Navigating Client Co-Mingling Issues in QuickBooks: A Practical Approach

Recently, a colleague reached out for guidance after taking on a project that involved transitioning a small gardening and landscaping business to QuickBooks. The situation quickly evolved into a challenging learning experience, shedding light on a complex issue that many small businesses face—client co-mingling of funds.

The Background

Upon stepping into this role, it became apparent that the client (let’s call her Liz) had been managing her business finances in a rather unconventional manner for the past decade. With the previous bookkeeper retiring, Liz was now entrusting her financial matters to an inexperienced hand. The records were traditionally kept by hand, creating a situation fraught with potential pitfalls.

In checking the business account, I noticed a disturbing trend: major personal expenses, including mortgage payments, utility bills, and even gym memberships, were being routed through the business account. To illustrate, Liz’s monthly expenses included entries like these:

• Bob’s Pest Control: $1,000 (Business expense)
• Jill’s Fertilizing: $600 (Business expense)
• Insurance Company (Home & Auto): $3,000 (Personal expense)
• Chase Bank (Mortgage): $3,500 (Personal expense)
• Comcast: $200 (Personal expense)
• SIMPLE IRA: $4,000 (Personal contribution)

From this snapshot, it’s clear that while there were legitimate business costs, several entries reflected a significant co-mingling of personal and business expenses.

The Key Issues

As I delved deeper, I discovered that Liz was inadvertently using the business account for personal transactions. The SIMPLE IRA, which she thought was a company contribution, turned out to be her personal investment—also funded through the business account! This led to a pressing question: how should these expenses be accounted for in QuickBooks?

Seeking Solutions

With Liz and her former assistant seeming perplexed about the necessity of these inquiries, I found myself in a challenging position. It was clear that their historical practice of jotting down expenditures in a ledger before handing them off to an accountant was no longer sufficient. However, simply asking Liz to sort through her transactions was not a viable option.

So, how do I approach this in QuickBooks? Should I categorize all the personal expenses as “Owner Draws”? This could be one effective method, allowing me to distinguish personal transactions from business operations. However, this raises another set of questions regarding the accuracy and legality