Addressing Client Co-Mingling Issues: Navigating Personal and Business Expenses in QuickBooks

Recently, a friend sought assistance with transitioning her gardening and landscaping business to QuickBooks after her assistant/bookkeeper retired. Having no prior experience with the software, I unexpectedly found myself navigating uncharted waters, especially when I discovered significant co-mingling of personal and business expenses.

The situation became apparent while inputting records the former bookkeeper kept manually for over a decade. The owner, Liz, was using her business account to pay for numerous personal expenses, including her mortgage, utility bills, gym memberships, and IRA contributions. This practice not only complicates Bookkeeping but also raises potential legal and tax implications.

Let’s take a closer look at a snapshot of a typical month’s transactions for Liz’s business:

• 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

Upon reviewing these entries in QuickBooks, it became evident that legitimate business expenses, such as payments to pest control and nurseries, were intertwined with personal expenses. For instance, the payments for the mortgage, cable, phone services, and even personal IRA contributions were processed through the same business account.

In an attempt to clarify, I inquired whether the SIMPLE IRA funds were made as employer contributions. To my surprise, Liz’s assistant confirmed that these were personal contributions made from the business account—a clear indication of co-mingling.

So, what’s the best course of action in light of this issue? Although I contemplated requesting that Liz separate her expenses, I need a structured approach to address these discrepancies within QuickBooks.

One potential solution is to categorize personal expenses as “Owner Draws” in QuickBooks. This designation can help differentiate these transactions from legitimate business costs. However, I’m aware that implementing this method requires some discussion with Liz and her former assistant, who have become accustomed to their handwritten ledger system and might be perplexed by the shift towards more precise Accounting.

As I navigate this situation, I can’t help but wonder: Am I overreacting to the presence of co-mingled expenses? Is this a standard practice