Navigating Client Co-Mingling: Addressing Personal Expenses in QuickBooks

Recently, I had the opportunity to assist a friend who needed help transitioning from years of hand-written Bookkeeping to QuickBooks after their bookkeeper retired. This seemed like a straightforward task until I delved deeper into their financial records and stumbled upon a significant issue: the co-mingling of personal and business expenses.

The client, Liz, runs a gardening and landscaping business and has been using a manual ledger system for nearly a decade to track her finances. However, as I started categorizing her transactions in QuickBooks, I noticed an alarming pattern – Liz was using her business account to pay for personal expenses. These included her mortgage, utilities, Individual Retirement Account (IRA) contributions, gym memberships, and even cable bills.

To illustrate the situation, here’s a snapshot of a typical month’s expenses:

• 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: $4,000

From this list, it’s clear that while some expenses, such as pest control and nursery supplies, are legitimate business-related costs, others, including the mortgage and utilities, represent a major co-mingling issue.

In my attempts to clarify the situation, I discovered that the retiring admin had been entering a SIMPLE IRA contribution that was, in fact, Liz’s personal contribution and not an employer’s deposit—again charged to the business account.

Faced with this complexity, I pondered the best approach to resolve these discrepancies in QuickBooks. While it might be tempting to demand Liz separate her personal expenses from her business finances, that could lead to frustration, as they are accustomed to their old ways.

So, what should I do? Is it acceptable to categorize these personal expenses as an “Owner Draw” in QuickBooks? I reached out for clarification but found that both Liz and her retiring admin seemed puzzled by my inquiries, perhaps viewing them as unnecessary complications in their well-established process of simply handing off their records to an accountant.

Am I overreacting to what’s clearly a significant issue? Or is this a common scenario faced by many small business owners? If so