Addressing Client Co-Mingling Issues: Proper Expense Management in QuickBooks
Managing financial records for small businesses can often lead to intricate challenges, especially when transitioning from manual Bookkeeping to digital Accounting Software. A recent experience with a client’s financial setup brought to light significant issues surrounding co-mingling of personal and business expenses.
The Background Story
The owner of a landscaping and gardening business, Liz, recently transitioned from a hand-written Bookkeeping system to QuickBooks after her long-time assistant retired. In this process, I took on the role of assisting with the QuickBooks setup, only to discover a complicated blend of personal and business expenses being recorded in the same account.
As I began to pull data into QuickBooks, I noticed numerous transactions that raised red flags for co-mingling. For example, Liz’s business account was handling significant personal expenses such as:
- Mortgage Payments
- Utility Bills
- Contributions to an IRA
- Gym Membership Fees
- Cable and Phone Bills
These transactions were mixed in with legitimate business expenses, including payments for pest control, fertilizers, and nursery supplies.
Understanding the Implications of Co-Mingling
The practice of using a business account for personal expenses can lead to severe complications, particularly for tax purposes and financial clarity. Here’s a typical transaction list that illustrates the issue:
- Bob’s Pest Control: $1,000
- Jill’s Fertilizing: $600
- Home & Auto Insurance: $3,000
- Ed’s Nursery: $2,000
- Mortgage to Chase Bank: $3,500
- Comcast (Cable): $200
- AT&T (Phone): $200
- SIMPLE IRA Contribution: $4,000
Among these, while the expenses related to pest control and fertilizing are justifiable business costs, the payments for the mortgage, insurance, and personal contributions to an IRA present a real concern regarding financial practices.
Determining a Path Forward
When I had the opportunity to discuss these discrepancies with Liz and her retiring assistant, I found that they were somewhat surprised by my inquiries. Their historical approach had been simply to record everything, believing it would be handled appropriately by their accountant later.
So, the pressing question remains: how should these expenses be categorized in QuickBooks?
- Separate Personal and Business Expenses: The best course of action is for Liz to establish a clear
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