Accounting for Personal Expenses in QuickBooks
As a rule, business funds and personal money should never mix. This is especially true for corporations and LLCs. Mixing personal and business funds for these entities could raise legal questions, not just accounting problems. For more information on this issue consult an attorney or tax professional in your area.
The reality is that most small businesses owners will at times pay for a business expense with personal money or pay a personal bill with business funds. Some sole proprietors don’t separate personal and business activity at all, using just one checking account for both. (I can not recommend against this enough.) Here’s how you can handle the occasional overlap while keeping your financial statements readable and meaningful.
Scenario 1 - Business expense paid with personal funds.
The easiest way to account for this is by writing a business check to the owner (or whoever paid the expense) using the account fields on the check to properly distribute the expense. You can also use an expense report / reimbursement form to document and track several purchases and reimburse all at once.
At other times, the business does not have the money to pay certain expenses and these are not paid back to the owner immediately. In this case a bill may be entered for payment later. In the case of sole proprietors, if the expense will not be repaid a credit can be issued for the bill using the Owner’s Contributions (or other owner’s equity) account.
Senario 2 - Personal bill or expense is paid with business check.
This is mainly an issue with sole proprietors. Ideally this business would write a “draw” or payroll check to the owner, then the personal bill would be paid from this personal money. Skipping the step of payment to the owner does not change the accounting. These types of transactions should be recorded using the “Owner’s draw” or other equity account.
Whatever action you take to account for these transactions, always use the memo fields and/ or notes on the original paperwork to document what was done and why. In case of an audit or other examination, these notes will help you explain any irregular looking transactions.
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Comments
what if the business is a sole proprietor who used his own credit card to pay for a business expense. Which accounts should be debited and credited ? (debit owner’s equity and credit cash?) please help
Zaina -
The same principles apply. If the money will be reimbursed you can enter a bill, payable to the owner and using the correct expense account(s). If the owner will not be reimbursed a journal entry crediting owner’s equity or contributions and debiting the appropriate expense account would be fine.
Remember to document the transaction in the memo fields.
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