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Anonymous
Not applicable

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

I use my personal card to pay for business expenses therefore my statement and what comes into quickbooks from this account is a mix of personal and business. 

What is the best way to remove the personal charges from Quickbooks?

I have created a 'personal expense' account that I am putting these transaction in and then can get the total and remove when needed.

Would it be better to select the personal expenses and use the exclude button?


Thanks

Solved
Best answer October 15, 2018

Best Answers
Malcolm Ziman
Level 10

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

If you are a sole proprietor, then from a legal point of view it does not matter if you mix personal and business in one bank account, as the legal ownership is the same. It also does not matter from a tax point of view, as there is no reporting of assets (bank account is an asset) in the tax return - just schedule C, which is the P&L.  From a personal tracking point of view it's a good idea to reconcile the bank accounts, so you should not exclude transactions, as if you do, you can't reconcile.  You can even categorize personal expenses, under "Other Expense" type accounts, and post business expenses as regular "Expense" type accounts, and then the Operating Income in the P&L (which does not include "Other Expense" accounts) is the taxable income, before adjustments, like mileage.

If this is a corporation then, you should not mix personal and business in one bank account, mainly because you may lose the personal liability protection that you get with a corporation.

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24 Comments 24
Malcolm Ziman
Level 10

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

If you are a sole proprietor, then from a legal point of view it does not matter if you mix personal and business in one bank account, as the legal ownership is the same. It also does not matter from a tax point of view, as there is no reporting of assets (bank account is an asset) in the tax return - just schedule C, which is the P&L.  From a personal tracking point of view it's a good idea to reconcile the bank accounts, so you should not exclude transactions, as if you do, you can't reconcile.  You can even categorize personal expenses, under "Other Expense" type accounts, and post business expenses as regular "Expense" type accounts, and then the Operating Income in the P&L (which does not include "Other Expense" accounts) is the taxable income, before adjustments, like mileage.

If this is a corporation then, you should not mix personal and business in one bank account, mainly because you may lose the personal liability protection that you get with a corporation.

Anonymous
Not applicable

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

Thanks Malcolm. That is very helpful. I have only started but have been doing a mixture of both methods and want to do what is best going forward.
To give more context - I am a sole proprietor LLC filing as a S-Corp. Does that change anything from your answer? Thanks for the help!
Malcolm Ziman
Level 10

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

LLC filing as a S-Corp is a corporation.  Therefore there are a few things wrong with mixing personal and business in one bank account. For one, the courts won't protect you if you personally get sued. Also legally if the money in the bank account is owned by corp, then you shouldn't be using it for personal expenses, as it's not your money. It's probably not illegal, but the IRS may decide it's income, and it will be subject to income tax and 15.3% self employment tax.   You should be on the payroll of the corporation, and drawing a reasonable salary, and paying withholding taxes, while the corp pays employer tax.  You have to declare assets on the tax return, so you definitely should not exclude any transactions.
The personal should be considered a shareholder's loan and it's probably a good idea to pay it back.
There are probably other concerns, and others may elaborate.
Anonymous
Not applicable

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

Yes I am doing most of that. Where I get confused is this:
I am not using the company account for personal transactions - that is 100% business.
I am using my personal Charge card (Amex) for everything and then paying off the business charges from by business bank account and the personal charges from my personal bank account.
Quickbooks is good at matching these Charges with bank payments on the business side. Would there be issues with court protection doing this you think?

My accounting problem is that all transaction from the card appear in quickbooks and I don't know how to best deal with them but I think 'Personal expenses' is better than excluding. I am not sure how to account for personal payments coming from my personal bank to my charge card.

I appreciate it Malcolm!
Malcolm Ziman
Level 10

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

"My accounting problem is that all transaction from the card appear in quickbooks"
You should not have a personal Charge card in the books at all.
I would delete the account and let the corp get its own charge card.
For past transactions, create journal entries to debit expense and credit shareholder's loan
Not sure about the legal but it's best to just not mix personal and business in a corp
Anonymous
Not applicable

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

best practice is to not mix personal with business transactions.  get a 2nd CC, even if it is a personal card, and use it for business only.

Anonymous
Not applicable

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

Thanks but doesn't answer my question.
Teri
Level 9

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

If you are filing taxes as an S-Corp, definitely suggest separate biz from personal with separate bank accounts and credit cards or you are defeating the whole purpose of being S-Corp to begin with, which is to separate liability between biz and personal, meaning if biz gets sued they can only take your biz assets vs. personal as well (like your business truck vs. personal car too).  Until then, you should be recording personal charges as Distributions of profit which reduce equity as it should, since you are using business funds for personal purposes.  

qbteachmt
Level 15

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

Here is how to handle Personal Credit Card with the mix of personal and business; Not as a linked card account in the business file.

