If you search the web or asked a few accountants, you will probably get the idea that the easiest way to pay yourself is to reimburse yourself.  I did not mention anything about reimbursement In the How to Pay Yourself article, it is because paying yourself involves giving money to yourself for personal expenses, while reimbursement only deal with business expenses, hence it is for your business, not paying yourself.

What is Reimbursement

Reimbursement is when an employee paid for business expenses out of their own pocket, which are after tax earnings, the employer paid the employee those spending without taxing the employee.  Or, if you run a consultant business, and you charge your clients all expenses related to the clients, you bill them your business expenses, and those incomes are considered Reimbursement income for you, and they are not taxable.

Example 1: 

Amy, an employee, gets salary of 2000 after paid income tax from her pay check for 200 for the month. She used her 2000 dollars after tax money to buy a flight ticket for a business trip.

Amy notified the employer that she paid for her business trip out of her own pocket, and requested a “reimbursement” of the 2000 dollars with the proof of business spending of the flight ticket itinerary. 

Next month, Amy gets a salary of 2000 after paid income tax from her pay check for 200, along with the 2000 dollars for the flight ticket business expense.

In total, she received 6000 dollars from the company (4000 from salary, 2000 for flight ticket expense), but she only paid 400 dollars tax which applies for her 4000 salary.

How to Reimburse Yourself

So what happened if you are the owner of the company? The rule of thumb is: for all business expenses you pay from your personal income, record as a “reimbursement expense” to yourself.   Regardless if you are an employee who draws salary, paying yourself dividend, or paying yourself nothing from the business, you can use this method.  The point is that money use for business expenses should not be taxable, regardless of who is paying for it.

Example 2:

You are the owner of company ABC.  You paid 1000 by interact on your personal checking account for photocopying machine for your office.

Using Quickbook to record Reimbursement

If you are using quickbook, it is easy, all you need to do is to fill in the cheque form:

1. Use the cheque form, select Petty Cash or Checking account from the select drop down box.
2. In the No. field, enter “Reim”.  In the Payto field, pay to yourself. 
3. In the Account select field, select “Office Supplies”
4. Enter 1000 in amount field and select the correct tax field, Quickbook automatically calculate the correct GST and PST. 
5. Save

Manually record Reimbursement

To manually record into the book, you Decrease Petty Cash account (Asset), Increase Reimburse – Office Supplies account (Expense). 
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As you can see, reimbursement only works when you are paying for business expenses, you cannot reimburse personal expenses.  

Need Help in Bookkeeping?  We offer consultation on the phone, email, or face-to-face appointment.  Contact us today and see how we can help. 1-416-628-2036, info@wizebiz.ca

Related Articles:

How To Pay Yourself – Corporate
Mix Personal and Company Spending
Mix Personal and Company Spending – using Quickbook
Debit and Credit

What is Retained Earnings?
Retained Earnings in short, is the left over money you can spend on your business. It is the earnings reinvested in the business after the deduction of any distributions to shareholders, such as dividend payment.

When Quickbook closes your reporting period, it resets your net income for the new year and sets your net income to 0, and add / subtract this income / loss from last year to this year into your retained earnings account. It is the correct action to close the book for year end.

So what happened to the owners’ draws or dividends already paid out to shareholders? Quickbook does not do that. So we need to close the book manually to yield the correct Retained Earnings amount. The reason Quickbook does not close those accounts for you, is because owners’ draw and dividends accounts are often set up differently. For example, you may want to set up an owner’s draw account for each owner. It is also common to set up dividend accounts for each different class of shareholders. To ensure this flexibility, Quickbook does not create these account automatically in Quickbook, they need to be created manually. Therefore, Quickbook will not know how to close your book with these extra accounts.

How to close the book manually in Quickbook to correct Retained Earnings account

Example:
Your Current Period: Feb 1, 2006 – Jan 31, 2007
Dividend Paid: -35000
Net Income: 50000

You Last Period Retained Earnings (RE): 9000

You current year RE = Net Income + Last period RE – Dividend Paid = 50000 + 9000 -35000 = 24000

Now we come back to Quickbook. Your balance sheet report from your current period should have the following:

Dividend Paid: -35000
Net Income: 50000
RE: 9000

If you go one day further, and retrieved your balance sheet as of Feb 1, 2007, you should see the following:
Dividend Paid: -35000
Net Income: 0 (or any additional income you entered into the system on Feb1, 2007)
RE: 59000

Now this is only half the story, as you can see it doesn’t subtract your dividend paid so you can start your dividend paid from 0 for the new year. This will result in large amount of dividend paid throughout the years your business operates, so we need to close the dividend paid account.

Closing Dividend Accounts
Here’s how:

Make a Journal Entry in QB (Accountant -> Make General Journal Entries)

Choose the first day after your last period, in this case it is Feb 1, 2007
Increase (Debit) Dividend Paid by 35000 (This will increase the dividend paid to zero out the amount)
Decrease (Credit) Retained Earnings by 35000 (This will decrease the amount from RE where you paid out those amounts to yourself, hence no more in the business)

That is it! It is that simple.

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 First, let me refresh how to change tax rate. 

1. Go to List menu, click Tax Code List
2. Double click on GST and change tax rate from 6 to 5
3. Do the same with Standard

Scenario 1: You haven’t finished enter all your data from 2007

Continue to complete enter all your transaction from 2007.  After that change the GST tax rate.  Now you can start entering your 2008 data.  Notices that your GST rate for the new data entered after you change the tax code is automatically calculated with the new tax rate.

