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

When stepping into the world of Accounting Software like QuickBooks, it’s essential to grasp the intricacies of managing finances accurately, especially for small businesses operating with a mix of personal and business expenses.

Recently, I was approached by a friend whose gardening and landscaping business required assistance transitioning from a hand-written ledger system to QuickBooks after their bookkeeper retired. Having some familiarity with the software, I took on the challenge, only to quickly realize the complexity of their financial situation.

The Challenge at Hand

The business owner, Liz, has been mixing significant personal expenses with her business finances for years. This includes payments like her mortgage, utility bills, gym memberships, cable services, and contributions to her IRA—all drawn from the same business account. The Bookkeeping method they previously employed was informal and lacked the necessary categorization to keep personal and business expenses distinct.

A breakdown of Liz’s typical monthly expenditures reveals a tangled web of legitimate business expenses alongside personal ones:

• Business Expenses:
• Bob’s Pest Control: $1,000
• Jill’s Fertilizing: $600

• Ed’s Nursery: $2,000

• Personal Expenses:

• Chase Bank (Mortgage): $3,500
• Comcast (Cable): $200
• AT&T (Phone): $200
• SIMPLE IRA Contribution: $4,000 (personal, not employer)

Identifying the Co-Mingling Issue

As I transferred records into QuickBooks, it became clear that Liz was co-mingling personal and business expenses, which poses significant challenges not only for accurate Bookkeeping but also for tax reporting. The primary concern is distinguishing what should genuinely be categorized as business expenses.

Inquiries with the retiring bookkeeper revealed that even the SIMPLE IRA, which ideally would be employer-matched, was being funded personally—highlighting a substantial oversight. However, my attempts to clarify these discrepancies with Liz and her former administrative assistant were met with confusion and irritation. They seemed accustomed to their old system without realizing its potential pitfalls.

Seeking Solutions

As I navigate this new terrain, I’m left pondering the best course of action. Should I simply categorize all personal expenses as “Owner Draws” within QuickBooks? This seems like a straightforward solution, but it may not entirely resolve the underlying issue of funds being improperly allocated.

I understand the importance of sending a