The Importance of Tracking Non-Business Accounts: A Bookkeeper’s Insight
Hello fellow finance enthusiasts and bookkeepers! As someone who has spent years managing books for various companies, I’ve recently ventured into handling finances for private clients to earn some extra income. One intriguing challenge I’ve encountered involves assisting a newlywed couple—let’s call them H (husband) and W (wife)—who are transitioning from their traditional “end-of-the-year box-of-receipts” method to a more organized Bookkeeping system. This unique experience has prompted me to reflect on how meticulously personal accounts should be tracked, especially when intertwined with business finances.
Setting Up a Comprehensive Bookkeeping System from Scratch
In this scenario, H owns two rental properties, with income reported on Schedule E. Despite being a sole proprietor, without an LLC, I’ve recommended separate accounts for his rental activities, but this advice has yet to be implemented. Currently, both H and W deposit their paychecks into H’s checking account, the same one employed for both personal and rental-related transactions. The following are accounts within their financial landscape:
Essential Accounts for Bookkeeping:
- H’s Checking Account: Manages rental income and personal deposits.
- H’s Credit Card: Covers rental expenses.
Possibly Necessary Accounts for Bookkeeping:
- H’s High-Yield Savings
- W’s High-Yield Savings
- H’s Brokerage Accounts (Stocks and Bonds)
Unrelated Personal Accounts:
- W’s Credit Card
- W’s Checking Account
- W’s Venmo
- H’s Venmo
Navigating the Complexity of Personal and Business Finances
The complexity arises because H pays off W’s credit card from his checking account, where both their incomes are pooled. Understanding H has his own budgeting approach and primarily employs bookkeeping for tax purposes, they don’t typically itemize expenses. This raises the question: Should I meticulously track the non-business accounts, especially those in the second and third categories?
Based on my initial assessment, my focus was just on the critical accounts directly influencing the rental properties. However, the interconnected nature of their finances suggests that capturing a more holistic picture might be beneficial.
Balancing Detail with Simplicity in Bookkeeping
One pragmatic approach could be to categorize payments to accounts like W’s credit card and other personal spending under “personal expenses.” This way, the essential business-related financial activities are distinctly organized,
One response
Tracking non-business accounts in personal books can be quite insightful and beneficial, even though it may seem unnecessary at first glance, especially for a couple like H and W, who are beginning their financial journey together. Let’s delve into why it may be worthwhile to keep track of the accounts in your second and third categories, beyond the primary intention of maintaining business accounts for tax purposes.
Reasons to Track Non-business Accounts:
Improved Personal Financial Management:
By recording personal accounts, H and W can gain a comprehensive view of their household financial situation. This will allow them to manage their personal finances more effectively, set realistic budgetary goals, and identify potential areas for cost savings.
Enhanced Financial Clarity for Couples:
As newlyweds, establishing a joint financial strategy is crucial. Tracking both individual and joint accounts can help H and W understand their spending habits, facilitate open communication about finances, and align their financial goals.
Preparation for Future Financial Planning:
Detailed personal financial records can be invaluable for long-term financial planning. Whether they aim to buy a home, plan for children, or save for retirement, understanding their full financial picture will enhance their ability to make informed decisions.
Detecting Potential Fraud or Errors:
Regular monitoring of all accounts allows you to catch any unauthorized transactions quickly. Given the current scenario where multiple transactions occur between various accounts, vigilance can prevent costly mistakes.
Practical Advice on Bookkeeping Strategy:
Separate Personal and Business Finances:
Strongly advise H to open separate accounts for his rental properties and day-to-day personal expenses, if possible. This delineation will simplify tax filing and reduce the risk of mismanaging funds dedicated to personal or business use.
Track Aggregate Personal Expenses:
If they are comfortable, tracking the overall personal expenses from the joint accounts can help them gain visibility without diving deep into every personal transaction, which can be done through category-based recording (e.g., food, utilities, entertainment).
Categorization and Simplification:
You can record personal expenses as a single, categorized entry (e.g., “W’s Credit Card Payment – Personal”) rather than noting individual transactions. This way, personal expenditures are acknowledged without overshadowing business-focused Bookkeeping.
Advise on Budgeting Tools:
Encourage them to use personal budgeting tools like Mint or YNAB to track personal expenses. This can complement your Bookkeeping efforts and provide them