Myth: If I make a personal purchase from my business accounts or with a business credit card, I can exclude the purchase from my bookkeeping.
Fact: In order to properly reconcile your business accounts, all transactions should be recorded, even if they are personal in nature.
Whether you routinely make personal purchases from business accounts or accidentally used the wrong credit card, you should record these purchases in your accounting software. By doing so, you maintain proper bookkeeping and reconciliation. Reconciliation is the process of comparing two sets of records (like your bank statement with your checkbook register) to confirm that all transactions have been recorded and agree with one another.
Risks of Commingling Accounts
Before I go on, let me say that I do not condone the practice of commingling business accounts and personal funds, especially if you are operating your business as anything but a sole proprietor (in other words, an LLC, SCorp, or CCorp). Mixing business and personal funds could void the protection that these types of legal entities protect. Ultimately, you are saying that the business and you are one in the same, not separate entities.
Think of it like this. Would you give your employees a company credit card and invite them to buy groceries, gifts, or gas? If the answer is yes, please tell me where I can send my resume. Most likely, the answer is no. Unless you consider you and your business to be one and the same, you should not use business accounts to purchase personal items.
To understand this better, think of yourself as an employee. This will keep the lines clear between business and personal funds. Obviously, you need money to live. The proper way to provide that money is to pay yourself a salary and/or a draw, taken directly from a business account. Once you’ve paid yourself and deposited the money in a personal account, you use the personal account to purchase items.
How to Adjust Accounting Records
Enough of my soap box. If you didn’t know any better and made personal purchases from a business account, who can blame you? Now it’s time to move forward and adjust your accounting records. (For additional information, see my demonstration in a QuickBooks Online demo account.)
Here are the 3 steps to account for a personal purchase made from a business account:
- Confirm you have an equity account set up for Owner’s Draws in your chart of accounts (It may be called Owner Distribution, Partner Draw/Distribution, etc.)
- If an equity account doesn’t exist, create one
- Record the purchase as you would any other purchase and classify it to the Owner’s Draws account
If this was an oops and you didn’t mean to use your business account for this purchase, you can “reimburse” the company by putting the funds back in the business account from your personal account. To do this:
- Create a deposit for the amount you are replacing
- Code the deposit to the same account – Owner’s Draw
This will wash out the transaction to zero. You successfully recorded the transaction and updated your bookkeeping records.
Tips & Advice for Business Accounts
You can choose not to replace the funds, but I don’t recommend it. Commingling funds can void your business’ protection as a legal entity and can damage the integrity of your financial statements. Accurate financial statements improve your ability to make well-informed business decisions. Additionally, accurate bookkeeping records present legitimate financial data to partners, lenders, and other interested parties. Separating personal and business finances is worth the effort.
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