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

In the world of small business Accounting, keeping personal and business finances separate is crucial. This essential practice not only ensures accuracy in financial reporting but also safeguards you from potential tax liabilities. Recently, I encountered a challenging situation while assisting a friend with her gardening and landscaping business as she transitioned from manual Bookkeeping to QuickBooks. Here’s a look at the issue and how it can be tackled for those in a similar scenario.

The Background

My friend, Liz, recently faced a significant change: her long-time bookkeeper had retired. After being brought on board to help her navigate the transition to QuickBooks, I soon realized that the Bookkeeping practices had been quite informal. Liz and her assistant had been recording all transactions by hand for the past decade, which included an array of expenses, some of which were personal in nature.

The Expense Dilemma

As I began entering data into QuickBooks, it became apparent that many personal expenses were being paid from the business account. These included:

• Mortgage payments
• Utilities
• Gym memberships
• Cable bills
• IRA contributions

In addition to legitimate business expenses such as pest control, fertilizers, and nursery supplies, the presence of these personal costs raised significant co-mingling issues.

For example, a typical month’s expenses reflected in the books looked like this:

• 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

You can see how the lines between personal and business expenses have blurred, and this co-mingling can result in complications during tax season or when preparing financial statements.

Moving Forward

Given the situation, I wondered how to best account for these personal transactions within QuickBooks. A possible solution would be to categorize these personal expenses as “Owner Draws.” This method can help clarify the distinction between business and personal funds, assisting the owner and her accountant when they review financials for tax purposes.

While discussing this with Liz and the retiring assistant, I faced some resistance. They seemed puzzled about the necessity of my inquiries, perhaps due to years of accustomed informal record-