Should You Track Non-Business Accounts in Personal Bookkeeping?
Hey there! I’ve been in the Bookkeeping world for several companies, and recently, I started maintaining books for a few clients on the side for some extra income. One of my clients is a newlywed couple, and they previously took the “hand a box of receipts to their accountant at tax time” approach. So, unlike my prior experiences, I’m setting up their books from scratch and pondering how detailed I should be with accounts that aren’t directly related to their business or tax returns.
For simplicity, let’s call them H (husband) and W (wife).
H is the owner of two rental properties and files under Schedule E as a sole proprietor—there’s no LLC involved. Despite my advice to separate accounts for his rental business, he hasn’t made that move yet. H and W both work day jobs, depositing their paychecks into H’s checking account, which also handles rental income and expenses. Let’s break down their accounts based on their relevance to the business:
Accounts Clearly Needing Bookkeeping
- H’s Checking: Receives income from rentals
- H’s Credit Card: Used for rental expenses
Accounts Possibly Needing Bookkeeping
- H’s High-Yield Savings
- W’s High-Yield Savings
- H’s Brokerage Account 1 (Stocks)
- H’s Brokerage Account 2 (Bonds)
Accounts Unrelated to Business
- W’s Credit Card
- W’s Checking Account
- W’s Venmo
- H’s Venmo
The issue arises because H pays W’s credit card bill from his checking account, into which both of their paychecks are deposited. H might have his own budgeting system in mind, and it seems I’m mainly being hired to straighten things out for tax purposes. They’re unlikely to itemize expenses, based on their past habits, which is about the only reason I could see for meticulously tracking the accounts in the third category.
So, my main question remains: Should I monitor the accounts in the second and third categories? Initially, I planned only to manage the first category, but there’s clearly more complexity involved than I expected. I’m wondering if a simple solution would be to categorize payments to W’s credit card (and similar transactions in the third category) as “personal expenses.”
Would appreciating some advice on how detailed I need to be with these non-business accounts.
One response
When setting up personal Bookkeeping for clients, especially those with intertwined personal and business finances, it’s important to consider how detailed the Bookkeeping should be for various types of accounts. Your question revolves around whether to track certain accounts that are not directly related to the primary business activities. Let’s break down the considerations and provide guidance on the matter.
Reasons to Track Non-Business Accounts (Category 2 and 3)
Overall Financial Picture
Tracking all accounts provides a comprehensive view of H and W’s financial situation. This can be beneficial for future financial planning, budgeting, and identifying areas for financial improvement.
Interconnected Finances
Although some accounts are classified as non-business, there is a financial flow between these accounts (e.g., H’s checking account being used to pay W’s credit card). Tracking them can help you untangle these financial connections and provide clarity on personal versus business spending.
Tax Optimization
While H and W might not itemize deductions currently, having detailed records can allow for tax optimization opportunities in the future. Especially for H’s rental properties, understanding cash flow fully can help in tax planning beyond simple compliance.
Budgeting and Spending Analysis
Tracking these accounts allows you to provide insights into their personal spending habits and savings. This could be an added value service you offer in addition to simple tax preparation, providing them with advice on budgeting or reducing unnecessary expenses.
Preparedness for Itemization
Situations can change, such as acquiring more properties or changes in tax laws, which might necessitate itemization in the future. Having historical data makes it easier to transition into more detailed tax preparation if needed.
Practical Approach
Given that tracking everything can be overwhelming, consider the following approach:
Minimal Tracking for Non-Business Accounts
For W’s accounts and other personal accounts (Category 3), you could record them periodically (e.g., monthly summaries) instead of every transaction. Assign them as personal expenses in your Bookkeeping system for clarity.
Comprehensive Tracking for Relevant Accounts
For H’s savings and brokerage accounts (Category 2), consider whether their activities might impact tax liabilities or business cash flow. If they frequently interact with business transactions (e.g., funds moving between savings and business checking), it might be prudent to track them more closely.
Conclusion
In your role, balancing between thoroughness and practicality is key. Providing value