 

Make a bank type of account and name it Owner Funds. For anything you paid personally, from cash or personal credit card or personal checking, you use this Bank account as the source of the spending. Then, at least at year end, make one deposit as Equity, to bring this account to 0.

 

Now you stop trying to manage a Mixed Card in the business file, entirely.

Wardogs
Level 1

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

This answer helps me as I recently opened my business and have the same problem because I waited a couple months to open my business accounts. 

 

Can anyone else back this up as the best method to this problem? Seems like it makes sense, so thanks for your input qbteachmt!

Wardogs
Level 1

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

I just noticed there is an account already in my chart of accounts called 'Owner's Investment'. Would this be the same thing as 'Owner Funds'?

qbteachmt
Level 15

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

As long as your business is running as a tax entity type of Sole Proprietorship, then any money in or out of personal nature, or any use of other personal financial resources such as personal credit card and personal cash, are simply your own Asset = funds or resources that are yours, personally.

 

That means using them for business purposes increases your Equity ("ownership position") in the business. Those funds (or resources) are not Income for the business; you provided it, not from the result of a Business activity. And any removal of funds (checking withdrawal, keeping cash when paid by a client, etc) reduces your Equity in the business, because you removed the funds (asset).

 

Here is "the accounting formula" that explains how to track this:

Money is an Asset, so...

Assets = Liability + Equity

 

Assets go up, so either Debt (liability) has gone up (you borrowed funds) or Equity has gone up (you provided funds to the business).

 

Assets go down, so either you used it to buy other assets (furniture, fixtures, inventory, property) for the business; you used it to pay down Liability (debt service, such as paying down business credit card or business loan or mortgage principal); or, Equity has gone down (you took funds for personal use).

 

That is why we refer to the Balance Sheet. That formula reminds you this stays In Balance.

 

As long as you do not see these activities in the Profit and Loss reporting (it's not income or expense; it's Cash Flow as inflow and expenditure), you are on track.

 

Hope that helps.

Teri
Level 9

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

qbteachment - Thanks for sharing as I am sure this will benefit many here but is N/A for me and all of my clients since I am an S Corp and all of my clients file taxes as an S Corp or C Corp, where the number one rule is NOT to mix business and personal expenses, so that is exact opposite. 

 

Personally, I cannot see any scenario where I would recommend this to any business owner since then you have zero protection from personal liability from any debt or issues with your business. Meaning if you are sued for anything, they can take your business assets and personal assets too. God forbid if that ever happens, but at least then they can't take your house and your 401k too.

 

Even more importantly to me, is how do you know how your business is doing if you cannot see how much profit you are making from one month to the next? Much easier to keep it separated. Not to mention if you ever get divorced then you have even more to get sorted out. Of course, we all hope bad things never happen, but I say always plan for the worst and hope for the best.

qbteachmt
Level 15

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

Yes, Teri, nearly every reply from an All Star on this topic includes the "if your entity is" consideration.  So, everything here applies. It applies when that is your entity type. It doesn't apply, if that is not your entity type. That's why we phrase our responses with this specific piece of info.

Teri
Level 9

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

Yep, and when the person asking above says: "I am a sole proprietor LLC filing as a S-Corp," there is certainly clarification needed (although my guess would be one person "S Corp," or he would not know the words "filing as an S Corp"). And I would say if you were to have to guess it is much easier to keep separate and then combine later vs. having to split apart later. Doing that for a client right now who was misguided by two bad accountants on QB and what a mess to clean-up. Starting with amending tax returns to avoid 75% tax penalty for fraud for taking large Distributions and not paying any payroll taxes. 

CS Construction
Level 1

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

Clearly, you have a situation that is best handled by getting a second credit card and use it for personal expenses. Do not link the new personal credit card to QuickBooks. 

 

Increasing "credit available" on your cards also will help with your borrowing capacity. Not just on the credit cards but also applying for business and personal loans. Just call the credit card company to increase your line of credit.

 

Your credit utilization ratio (also known as your debt-to-credit ratio or your balance-to-limit ratio) is one of the factors used to compute your credit score. A higher ratio means a lower credit score.

You can improve your credit score by increasing the amount you can borrow. I have five credit cards and use only two. My maximum borrowing is about $100,000 and I have less than $10,000 credit card debt at any one time. I pay all my bills 2 days early. My credit score is 840 because I pay bills on time, have multiple credit accounts,  high borrowing capacity, and a low amount of debt compared to what I could borrow.

