Navigating Co-Mingling Issues in QuickBooks: A Guide for Small Businesses

When managing the finances of a small business, clarity and organization are crucial. Recently, I encountered a situation that highlighted the importance of keeping personal and business expenses separate. A friend sought assistance after their long-time bookkeeper retired, and the task was to transition their financial records into QuickBooks after a decade of ledger-based Accounting.

Upon delving into the financials of Liz’s gardening and landscaping business, I quickly realized the complexity of their situation. The records revealed a troubling pattern: several major personal expenses were being charged to the business account. These included a mortgage, utility bills, IRA contributions, and gym memberships—items that clearly belong in a personal budget, not a business ledger.

Here’s a snapshot of a typical month’s transactions:

• Bob’s Pest Control: $1,000
• Jill’s Fertilizing: $600
• Insurance Company (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 expenses related to pest control, fertilizing, and nursery supplies are legitimate business expenditures, the inclusion of the mortgage and utility bills raises significant red flags. Even the SIMPLE IRA contribution, initially thought to be an employer match, turned out to be a personal contribution made from the business account—a definite co-mingling issue.

This discovery led me to ponder the best approach for addressing the problem. Simply instructing Liz to separate her personal expenses from the business ones seemed impractical, especially since she and her retiring assistant had grown accustomed to their method of managing the books without much oversight.

So, how should one handle such expenses in QuickBooks? Although there isn’t a one-size-fits-all answer, here are some steps to consider:

1. Identify and Categorize: Begin by identifying the expenses that are clearly personal. Tag these transactions as “Owner Draw” or create a separate category for personal expenses that were wrongly recorded under business transactions.

2. Educate the Client: It’s important to have an open conversation with Liz about the implications of co-mingling funds. While she may feel defensive or uncertain about changing her methods, emphasizing the necessity for accurate record-keeping will help her understand the benefits.

3. Implement Separation: Advise