It’s common practice for new (and sometimes experienced) small business owners to make both personal and business purchases on the same cards. However, this can cause a lot of confusion for both you and your bookkeeper year round, and your accountant at tax time. Keeping your finances separate can not only make life simpler for your bookkeeper and accountant, but it can also save you money. Combining your finances can cost you in missed tax deductions, and you could even become personally liable for your company’s debts. This personal liability can happen even if you set up your business as an LLC or Corporation, which most people do to avoid that very thing. You can easily avoid “piercing the corporate veil” in this way by signing up for a business-only bank account and credit card. Some online banks offer no-fee accounts for those of us on a budget.
If you’re building your business using personal funds, there is a way to do this without making problems for yourself down the road. You still need separate accounts, but anything you spend from your personal debit or credit cards can still be entered into your books. Instead of entering it the way you would a regular purchase, you’ll enter it as a Journal Entry. If you don’t plan on being paid back, this will go in as a Debit to Purchases (or a different account of your choice), and a Credit to Owner’s Contribution (or Investment, depending on how you have your Chart of Accounts set up). If you do eventually want to be paid back, you’ll Credit Owner Repayment Payable instead.
If you do ever accidentally make a personal purchase on your business card, don’t worry, it happens. Just make sure to categorize it under Owner’s Pay & Personal Expenses when it comes through the bank feed. This will at least show your accountant and the IRS that it shouldn’t be counted under business expenses.
A great bookkeeping professional will make suggestions to you based on what they see as they manage your books. I am one of these bookkeeping professionals. Reach out to me today to discuss what I can do for you.
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