If You Mix Up Personal And Business Expenses In QuickBooks Online

If You Mix Up Personal And Business Expenses In QuickBooks Online

This can go two ways:

• Pay for a business expense with personal means (better)
• Pay for a personal expense with business means (commingling)

The bottom line is that it's bad to commingle personal and business funds.

I hope it never happens, but if you DO wind up in a lawsuit, the first thing they will do is subpoena your accounting records and if they find commingling, they will use that to attach your personal assets. 

In other words, you could lose the benefit of the very protection of personal assets that having a corporation affords.

If you pay for a business expense with personal means

If you pay for a business expense with personal means, that’s ok. It’s no different than any employee who pays for something out of their personal funds and submits an expense report to reimbursed.

The owner of the company can handle it the same way. The problem is they usually don’t. They either wind up showing it as a contribution to the business, which is ok, but it’s not bulletproof, or they show it as a loan. Again, ok, but not bulletproof. 

The best way is to treat it as an expense report, and by the way I have a clever trick to show you on how to do this in QuickBooks Online.

The short answer is we are going to create a credit card account type and call it “Expense Reports - [employee name].

Using a credit card account type makes it easy to import transactions as well as code them. Bottom line we get things categorized correctly and they show up properly on the balance sheet as a liability due to the individual.

If you buy inventory with a personal credit card

It works the same way, just use the "Item Details" section as shown here:

Note this is an expense using the Expense report account (up top), and we're using the Item Details section to capture inventory.

If you Pay for a personal expense with business means (commingling)

This is where you can get into trouble. Sometimes it happens by accident. It’s not the end of the world. When we identify a personal expense paid from the business we want to treat it as a loan to the shareholder or owner. 

Most often you’ll see these get coded as Distributions, which again is not wrong, but it’s not bulletproof. When you show it as a loan, and then repay it, that’s consistent with the story that it was a mistake, and we do care very much about running our business properly.

Calling it a distribution doesn’t say the same thing. 

Remember that I am looking at this through the eyes of someone who might be scrutinizing the numbers. 

A lot of bookkeepers would say I am going overboard. But that’s the point. To get bulletproof books, you have to go overboard. You have to tell the right story to someone who would scrutinize the books looking for a reason to take something you have, or to not give you something you want.