Mix personal and company spending
This is one of the most popular questions from small business owners. Most of them won’t be able to find the answer other than “you are not suppose to do that, try separate them”. Honestly, how many times do you need to make a purchase for the business, when all you have is a personal credit card? How many start up business cannot even obtain a credit card for the business because of it is new and the owner needs to assume all the liabilities of loans to put into the business anyways? How about it takes 5 business days to clear a check that you pay yourself, but your wife birthday is in 3 days?!
Most small business owners get frustrated, they often say, “Since company and personal income are ”all my money” anyway, so why all the trouble?! It is tough enough to run a business, who have time to do all that?”
When it comes to tax time and facing all the bookkeeping duty, they have headache! Especially when the last thing you want is the tax man knocking on your door.
Here’s what you can do to get these transaction recorded accurately for your company.
If you pay to the company:
| You contribute to the company, and not planning to get it back. | You as an owner or shareholder, put capital into the business | Increase Equity (Capital Stock, or Owner’s equity), Increase Asset (Petty Cash, Bank Account) |
| You pay company expenses with personal money (credit card, cash, etc) | You can treat this as a short term loan, or a contribution to the company permanently. | Increase Expense, Increase Liability (Reimburse Owner) |
| You buy the company a piece of fix assets (computer, equipment, furniture, etc) | Same as above, you can treat this as a short or long term loan, or a contribution to the company. | Loan: Increase Asset, Increase Liability (Short/Long Term Loan to Owner) Contribution: Increase Asset, Increase Equity |
If the company pay for you:
| The company pay for your personal expenses (grocery, phone, rent, etc) by cash, cheque or direct debit | You can treat this as a short term loan to the owner, or take out the money as dividend | Loan: Increase Asset (Loan to Owner), Decrease Asset (Cash or Bank Account) Dividend: Decrease Equity, Decrease Asset (Cash or Bank Accout) |
| You transfer money from company to yourself (or cheque, cash) | Usually this involves a big chunk of money. Again you can treat this as a loan, or dividend | Same as above |
| Your company pay for your personal expenses by company credit card | Instead of decrease cash like the above, your company actually take a loan to pay your personal expenses | Loan: Increase Liability (Credit Card Account Payable), Increase Asset (Loan to owner) Dividend: Increase Liability (Credit Card Account Payable), Decrease Equity |
So how do you determine if you want to take a loan or a dividend? This depends on you; will you have money to pay those loans between your personal and company account?
Here is my little trick:
1. Create an account for personal expenses as “Unclassified Expenses” or “Owners Expenses”
2. Create an account for personal contribution as “Owner’s Equity”, “Shareholder’s Equity” or “Shareholder’s Dividend” (note: sometimes they are also called Capital Stock, or Capital Investment”)
3. Use the Unclassified Expenses account to track all your personal expenses
4. Use the Owner’s Equity account whenever you make contribution to the company. Assuming you have enough to contribute to the business, you can also draw dividend from the company account instead of going through the loan process.
5. Look at the amount of Unclassified Expenses and see if you can pay back those amount from your personal account in the future, then determine which expenses to assign as loan or dividend, and do an adjustment on the journal entry (if you don’t know how to do it yourself, you should consult a professional bookkeeper or accountant)
Of course the best way is to never co-mingle personal and company spending.
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http://wizebiz.ca/blog/2008/06/27/how-to-reimburse-yourself/ How to Reimburse Yourself
