Navigating Co-Mingling Expenses in QuickBooks: A Guide for Small Business Owners

When taking on the responsibility of managing finances for a small business, particularly one that has been operating with manual Bookkeeping for years, the transition to a software-based solution like QuickBooks can be both exciting and daunting. Recently, I found myself in such a situation while helping a friend, Liz, whose gardening and landscaping business has relied on handwritten records for over a decade.

The Challenge of Co-Mingling Expenses

After Liz’s bookkeeper retired, she sought my assistance to modernize her financial record-keeping. As I delved into her books, it quickly became apparent that the business account was being used for a myriad of personal expenses. These included significant items such as the mortgage, utilities, gym memberships, and even contributions to her IRA. It prompted a pressing question: how do we navigate the complexities of co-mingling personal and business finances in QuickBooks?

A Closer Look at the Finances

The monthly expense records revealed a mix of what seemed to be legitimate business expenditures alongside personal obligations. A typical month included transactions like:

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

While the pest control, fertilizing, and nursery expenses are clearly related to the operation of the business, the mortgage and utility payments raised significant red flags regarding co-mingling.

Understanding the Implications

It’s crucial to understand the ramifications of using a business account for personal expenses. This practice complicates Accounting and potentially poses issues during tax season. In conversations with Liz and her retiring admin, it became evident that they were somewhat perplexed by these inquiries; they were accustomed to entering all expenses into a ledger and allowing their accountant to sort out the details.

Finding a Solution in QuickBooks

So, what’s the best approach to handle this situation in QuickBooks?

1. Separate Owner Draws: A logical solution would be to classify personal expenses as “Owner Draws.” This allows for a clear distinction between business and personal finances, facilitating accurate financial reporting.

2. Expense Categorization: As you input transactions, categorize them correctly