Navigating Co-Mingling of Client Funds: Best Practices for Accounting in QuickBooks
When stepping into the world of Accounting, particularly for small businesses, it’s not uncommon to encounter complex financial situations. Recently, I took on a job helping a friend who was struggling with her business Accounting after her long-time bookkeeper retired. She had been manually tracking her gardening and landscaping business’s finances for over a decade, and it quickly became apparent that there were significant gaps in her financial practices, especially concerning the use of her business account.
Understanding Co-Mingling of Funds
During my review of the business’s financial records, I discovered a troubling trend: Liz, the business owner, was using her business account to pay for a range of significant personal expenses, including her mortgage, utilities, gym memberships, and even contributions to her IRA. These transactions were previously recorded in a handwritten ledger without much scrutiny, which is common for many small business owners who might not fully understand the implications of such practices.
Here’s a simplified snapshot of a typical month’s expenditures for the business:
| Vendor/Expense | Amount |
|—————————-|———–|
| 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 Contributions | $4,000 |
It’s clear that while some entries, like pest control and fertilizers, are legitimate business expenses, others—including the mortgage and utility bills—are definitely personal in nature, thus leading to a serious co-mingling issue.
Addressing the Challenge
After diving into the details, I found that these personal expenses were being lumped together with business transactions in QuickBooks. This lack of separation not only muddles the accounting process but can lead to significant complications when it comes time to file taxes or conduct financial analysis.
I had a conversation with the outgoing administrative assistant to clarify whether some of these payments were business-related, but discovered that even the SIMPLE IRA contributions were personal and paid from the business account.
Given the situation, I am faced with the dilemma of how to correct these records in QuickBooks. Should I categorize personal expenses as “Owner Draws”? This seems like
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