Client Co-Mingling Issue – how to account for these “expenses” in QuickBooks?

Navigating Co-Mingling Issues: Best Practices for Accounting in QuickBooks

When stepping into a new role, especially in Accounting, one often faces unique challenges that can test one’s skills and adaptability. Recently, I found myself helping a friend’s client transition to QuickBooks after the retirement of their long-time bookkeeper. This client, Liz, has been documenting her gardening and landscaping business expenses manually for over a decade. However, I quickly discovered a significant issue: a co-mingling of personal and business expenses.

While it’s common for small business owners to mix personal and business finances, it’s crucial to understand how this practice can complicate Bookkeeping. Liz had been using her business account to pay for personal expenses such as her mortgage, utilities, gym memberships, and more. To illustrate, here’s a snapshot of a typical month’s transactions from her business account:

| Vendor | Amount |
|———————————|———|
| Bob’s Pest Control | $1000 |
| Jill’s Fertilizing | $600 |
| Insurance Company (Home & Auto) | $3000 |
| Ed’s Nursery | $2000 |
| Chase Bank (Mortgage) | $3500 |
| Comcast | $200 |
| AT&T | $200 |
| SIMPLE IRA | $4000 |

While I can clearly identify legitimate business expenses such as pest control and fertilizing, the payments related to her mortgage and utilities indicate a problematic overlap that can lead to serious Accounting headaches.

Engaging in discussions with the retiring administrator revealed that even individual retirement account (IRA) contributions were being funded through the business account, which raises further questions about financial reporting and accountability. Despite my inquiries, Liz and her team seemed perplexed and slightly dismissive of the potential implications of these practices, having relied on a simple handwritten ledger system for so long.

So, what’s the best approach when faced with this kind of scenario?

1. Assess the Situation: Begin by categorizing expenses into legitimate business costs and personal expenditures. This will help you to understand the extent of co-mingling and prepare for clearer financial reporting.

2. Owner Draws: To address personal expenses paid from the business account, you can record these transactions as “Owner Draws” in QuickBooks. This method separates personal expenses from business income, making it easier to track and report.

3. Education and Communication: It is crucial to