Navigating Client Co-Mingling: Properly Accounting for Personal Expenses in QuickBooks

A friend recently encountered a situation that many small business owners may face when transitioning from manual Bookkeeping to a digital platform like QuickBooks. Shortly after their assistant/bookkeeper retired, she sought guidance to streamline her gardening and landscaping business’s finances, which had previously been managed with pen and paper for about a decade. Feeling up to the challenge, I offered my assistance but quickly discovered the complexities involved.

Upon reviewing the business’s transactions, it became apparent that the owner, Liz, was using the business account for significant personal expenses. Items such as mortgage payments, utility bills, retirement contributions, gym memberships, and cable charges were all paid from the same account designated for business operations. This overlap raises a pressing question about co-mingling—mixing personal and business finances—which can lead to serious Accounting and tax complications.

To illustrate the situation more clearly, here are some examples of transactions from a typical month:

• 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 many of these expenses, such as those for pest control, fertilizer, and nursery supplies, appear to be legitimate business costs, others—like the mortgage, cable, and phone bills—seem to fall squarely in the personal category. Even the contribution to the SIMPLE IRA was revealed to be Liz’s personal deposit made from business funds, further complicating the financial landscape.

When faced with the challenge of reconciling these transactions in QuickBooks, I found myself at a crossroads. The natural inclination is to ask the client to clearly separate personal and business expenses moving forward, but their habitual reliance on hand-written records and a lack of awareness regarding these discrepancies made my inquiries seem unwelcome.

So, what is the best approach in this situation? Should I categorize the personal expenses as “Owner Draws” in QuickBooks to maintain clarity and correctness in the Accounting records?

Am I overreacting to what could be a common practice among small business owners who frequently intermingle their finances?

Ultimately, this situation underscores a crucial aspect of small business management: maintaining clear boundaries between personal and business expenses. Not