Navigating Co-Mingling Issues in QuickBooks: A Case Study

Recently, I had an opportunity to help a friend transition their Bookkeeping practices into QuickBooks after their long-serving assistant decided to retire. Having only used traditional ledger methods for over a decade, the leap into digital Accounting proved to be quite an eye-opener for both of us.

Upon taking the role, I quickly found myself grappling with an unexpected challenge: the business account was being used to cover a range of significant personal expenses. This included payments for mortgage, utilities, IRA contributions, and even gym memberships, alongside ordinary business transactions.

Understanding the Landscape

The client runs a gardening and landscaping business, and a typical month’s transactions included both legitimate business expenses, like pest control and nursery supplies, as well as personal bills. To illustrate:

• 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 (personal contribution)

It became clear that while items like pest control and fertilizer are valid business expenses, some charges, such as those related to the mortgage and utilities, constituted significant co-mingling of personal and business funds. This raises concerns not just from a Bookkeeping perspective but also for tax compliance.

Addressing Co-Mingling: Best Practices

In reviewing these transactions and trying to implement them into QuickBooks, I faced a dilemma. The usual practice for handling personal expenses from a business account is to classify them as “Owner Draws.” However, given the longstanding practice of recording everything without much distinction, approaching this issue has its complexities.

When I attempted to discuss these discrepancies with both the business owner and the retired assistant, they reacted with confusion and annoyance. For them, the old hand-written system worked without any apparent issues, as they simply passed everything along to their accountant.

Finding a Path Forward

So, what is the best way to handle this? Should I simply classify the personal expenditures as “Owner Draws” in QuickBooks? The answer, while uncomplicated in theory, requires careful communication and education. Here are some recommendations:

1. Educate the Client