We see lots of questions on QBCommunity about how to handle scenarios where the owner either puts money towards their business out of personal funds or uses business funds to pay for personal expenses.
These are both common scenarios and for more than financial reasons, it’s imperative to account for these types of transactions properly.
This will reapply some of the techniques we learned from the “Creating and Managing Accounts” tutorials as you may need to create some new accounts. For the workflows below, it’s very important to follow them in order and exactly as directed so your accounts remain accurate.
Let’s start with a scenario where you, as the owner, paid for an expense for the business out of your own pocket. Create an “Owner’s Contributions” equity account (Accounting > Chart of Accounts > New Account) that you will use going forward.
Now, enter the Expense the same way you'd record a typical expense transaction, entering the date of the purchase and the payment method. In the line item section, enter the expense and then add an additional line item posted to your new Owners Contribution account for the same amount as a negative value. This effectively “zeros-out” the expense. By doing this, your checking account (or whatever account you are paying from) records remain accurate - - you can track what you as the owner have contributed without impacting those numbers.
It’s also wise to utilize the memo section if you want to add an explanation for why personal funds were used – the more documentation you have, the easier tax season will be. You can even create sub-accounts of Owner’s Equity if you want to separate one-off payments from other types of purchases, like assets.
We recommend checking your Owner’s Equity Account in the CoA (click “view register” for more details) and your Profit and Loss Statement after entering an Owner’s Contribution. A quick review shouldn’t take more than a few seconds.
Give it a try - simulate a few of your recent purchases as if you, as the owner, had paid for business expenses out of your own pocket in Quick Books Online Test Drive.
Now, let’s look at the opposite scenario when business funds are used to pay for an owner's personal expenses. Create an “Owner’s Personal Purchases/Owner's Draw” equity account (Accounting > Chart of Accounts > New Account) that you will use going forward.
The detail type can also be “Personal Expenses” if you want to further differentiate this account from the Owner’s Contribution account you just created (note that the Category and Detail Type can be exactly the same, but the name distinguishes the two).
Enter the expense (in the case of the tutorial, a meal) and use your new Owner’s Draw account. When you go into your Balance Sheet or CoA, you will see the company payment method you used when you entered the expense has been reduced and your Owner’s Draw Account now has a negative balance.
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Could someone please explain to me why you would enter personal purchases paid from a business account as an expense when it is not?
You are correct, you do NOT do that. business funds used for personal expenses are an equity draw (sole proprietors & partnerships)
Furthermore, why you would use the write check function to record such purchases when they are paid by debit card or thru ACH?
Write checks is a data entry form. ACH, EFT, and a Debit card are just methods of electronic checks. Use write check, change the check number to ACH, EFT, or DB, do not print, and enter the transaction.
I believe I may be getting hung up on terminology and the difference between expense and expense accounts in Quickbooks Online. Any applicable information that would help to clarify this for me would be greatly appreciated.
Could you please elaborate as to why the expense form is used to record personal purchases paid for with company funds? These types of transactions are not an expense to the business. They are transfers between two balance sheet accounts (the business checking account and owner's draw.) As such, it makes more sense to use the write check, bank transfer or journal entry functions. Of the three options, I have found the write check function to be the most appropriate. It accomodates debit card and ach transactions along with class tracking.
Not all money out or purchase transactions are business expenses, however, when these types of transactions flow through a business checking account they must be accounted for. This is key to accurate reporting and recordkeeping. Because we are working with the business's financial records, only true business expenses should be entered as an expense type transaction.
I didn't write the article, If I had it would have been different.
Some folks like using the expense form, that is a title not a function, you can put balance sheet accounts on it
There is, quite often, more than one way to make entries, what counts is NOT how you did it, but that the accounts posted to are correct