Client Co-Mingling Issue – how to account for these “expenses” in QuickBooks?

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

Recently, a friend reached out for assistance with transitioning her business’s Bookkeeping to QuickBooks after her long-time assistant retired. For the past decade, they relied on a handwritten ledger to manage their financial records, and the shift to digital software was daunting. As I ventured into this new role, I quickly realized the complexities involved, particularly regarding the mixing of personal and business expenses.

Understanding the Problem

The business in question is a gardening and landscaping company, owned by a client named Liz. As I began inputting transactions into QuickBooks, it became evident that personal expenses were being charged to the business account. The list of expenditures was surprising—items such as mortgage payments, utility bills, IRA contributions, gym memberships, and even cable services were all paid through the business account.

Here’s a snapshot of a typical monthly expense report:

• 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 majority of these charges for pest control, fertilizers, and nursery supplies appear to be legitimate business expenses, others, like the mortgage and personal utility bills, raise red flags about co-mingling funds—a practice that can lead to serious Accounting and tax issues.

The Owner’s Perspective

In my conversations with Liz and the retiring assistant, it became clear that they had been accustomed to recording expenses without much distinction between personal and business. Liz even contributed personally to her SIMPLE IRA from the business account, which adds another layer of complexity. Their reliance on the old ledger method meant they never scrutinized these transactions closely, relying instead on their accountant to clarify things at tax time.

What Should Be Done?

As I pondered the best course of action, I considered the following:

1. Separate Accounts: The first recommendation would be for Liz to create distinct accounts for personal and business finances. This is crucial for accurate record-keeping and will simplify future transactions.

2. Reclassifying Transactions: For the time being, I debated whether I should categorize personal expenses as