Mix personal and company spending – using quickbook
This is one of the most asked questions by small business quickbook users. Most accountants or bookkeepers will refuse to answer this common question; after all they want your business.
Quickbook made it so easy for business owners to track everything and generate financial reports without any accounting knowledge. In general, the easiest way to separate personal spending and company spending in quickbook is to do a journal entry directly. Refer to the tips on bookkeeping tips – Mix personal and company spending, and do the entry directly into the general journal entry.
However, most people will have difficulty doing a direct journal entry without any knowledge in bookkeeping and accounting. Here are few simple ways to track this correctly in quickbook.
Method 1:
1. pay by cheque: enter cheque / bill as usual, in the account column, select unclassified expenses
2. at the end of each accounting period (e.g. monthly, yearly), you do a journal entry to decrease unclassified expenses, increase loan. Or decrease unclassified expenses, decrease equity.
This method is ideal if you are currently using an accountant. If you have an accountant, you don’t need to do step 2. Leaving the unclassified expenses as is, and the accountant will be able to figure out how to do the adjustment on their end. It is also easier to enter into the system, since you only have to worry about assigning it to one expense account.
However this method has a draw back. For example, what if you go to wal-mart to get some office suppliers, at the same time you also bought some toys for your kid. You now have both personal and company expenses on the same receipt, and the GST / PST is being applied as a whole.
In order to record this receipt transaction correctly, you will need to ensure the right tax code is apply correctly to only the company expenses, and not the personal expenses. If you don’t take your time in doing this correctly, your GST remittance will be wrong. In this case you will assign your toys transactions to “unclassified expenses”, and assign no tax code for personal expenses. Assign the rest of the business expenses accordingly with a right tax code.
The draw back: your report of true business income and expenses are incorrect, resulting in an incorrect profit amount. This is due to the fact that QB calculated the bottom line (i.e. profit) by subtracting all expenses from the total income. In this case, it will treat your personal expenses as business expenses and it will reflect in your financial statements.
Method 2:
1. pay by cheque: enter cheque as usual, in the account column, select owner’s equity. That is it!
2. At the end of the period, you owner’s equity account should show a negative number. This is the amount being deducted from your company’s equity.
In the Wal-Mart example in Method 1, you will be able to record these transactions, and assign an appropriate tax code to each transaction; hence your GST and PST remittance will be correct.
There will be no expenses subtracted from your income, instead, the earnings will be shown as equity, which represents your dividend and how much your company worth. This will give an accurate picture for tax purposes on your income. Personal expenses should not be deducted from your business income for tax purposes.
The downside of this method is that you will need to take more time and effort to record each transaction correctly and assign the appropriate tax code.
Still need help? Contact us, we can help. 416-628-2036, info@wizebiz.ca
