Common Bookkeeping Mistakes - #2 Mixing Personal and Business Accounts
We have great intentions to keep our expenses separate, but it's all too easy to mix them together. "What's the harm?" we think, especially if we are sole proprietors.
But don't. Just. Don't.
At the very beginning of your business, when you have to take some of your personal money and put it into your business, it's tempting to start heading down the wrong path. But both business-wise and tax-wise, it's best to open up a business checking account right away and use it exclusively for your business.
Once your business account is set up, do not use it to pay for personal items. That is a mess for your bookkeeper because those are not business expenses, and it is REALLY a mess for your accountant at tax time - there is no way they are considered legitimate tax deductions. Keeping them separate from the get go will save them time and YOU money.
Let's run through some examples:
You run a lawn-care business and need gasoline for one of your lawn mowers. You're getting gas for your personal vehicle and decide to get it all at once. Save everyone the headache and just run two separate transactions. Do not put the gas for the lawn mower on the same receipts as the gas for your car and, worse yet, do not get gas for your car using your business account!
You are at Walmart buying some office supplies for your business. You also need some shampoo and Q-tips for your home. Have the checker ring up two separate transactions and use your business account for the office supplies and your personal account for the shampoo and Q-tips.
Also, keep your receipts - just because a transaction is listed on your business account's statement doesn't mean it's tax deductible. A credit card/bank statement is not proper documentation for taxes. You need the receipt to prove that a deduction is legitimate.
It sounds so simple, but it's amazing how many people try to combine them! It truly is more efficient to just keep it separate from the get-go. If you need help with this task, consider hiring a professional bookkeeper to work with you.