I know this is not the topic however it is something to think about for the future as your business grows.

SuAnne
Level 2

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

I think one solution could be to utilize location tracking in QBO Plus and allocate transactions to the respective locations (personal or business). That way you can separate books within one account as you are able to pull reports by location. IRS audits require paper documentation rather than digital files. So long as you can substantiate the transactions in each location and don't mix personal with business other than clear owner contribution or draw you should be fine.  Most lawyers offer a free 30 min consultation to win your business should you ever need it. Ask a few corporate lawyers if that is an acceptable way of separating the books in the event the IRS (and/or your state/local tax authorities) chooses to push an audit to tax court. Likewise, you can ask if the separation by location will suffice to maintain your limited personal liability. Martindale is a good site to find lawyers by their field of expertise: https://www.martindale.com/ 

 

Teri
Level 9

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

I would definitely not recommend asking a lawyer about your accounting, not even a tax attorney!

Teri
Level 9

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

"Sole proprietor LLC filing as a S-Corp" --  These are different entity types with different rules and it seems the answer selected as best is not ultimately correct for the company who asked.

You are either a:

- Sole Proprietor

- LLC (state only)

- Partnership

- S Corp

- C Corp

 

- If you "file taxes as an S Corp", you follow same tax rules as an S Corp.

- A Corporation is a SEPARATE ENTITY from YOU that you set up to KEEP SEPARATE. 

- You keep separate so if business gets sued they can only take biz money NOT personal

- When you muddy the waters, by mixing biz with personal, you risk losing proof of separation.

 

Sweets_By_Design_CA
Level 1

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

Hi Malcolm,

 

You've been so helpful with others on this thread that I'm wondering if you could possibly help me out, as my questions are along the same vein.

 

I am a sole proprietor who works full time for an employer and who also has a side bakery/hobby business.  Because of this, I use my personal checking accounts for purchasing materials and supplies as well as receiving payments for cakes.  I'd like to know the best way to use Quickbooks to not only manage my business expenses and income, but possibly better organize/categorize my personal expenses and income.

 

Other than using a dedicated credit card for business expenses (which I'm definitely going to adopt), do you have any recommendations for the best way to setup and use Quickbooks for managing both my business income and expenses as well as personal income and expenses?

 

Thanks in advance for any advice you can provide.  I'm not sure if you're a user or work for QuickBooks, but either way, I can image your time is valuable and am grateful for any recommendations to make my bookeeping less hectic.

 

Thanks again,

Nicole

Fardinkhan Omar
Level 1

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

Hello, 

How can I apply expenses on a  item in Quickbooks Desktop? 

Adrian_A
Moderator

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

You have me to help you assign an expense account for your items, Fardinkhan Omar.

 

We can customize the expense account through the Item List menu. Let me guide you with these steps:

 

  1. Click the Lists menu.
  2. Select Item List.
  3. Double-click the item.
  4. Enter the expense account on the COGS Account field.
  5. Click OK.

 

 

Feel free to browse these links that talk about setting up items in QuickBooks Desktop:

 

 

There you have it, Fardinkhan Omar. With the steps above, I'm sure you'll be an expert when adding and editing your item's account. Take care!

Teri
Level 9

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

@Adrian_A@Fardinkhan Omar  

Perhaps this is just a bad example, but I cannot think of any scenario where Advertising will be COGS.

COGS (Cost of Goods Sold) same as COS (Cost of Sales) are cost incurred directly attributable to sale. Advertising is considered Indirect expense, usually G&A (General and Administrative) or specifically,

Marketing or BD (Business Development) which are costs incurred to get new business so at the point 

when those cost are recorded, they would not be attributable to a sale that has not even occurred yet.  

Denise 3
Level 1

How to manage personal expenses - Is it better to exclude personal transactions or list them as a personal expense which can be filtered out?

I work for a company who is an LLC operating for tax purposes as an S Corp.  The Single Owner Shareholder loves to mix his money, creditcards, etc through the company books.  Actually I think all of his familys personal expenses hit the Quickbooks Desktop Pro application at some point each month.  Therefore, I have created classes for expenses so I can separate them for reporting purposes and he will also be able to tell where is money is going for his personal expenses as well. Rather than lumping it all in a Due to/ From asset account, I can still catagorize the expenses so we can generate financials for solely the business and then combine them if desired.  This seems to help,  I also took over the accounting for a company that hadn't kept any books at all in the 3rd year of their business operating, so it has been challenging.  This might be an option for you.

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