Have you ever pulled out a puzzle, looked at the pieces, and wondered where to start? If you want to make it really hard, add an extra puzzle that looks similar and mix the pieces together. Could you do it? Probably, given enough time and mental stamina, but it’d be quite messy to untangle. It’s a similar feeling when you mix your personal and business transactions. Accounting and bookkeeping is really just a system of organization that is used to explain and convey value. When organized, it shows a picture of your business and how it is doing. But that picture can get all jumbled up if you're mixing up the pieces of your financial life.
So how do you keep the pieces organized? Start by keeping them separate. Any financial or accounting professional will always recommend you get a business bank account as soon as you decide to start a business. This allows all of your expenses to be put to your business and helps you avoid mixing up your transactions. The tricky part is when you use your personal card to pay for business expenses or your business card for personal expenses.
It happens; we’re human. And luckily, this can be fixed. First, let’s look at an example in which you pay for something personal but use your business bank card instead. Say you went out for dinner and by accident charged the meal to your business card. This can easily happen just by pulling out the wrong card. It is not a deductible expense to your business, so, legally, if you keep it on your business card it will easily sneak into your tax return and would be considered fraud.
To solve this issue, you have to record the expense as a payment to yourself. A payment to yourself will be considered income on your personal tax return. I recommend doing this as soon as you realize what happened. It is easy to forget what expenses should have been payments and your accounting can quickly resemble two puzzles combined.
Now, let’s think of the alternative: you use a personal card to buy something for your business. Maybe you want to buy a baby grand piano but don’t have the necessary funds in your business bank account. You still have the money to pay for it, but only in your personal accounts. You can record this one of two ways: you can buy it personally then contribute the piano to your business account, or you can move the cash to your business and then record the purchase of a piano.
Either way, you will have to show an asset being recorded on your business books and then you would show the money spent as a capital contribution, increasing your owners’ equity/retained earnings.
I might have lost you on the last bit there, but that’s one of the benefits of hiring an accounting professional to help you with your finances: we know what owners’ equity and retained earnings are and how buying a baby grand piano would increase them. We understand these concepts and can help make sure that all expenses are recorded in the right place, keeping the puzzles of your finances separate.
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