As an entrepreneur, are you keeping your business and personal finances separate? If not, it’s time to make a change. You may be asking, “Why is it so important to keep my personal and business money separate?” In my opinion, there are a few reasons.
1. It makes your bookkeeping so much easier.
When you have your personal and business funds together in the same account, it takes time to figure out which deposits and expenses are for the business and which are personal. Even if it is easy to determine, if you are doing bookkeeping with software, all transactions have to be entered so the accounts can be reconciled. That means extra time has to be taken to enter transactions that have nothing to do with the business. Sometimes clients only want to put in the business transactions and skip the personal ones, but then you can’t reconcile the accounts as transactions are not included. Doing it this way could inadvertently lead to missing transactions that should be included in the accounting (either income, expenses, or perhaps both.) It’s a sloppy way to do the work.
2. You don’t have good financial reports
If your business and personal expenses are all entered into the software to reconcile, then there are additional items included on the income statement and/or balance sheet. If posting personal transactions to expense accounts (such as telephone, utilities, etc) the expenses are overstated. If posting all personal expenses to a drawing account, the equity portion of the balance sheet shows more drawn out of the business than would have been listed had the owner only taken a distribution from the business for support. The income figures are probably also incorrect as most people usually have some deposits personally that don’t come from the business. Entering it into the software overstates how much money was earned by the business.
3. It makes tax return preparation more difficult.
Because your tax return is on business income and expenses, the CPA will have to figure out what is the true profit of the business by reviewing all the income and expenses and removing personal transactions from the equation. Whether filing a Schedule C or a corporate return, correct figures need to be reported to properly calculate the tax or refund due.
4. It’s an audit waiting to happen.
Are you looking forward to being audited? If not, keep your business and personal transactions separate. If the IRS looks at your bank statements and bookkeeping file, they may adjust your tax return and assess a balance due notice. They may disallow expenses and include deposits as income because your business and personal items were mixed.
You may think it’s not a big deal to mix funds or think it’s a hassle to have multiple bank accounts. However, it is not as much of a hassle as having to figure out your true business figures, get the correct information on a tax return, and prevent the IRS from adjusting your tax return. If you don’t want to pay bank fees, look into credit unions who generally don’t charge fees if you meet their less stringent requirements than banks have. You’ll have an easier time reconciling your accounts, knowing how profitable you are, and it will make your CPA’s life so much easier!
If you need help with your bookkeeping, we are here to help. Questions? Feel free to call or e-mail us us any time. [email protected] or 310-534-5577.
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