz, has been utilizing her business bank account to pay for various personal expenses, including her mortgage, utilities, gym memberships, and even IRA contributions. This practice can severely complicate not just Bookkeeping, but also tax reporting and financial clarity.

Throughout a typical month for Liz’s gardening and landscaping business, the expenses tracked include legitimate business costs, like pest control and fertilizer, but also personal payments, which raise red flags. These items include:

• Bob’s Pest Control: $1,000
• Jill’s Fertilizing: $600
• Home & Auto Insurance: $3,000
• Ed’s Nursery: $2,000
• Chase Bank Mortgage: $3,500
• Comcast: $200
• AT&T: $200
• SIMPLE IRA Contribution: $4,000

As I delved deeper into the data being pulled into QuickBooks, I noted a troubling pattern: the business account has been frequently used for personal expenditures, resulting in a muddled financial landscape.

Addressing the Situation

After discussing the SIMPLE IRA with the retired administrator, I learned it is not an employer contribution as I had initially presumed. Instead, it is a personal contribution from Liz, further complicating the Accounting process.

So, what steps should be taken to rectify this? Here’s what I considered:

1. Recognize Personal Expenses: Any personal expenses identified should ultimately be separated from business finances. This not only provides clarity but also helps with compliance and reporting accuracy.

2. Categorization in QuickBooks: The next logical step is to treat these personal expenditures as “Owner Draws” in QuickBooks. This will allow you to delineate between personal and business finances effectively, though it’s crucial for Liz to understand the implications