Scenario 2: You have finished enter all your data in 2007, and moving on the 2008

You can go ahead and change your tax code before you enter your 2008 data.  The new entry will use the new tax rate to calculate your GST. 

Scenario 3: You already have entered data for 2008, but it is still using the old tax rate, the numbers are all wrong.

First, change your tax rate now.  This will ensure all your new transaction entries have the correct tax rate.  To fix the data that has incorrect tax rate, you need to go back to all your 2008 transactions you have already entered, and change the amount in the GST field to the correct amount manually, and change the total to the correct amount, press save to save the transaction.  

I hope you don’t have a lot of data to fix!  If you do, I would still recommend you to go back to all your transactions and change them manually.  This will ensure accuracy of your data.  If you really do not have the time to fix your data, you will need to do a general journal entry.  General entry for this required bookkeeping knowledge and also Quickbook knowledge, I would strongly recommend you to find a Quickbook specialist in this case if you don’t know what you are doing. 

According to your company address when you set up your company, Quickbook detemines what tax accounts to set up, what sales taxes are applied to your province / states, and the tax rates.  It sets up the appropriate accounts for you automatically.  You can also set up new tax codes if you and assign your own tax rates for you business.

If you have not set up Sales Tax when you create your company.

1. Go to Edit menu, choose Preferences.
2. You should see a list of icons on the left, scroll until you see GST/PST and click on it.
3. Click on Company Preferences tab, and fill in the form accordingly

To create sales taxes, or modified tax codes and tax rates

1. Go to List menu, choose Tax Codes List. 
2. Double click on the tax code if you want to modify the tax rate, or click on Tax Code button, and click New to add new tax code.

When you create new customer:job, expense account, or item, you will be able to assign the tax code of your choose.  Once you have done that, all the invoices, bills payments you enter into the system, GST and PST will be calculated automatically for you. 

However, for the old records, you will need to go back to each one of them and re-enter all the values with the tax code applied.  The reason is that, Quickbook perform calculation and put your sales tax to the GST or PST payable liability account only during the time you enter your data. 

Having said that, of course it is possible to separate GST / PST from expenses after the fact.  Go to this article, Separate GST from Expenses in Quickbook,  for a step-by-step walk-thru on how you can separate GST / PST from expenses.

Don’t Panic!  There is an fast and easy solution for that!  Here it is.
There are a few options you can do:

1. Option 1: Fill in your GST return by hand and calculate manually (I will show you how below)
2. Option 2: Set up Quickbook GST / PST properly so you can use the “File GST” option in Quickbook.  ( I will also show you how )
3. Option 3: Go see a professional and have then file for you, of course additional costs apply!

Option 1: Fill in your GST return manually

This is actually a preferred method if you need to file your GST quick, but haven’t set up your Quickbook properly yet.  

1. Go to Report, and print an income and expense statement (also called profit and loss statement), remember to select the right date range when generate the report. 
2. Take the total income value, and calculate manually the tax your have been collected according to the tax rate of the year.  E.g. if your income over the year is $100,000, you collected $6000 ($100,000 x 6%). 
3. Now look at the expense report, for expenses that GST applied, sum up to get the total expenses for those GST applicable expenses.  Calculate the GST you have been paid.  E.g.  If your total expenses are $60,000, you have paid $3600 ($60,000 x 6%)
4. Your GST payable should be your GST collected minus GST paid.  In our example, you will pay Receiver General $2400 ($6000 – $3600)
5. Now you have all the information you need to fill out the GST form.
6. Record your GST payment into Quickbook, and assign it as expenses to Sales Tax expense.  (If you do not have such expense account, create new)

This method has a draw back.  If you pay by installment, and you decided to set up GST in Quickbook, you will need to take extra care on how you set up your GST payable liability account.

Option 2: Use Quickbook Sales Tax function

1. Go through the Sales Tax set up process.  Refer to Report Sales Taxes and Expenses in Quickbook on how to set you sales tax.
2. Click on Account from List menu (or however you use to browse your chart of account), you should see a GST Payable account set up under Liability. 
3. Print your income and expense report and calculate your GST like Option 1 (see above).
4. Click on Account from List menu, double click on GST Payable to open the journal entry window.  Enter these three records (numbers are as example given in Option 1): 
    Click Save button.  These entry in bookkeeping terms, you increase GST payable, decrease income, and decrease expenses.  The reason you do that is because you need to separate the GST from the total expenses, by decrease the GST amount from expenses.  The same rule applies to income.  Quickbook journal entry is smart enough to ensure you enter the correct “double entries” hence the book is always balance. 
5. Click on Vendor ->File Sales Tax button, go thru the steps and Quickbook should generate you a GST form with all the data filled in.

Of course sometimes it is not as straight forward.  For example, auto expenses are often only particularly use as business.  The portion used as personal expense cannot claim a GST return.  Taking all these extra calculation can be time consuming. Although following the above process with manual calculation can be achieved, if you are not sure, the best bet is to consult a professional.

If you are interested in knowing how to deal with mix personal and business expenses, click here.

At least it is much easier than doing your bookkeeping from scratch, or better yet not having to pay expensive bookkeeper or accountant to do everything for you.  You might still need to consult a professional, however with 90% of the work done, 10% will significantly lower your professional expenses. 

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