As a small business owner, you may or may not have designated bank accounts and credit cards for your business. In either instance, it’s important to distinguish between business and personal transactions and there’s a few ways this can be done.
Business Accounts – NO
If you’re like me, you only have personal accounts. This is common is you’re a sole proprietor or independent contractor. There is no legal separation between you and your business so using your personal accounts is the simple route. But how good are you at keeping tabs on what is what?
I not only use QuickBooks Online for my clients, but for myself as well. The difference for me is that I track ALL my finances. Yep, the process that most businesses do for their monthly accounting is something I do for me personal finances as well. I utilize class-tracking to assign a different class for anything that is tied to my business. This makes the separating between work and play seamless and easy to identify for tax time.
Business Accounts – YES
If you’re like many of my small business clients, on the other hand, you DO have separate business accounts. Which is stellar! Until…..you use your business account for personal or vice versa. I simple solution would be to mirror what I described earlier, with the class-tracking. This will only work, however, if you do your accounting to include all your personal finances.
If you wouldn’t dream of maintaining such close tabs on your personal monies then you will have to be diligent about keeping your receipts! If your accountant is merely basing their work on your business accounts, and you do a business transaction with a personal account, you may miss out on writing of those expenses. Here is how to account for the cross-over:
- Business purchase on personal account: this is essentially the same as putting your own money into the business and would be recorded as an Owner/Partner Contribution
- Personal purchase on business account: this is essentially the same as paying yourself first, then making the purchase and would be recorded as an Owner/Partner Distribution
If you are a sole proprietor, the Contribution & Distribution accounts will just be used as an offset. If you are not a sole proprietor and must report taxes on actual funds taken out of the business, your net Contributions and Distributions will be reportable income. It is wise to pay the company back if you use a business account regularly to pay personal items, otherwise it could hurt at tax time.
Head this advice: maintaining on-going separation now will save you an immense headache later!