04 Apr Mixing Personal and Professional (Finances That Is): What to Do WhenYou Cross The Line
Most every business owner and entrepreneur have been there. You are at the check out somewhere, reach into your pocket, and low and behold you don’t have your personal credit card with you. Luckily embarrassment was avoided because there was your business card. You swipe away and the problem is solved. EXCEPT now you have commingled your business and personal finances.
So why is this even a problem? Well, keeping your business and personal finances has many advantages. The main advantage is that segregation of personal and professional finances reduces personal liability, especially if organized as a corporation, and lends credibility to your accounting. Furthermore, segregation of funds also helps reduce accounting costs and gives a more credible appearance. Continually mixing personal and business can cause the protections of the corporate entity to be broken down. If you are operating as a sole-proprietor continual commingling of funds can lead to issues at the time of an audit.
So, if you haven’t done so already make sure you have separate personal and business bank accounts and credit cards. Dedicate a particular card for only business use if you can’t get a business card.
Now, what do you do when you already are set up all nice and segregated but mix the two here and there?
For starters make sure you save your receipts and documents. You may need to clearly document the transaction later. If it was an expenditure from your business accounts of a personal nature be sure that you post the transaction not among your expenses, but to either an owner equity account or a loan to/from officer account recommended by your tax adviser. If it was a business expenditure from your personal accounts you will need to post it FROM your owner equity or loan account TO the appropriate account. You can do this with a journal entry crediting the equity or loan account and debiting the appropriate account such as an expense or fixed asset account.
Keeping these kinds of transactions to a minimum will simplify your overall accounting and financial life, but when they do arise don’t panic and make sure they are well documented. Keeping consistent with this variety of transactions will be an important component of good business accounting.