Granted, as a small business owner you cannot always avoid mixing personal and company finances. The key, however, is to be sure to track, keep accurate records and clearly identify all your transactions. Here’s why:
- When you accurately track your business income, expense and job costs, you receive and can use accurate financial statements, operating results and management reports on a daily basis.
- You won’t lose out on (or double-count) tax deductions, or under- or over-report taxable income on your personal and business returns.
Accurately Record Business and Personal Transactions
When recording financial transactions, your primary goal should be to report all company-related activities in company accounting records and to accurately identify and post company-funded personal transactions.
The easiest way to keep company and personal expenditures segregated is for you (the company owner) to limit all personal financial transactions to personal accounts and to place company assets and liabilities in your business name.
On the personal side, for example:
- Use your personal checking account to make personal purchases, car payments, home mortgage payments, etc.
- Limit personal purchases on credit cards to personal cards.
- Purchase personal vehicles and establish related loans in your own name.
On the business side, create business transactions using your company name for the following situations:
- Business checking account
- Savings, money market or investment accounts
- Company assets (e.g., land, vehicles, equipment)
- Company credit cards
- Loan accounts related to company purchases
Also, take a regular paycheck and show it as a company expense (which you could record as “reduce cash, increase expense”). Or, if you receive draws (or distributions of income), you should assign the check to an equity account as a reduction of equity, so that it does not reduce your income (which you could record as “reduce cash, reduce equity”).
What to Record When You Mix 'Oil and Water'
Although the above scenario is the ideal situation, I often encounter owners who regularly co-mingle their business and personal funds. The resulting accounting challenge, then, is to clearly identify and correctly record personal transactions.
The best way to approach recording a personal transaction is to first understand the specific circumstances surrounding it so that you can then properly record it. Here are some examples of personal transactions and notes regarding how they could be recorded in your accounting system.
When you pay. In each instance, you, the owner, contribute something of value to the company, and the transaction should be recorded that way. For example:
|
Owner’s contribution |
Could be recorded as: |
|
You make a permanent contribution to the company |
Increase cash, increase capital contribution [equity] account |
|
You contribute fixed assets, such as new or used office equipment, vehicles or land |
Increase asset accounts, increase capital contribution [equity] or loan due to owner [short-term or long-term liability] |
|
You make a temporary loan to the company, such as purchasing goods or services out-of-pocket using cash, personal check or personal credit card |
Increase expense, increase reimbursements due to owner [short-term liability] |
|
You make a long-term loan to the company. This should be documented with a formal note including interest rate, term of loan, and re-payment requirements
Note: When you are repaid for short or long-term loans you have made to the company |
Increase cash, increase loan due to owner [long-term liability]
Decrease cash, decrease loan due to owner [liability] |
|
You “contribute” personal credit cards for company-only use |
When you place company purchases on the card, record them as "increase owner credit card liability, increase expense."
Note: Interest charges on these accounts used only for business are tax deductible. |
When the company pays. Here are some examples on how to record when the company contributes funds to you or pays out funds on your behalf:
|
Company's contribution |
Could be recorded as: |
|
You receive a draw or distribution of income. |
"Reduce cash, reduce equity" (depending on type of company) as follows:
- Draw (sole proprietor)
- Distribution (sub S corporation, LLC or partnership)
- Dividend (C corporation)
|
|
The company pays your (or your family’s) personal expenses. |
Decrease cash, and increase loan due from owner [current asset] or reduce equity, as shown above |
|
You receive a temporary short-term loan from the company. |
Decrease cash, increase loan due from owner [current asset] |
|
You receive a long-term loan (should also be formally documented). |
Decrease cash, increase loan due from owner [other asset] |
If you’re not sure about how to identify or record a personal transaction, ask yourself questions and/or try to find original paperwork for individual transactions to determine underlying circumstances. For example, try to determine:
- Who initially owned the asset or liability, and who currently owns it — the company or the owner?
- Why are you are receiving the in-coming funds — from work performed or as a loan from the owner?
- Who benefited from the expenditure — the owner or the company?
If you still don’t know how to record the transaction, do the following:
- Place in-coming funds in an account called "unclassified income."
- Place outgoing funds in an account called "unclassified expense."
- Contact your accountant for advice about how to record the transaction.
Keep 'Em Straight
Taking the time to investigate, understand and properly record transactions as they occur throughout the year will save your tax accountant considerable time and frustration at year-end.
More importantly, it will especially pay off for you as you access your daily accounting and operating data. You will receive far more benefits from those "oil and water" (company and personal) transactions when they are recorded correctly and you can easily identify them in your current financial reports.
Diane C.O. Gilson, CPA, CIA, is a Certified QuickBooks® ProAdvisor and MasterBuilder ProAdvisor, author, trainer and construction accounting coach. She is a frequent speaker at The International Builders’ Show and The Remodelers’ Show. Her firm, Info Plus Accounting, offers bookkeeping and support services to construction companies. For more information, call her at 734-544-7620 or via e-mail at help@InfoPlusAcct.com.
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