Addressing Co-Mingling Expenses in QuickBooks: A Guide for New Users

Navigating the transition to QuickBooks can be challenging, especially for small business owners unfamiliar with digital Accounting. Recently, I had the opportunity to assist a friend whose longtime bookkeeper had retired, leaving her in need of guidance on adopting QuickBooks for her landscaping business. The scenario quickly revealed a significant issue: the co-mingling of personal and business expenses.

Understanding the Problem

The client, Liz, had been managing her finances meticulously by hand for over a decade. However, it became clear that a number of personal expenditures were being paid from the company’s business account. This included payments for her mortgage, utilities, gym memberships, and even contributions to her retirement account, alongside legitimate business expenses like materials and insurance for her gardening services.

To illustrate, here’s a breakdown of a typical month’s transactions from her business account:

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

As I began to import these transactions into QuickBooks, it became painfully obvious that separating business from personal expenses would be essential for accurate Accounting.

Finding a Solution

The first question that arose was how to account for these personal expenses. I contemplated whether I should simply categorize them as “Owner Draws” within QuickBooks to reflect Liz’s contributions rather than try to untangle the mixed records further.

Despite my attempts to clarify these matters with Liz and her retiring assistant, my inquiries were met with confusion. They’ve operated under a system of handwritten ledgers for so long that my questions about the separation of expenses seemed out of place. However, I knew that continuing with this co-mingling could lead to complex financial reporting issues and potential tax complications down the line.

Steps to Take

1. Open a Dialogue: It’s crucial to have an open discussion with Liz about the necessity of separating personal and business expenses. Explain why it matters for both her financial clarity and compliance purposes