Navigating Client Co-Mingling Issues in QuickBooks: A Guide for Entrepreneurs

In the world of Bookkeeping and Accounting, few challenges are as perplexing as co-mingling personal and business expenses. Recently, I was presented with a unique case when a friend sought assistance with transitioning their gardening and landscaping business to QuickBooks after their long-time bookkeeper retired. What seemed like a straightforward task quickly revealed a tangled web of financial discrepancies that required careful handling.

Understanding the Context

The client, Liz, and her previous bookkeeper had managed to keep their financial records by hand for over a decade. Now, as I familiarized myself with QuickBooks, it became clear that Liz was inadvertently using her business account to pay for significant personal expenses. This isn’t uncommon, especially for small businesses where personal and business finances often overlap.

A Typical Month’s Breakdown:

While most of Liz’s expenses, such as payments to pest control and suppliers, could be classified as legitimate business costs, the inclusion of personal payments raised serious concerns. Here’s a snapshot of some transactions that appeared in the business account:

• Bob’s Pest Control: $1,000
• Jill’s Fertilizing: $600
• Home & Auto Insurance: $3,000
• Ed’s Nursery: $2,000
• Mortgage Payment to Chase Bank: $3,500
• Comcast Cable Bill: $200
• AT&T Phone Bill: $200
• SIMPLE IRA Contribution: $4,000 (personal contribution)

It was troubling to discover expenses like the mortgage, phone, and cable bills mixed in with ordinary business expenditures. Even more concerning was the revelation that the IRA contributions were personal funds being funneled through the business account.

Addressing the Challenge

Upon recognizing the co-mingling of funds, I sought clarity from Liz and the retiring bookkeeper. However, my inquiries were met with confusion and frustration. They had always recorded everything in a handwritten ledger and left it to their accountant to sort out the mess.

Finding a Solution

So, what’s the best way to approach this situation in QuickBooks without overwhelming Liz or disrupting her business? Here are a few steps I recommend:

1. Educate the Client: Start by explaining the importance of keeping personal and business finances separate. This not only ensures accurate Bookkeeping but also simplifies tax preparation.

2. Owner Draws: Consider categorizing personal expenses