Originally Published by Prosperity Bookkeeping
Picture yourself with a shopping cart full of school supplies at the checkout – and you grab the wrong credit card to pay for them. Oops! You just paid for your kid’s backpack and everything that goes inside with your business credit card. Mistakes like these happen. In order to maintain the integrity of your financial statements, you need to go through a fairly painless process to adjust your accounting records. But if this school supply scenario is more than just a one-time glitch, we need to have a serious conversation.
Maintain Legal Liability Protection
Commingling personal and business accounts is a big no-no for any business owner, but especially if you’re operating your business as an LLC, S Corp or C Corp and not simply as a sole proprietor. (For advice about choosing a business structure, read this article by the U.S. Small Business Administration.) By mixing business and personal funds, you’re acting as if you and the business are the same entity. Therefore, you put your personal bank account and assets at risk. Your business entity loses the legal liability protection that comes with its corporate structure.
Preserve Accurate Bookkeeping Records
The second reason not to commingling personal and business accounts relates to the accuracy of your bookkeeping records. If you make personal purchases with your business account, whether mistakenly or routinely, you should record these purchases in your accounting program. Accurate financial statements are important for three main reasons:
- Improve your ability to make well-informed business decisions
- Present legitimate financial data to lenders, partners, and other interested parties
- Keep accurate books so it’s easier to prepare a business tax return
Can you imagine giving your business credit card to an employee and inviting the employee to buy groceries, lottery tickets, or gas? Of course not. The same policy applies to you. You shouldn’t use business accounts to pay for personal items. The correct way to compensate yourself as a business owner is to take a draw from the company or pay yourself a salary directly from a business account. After depositing the money in a personal account, you’re free to buy personal items using a personal checkbook or credit cards.
How to Adjust Your Accounting Records
Earlier in this article, I promised a fairly painless process to adjust your accounting records if you used a business account to purchase personal items. To adjust your accounting records, follow this 3-step process:
- Confirm that 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
To reimburse your company for the personal purchases, you can transfer funds from your personal account to your business account. To adjust your accounting records, follow this 2-step process:
- Create a deposit for the amount you are replacing
- Code the deposit to the same account – Owner’s Draw
This zeroes out the transaction and corrects your bookkeeping records all at the same time.
Avoid Sloppy Business Operations
In addition to the school supply scenario, there are other scenarios to avoid related to commingling funds. Perhaps a client makes a check out to your name instead of your business’ name. Maybe you use one bank account for business and personal needs or move money back and forth between a personal and business account without documentation. All of these are examples of sloppy business operations that increase your liabilities. When you treat your business’ money the same as your own, you become personally liable for business debts and lawsuits. Don’t put yourself in that position!
For more business tips, financial advice, and a full line of bookkeeping services, contact Prosperity Bookkeeping. Prosperity Bookkeeping provides a proven process that will have you spending less than one hour per month on bookkeeping-related tasks.