47: Recording Personal Expenses Paid With Business Funds Whether You Are Starting A Business, You A


47: Recording Personal Expenses Paid With Business Funds Whether You Are Starting A Business, You Are Self-Employed, A Solopreneur, Entrepreneur, Small Business Owner, Virtual Online Bookkeeper, Virtual Assistant Or VA

Over the last few episodes, I’ve talked about why you shouldn’t be commingling your personal and business funds, and today’s episode is no different, but like I’ve mentioned in the past, I understand that there are times when this happens, and you need to know how to account for it in your bookkeeping so that your financial statements are not reflecting the wrong data about your business. In today’s episode, I am going to focus on times when you may have paid for a personal expense out of your business account. This could be the result of accidentally grabbing the wrong credit card or checkbook when you are shopping for personal items. Even though you know these expenses are not supposed to be in your business financials, you will still need to record the transactions so that your books will still be in balance. The question of how to record these transactions comes up a lot and after today’s episode, you will know exactly what you need to do if this ever happens to you. Don’t miss this episode if you are using a computerized bookkeeping system like QuickBooks, Wave, Xero or FreshBooks or a manual system such as an Excel spreadsheet or Google Sheets and you happen to have a situation where you have used your business funds to pay for a personal item. This happens in businesses periodically no matter if you are just getting ready to start your small business, you’re a solopreneur, entrepreneur, small business owner, virtual online bookkeeper or virtual assistant, so listen in and make sure you are prepared to record transactions like this in your business…


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Show Notes:


Over the last few episodes, I’ve talked about why you shouldn’t be commingling your personal and business funds, and today’s episode is no different, but like I’ve mentioned in the past, I understand that there are times when this happens, and you need to know how to account for it in your bookkeeping so that your financial statements are not reflecting the wrong data about your business. In today’s episode, I am going to focus on times when you may have paid for a personal expense out of your business account. This could be the result of accidentally grabbing the wrong credit card or checkbook when you are shopping for personal items. Even though you know these expenses are not supposed to be in your business financials, you will still need to record the transactions so that your books will still be in balance. The question of how to record these transactions comes up a lot and after today’s episode, you will know exactly what you need to do if this ever happens to you. Don’t miss this episode if you are using a computerized bookkeeping system like QuickBooks, Wave, Xero or FreshBooks or a manual system such as an Excel spreadsheet or Google Sheets and you happen to have a situation where you have used your business funds to pay for a personal item. This happens in businesses periodically no matter if you are just getting ready to start your small business, you’re a solopreneur, entrepreneur, small business owner, virtual online bookkeeper or virtual assistant, so listen in and make sure you are prepared to record transactions like this in your business…


Welcome Back…Alright, picture this…you are out shopping for groceries and when it comes time to check out, you realize you don’t have your personal checking account, debit card or even your personal credit card. Your cart is full of groceries, and you only have one way to pay…by using your business credit card. You know these groceries are not for your business, but since you only have your business credit card with you, you start weighing your options. What do you do? If you are like most people you decide to use your business credit card and tell yourself you will figure it all out later. Well, later comes around and before you know it, you are recording your credit card transactions for your business credit card, and you find that one charge for the groceries you bought with your business card rather than your personal funds. Now what? Well, we are going to get into that today, but first I want to talk about what exactly commingling money means in a business.


Commingling simply put means that you are mixing the funds from one place with the funds of another place. In this scenario with the groceries, the funds for the business have been commingled with personal expenses since the business credit card was used to purchase the personal groceries. Mixing these funds is not advised and can cause a lot of problems including legal and liability issues, but today, we are focusing on how these commingled funds can cause issues when recording your business transactions.


Ok, so back to our situation where we purchased personal groceries with our business credit card. When the time comes to record this personal expense that was incurred with the business credit card, I’m sure there is lots of advice to take into account. I know there a few of you that are saying, why don’t you just leave that one charge out of your books. Well, this would seem to make sense to do, but you will run into an issue when you go to reconcile your credit card account. To be able to reconcile an account, you need to have all of the transactions accounted for and recorded. This same situation could happen with your business checking account or other business account, and no matter which business account might be used, you need to have all of your transactions recorded to be able to reconcile your accounts. For this situation, we are going to stick with the scenario that we used our business credit card to make the purchase.


Luckily, there is a pretty simple solution. For most businesses, you would record this personal transaction as an Owner’s Draw. This account is found in your equity section. When you code a transaction to this account, it will not have an impact on your Income Statement which will keep your business financials in order. Whenever you come across a personal expense that you have made with a business account, you will want to make sure to use this same Owner’s Draw account. If you don’t see an Owner’s Draw account in the equity section of your chart of accounts, you might have something similar. I know QuickBooks has an account called Owner’s Pay and Personal Expenses for example that is often included in the chart of accounts in the equity section.


This seems pretty straightforward, but I often see business owners who will add an account in their chart of accounts for something they pay for personally out of their business account and this account they add is an expense account. You do not want to do this. For example, what if you needed to pay for your daycare expenses out of your business account. In this case, you would not want to add a new expense account called daycare expenses as an expense and code your daycare transaction to this account. What this would do is reduce your Net Income in your financial statements and would give you a false sense of how your business is doing. If you continued to pay these daycare expenses from your business and you had $5000 in daycare expenses throughout the year and these were recorded as a business expense, your Net Income for the year would be understated by $5000 from the daycare expenses. When you actually take the $5000 out of your Income Statement, you all of a sudden have an additional $5000 of income you may not have been planning on paying taxes on. If you recorded the daycare expenses as an Owner’s Draw or an Owner’s Pay and Personal Expenses equity account, your Income Statement would have listed the correct net income and you would have been able to make better business decisions based on the accurate data.


Keeping your business and personal expenses separate can be difficult, but one tip I can give you to help you keep your business and personal expenses separate is whenever you are making a purchase and you have both business and personal items you are purchasing, run one transaction through with all your business purchases and then run a separate transaction through with all your personal items. I know this sounds like a hassle, but when it comes to your books and making sure you are not commingling your personal and business funds, I promise, it will be much easier on the bookkeeping side. Just make sure you don’t leave home without both your business and personal accounts – whether that be your checking account, debit card or your credit card so that you can keep everything straight.


If you are outsourcing your bookkeeping and you have a lot of personal transactions in your business finances, this could be costing you additional fees as well. Most bookkeepers will base their fees on the amount of time it will take to do your bookkeeping or how many transactions you have each month. By keeping your personal transactions out of your business accounts, you will not have any additional transactions that could be causing more time and a higher fee for you to pay to have your bookkeeping done. Have separate business accounts and don’t commingle your business and personal funds.


Making sure you have separate business and personal accounts is one of the items listed in my 5 Essentials For Stress Free Bookkeeping. This guide is helpful whether you are doing your own bookkeeping for your business, or you are doing bookkeeping for multiple businesses by covering the five essentials every business needs to do to have stress free bookkeeping. Grab your free guide by going to https://www.financialadventure.com/5essentials, and if you have any bookkeeping questions, you know you can contact me by going to https://www.financialadventure.com/Contact-Us. I’ll also post a link where you are listening to this podcast so that you can easily contact me


And, you know I’m going to ask…what’s at least one thing you will take away from this episode that will help your business succeed and grow your bottom line? If you need some accountability, join our PRIVATE Facebook community and post your action item, we’d love to support you.

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