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

Managing finances in a small business can be a daunting task, especially for those who have relied on traditional methods for years. A recent experience with a client, a gardening and landscaping company, highlighted a common challenge: co-mingling personal and business expenses.

The Situation

I recently stepped in to assist a friend whose bookkeeper had retired. The client, Liz, had been maintaining her financial records manually for over a decade. Intrigued by the opportunity to familiarize myself with QuickBooks, I took on the challenge. However, I quickly realized the complexity of the situation: a significant portion of Liz’s personal expenses was being paid from her business account.

Identifying the Problem

Upon reviewing the books, I noted several entries that raised red flags. The expenses included:

• Business Outlays:
• Bob’s Pest Control: $1,000
• Jill’s Fertilizing: $600

• Ed’s Nursery: $2,000

• Personal Expenses:

• Chase Bank (Mortgage): $3,500
• Comcast (Cable): $200
• AT&T (Phone): $200
• SIMPLE IRA Contribution: $4,000 (personal, not employer-related)

This mix of legitimate business expenses alongside personal costs indicated a significant co-mingling problem. Many small business owners struggle to distinguish between personal and professional finances, often leading to confusion in their Accounting practices.

The Challenge of Transitioning to QuickBooks

When I probed about the nature of certain expenses, the retiring bookkeeper seemed perplexed by my inquiries. They had been accustomed to simply recording everything manually and submitting it to their accountant. This approach is not uncommon; many small business owners find it easier to track expenses without adhering to strict categorizations. However, this can lead to complications during tax time or when assessing business health.

Finding a Solution

So, what should be done in situations like this? Here are some steps to consider:

1. Separate Personal and Business Expenses:
   Encourage your client to open a new personal account for non-business expenses. This crucial step can prevent further co-mingling and simplify record-keeping going forward.

2. Classify Expenses in QuickBooks:
   For the personal expenses already listed in the business account, it’s essential to categorize these correctly in QuickBooks.