Navigating Client Co-Mingling Challenges in QuickBooks

Managing finances for a small business can be a daunting task, especially when transitioning from manual Bookkeeping to a digital platform like QuickBooks. Recently, I took on a project to assist a gardening and landscaping company that had relied on handwritten ledgers for the past decade. With their bookkeeper retiring, they were looking for help in modernizing their Accounting practices. However, what I discovered was a significant co-mingling of personal and business expenses that raised serious concerns.

Understanding Co-Mingling of Funds

The client, whom I’ll refer to as Liz, was using the business account to cover a wide array of personal expenses—everything from mortgage payments and utility bills to gym memberships and IRA contributions. To better illustrate, here’s a snapshot of how their recent expenditures looked:

• 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

As I began to input these transactions into QuickBooks, it became clear that while some costs were legitimate business expenses, such as pest control and fertilizers, others—particularly those related to personal living costs—were problematic.

The Challenge of Proper Categorization

I engaged with the retiring administrator about a few items in the ledger. One notable example was the SIMPLE IRA contribution, which, as I learned, was actually Liz’s personal contribution, not a company-sponsored benefit. This kind of financial overlap poses a real risk for the business, both in terms of accurate record-keeping and potential tax implications.

Given this scenario, I found myself pondering the best course of action. Simply demanding that the client separate her personal expenditures from business transactions seemed impractical and might not yield the cooperation I needed.

Possible Solutions

So, what is the best way to handle these co-mingled funds within QuickBooks? Here are a few strategies to consider:

1. Owner Draws: Record the personal expenses as ‘Owner Draws’ in QuickBooks. This approach can help in distinguishing between business and personal spending, ensuring clearer records for tax purposes, albeit requiring meticulous tracking.