Why You Shouldn’t Mix Business With Personal When it Comes to Bookkeeping
You’ve heard the saying “Never mix business with pleasure”, right? The two things shouldn’t merge because that’s when things start to go wrong. Kinda like forks and power outlets (ask Itchy & Scratchy)! That phrase might specifically relate to how you run a business, but it totally works when talking about your bookkeeping too. So here’s why you shouldn’t mix business with personal (or pleasure!) when it comes to your bookkeeping.
Business and Personal Accounts
We’re talking about your bank accounts, of course.
When you first set up your business, the temptation to do everything from your existing personal business account can be persuasive. As a new business owner, the idea of having to set up a separate business account with all the extra fees can be annoying. Especially when, in the beginning, you’re not taking in any income – the last thing you want to do is spend more money.
It’s easy to fall into the trap of thinking you can manage everything from your personal account. You might feel confident that you’ll be able to keep track of everything, especially you sole proprietors! I get it. 100% of your business’s income is considered your personal income. But here’s the kicker… your personal expenses AREN’T considered your business expenses. More on that in a minute!
Sure, this situation may not be such an issue for sole proprietors. But we always say it’s worth forming good habits early on when you’re running a business. So get in the habit of keeping things separate from the very start, if you can!
The simple fact is that all hell breaks loose when you mix your business and personal accounts. Keep reading to find out why.
Apart from sounding a bit saucy – and yes, accounting can totally be sexy for the record! – the mixing of business and personal accounts or commingling accounts is a bookkeeper’s nightmare.
Ways accounts can be commingled, or mixed, include:
- Writing cheques from personal accounts to pay business expenses
- Taking money from business accounts to pay personal expenses
- Moving money between accounts without documentation
- Sharing an account for both business and personal expenses
These can all make keeping track of your business accounts a nightmare and should be avoided.
Here Come the Issues
Let’s talk about why you shouldn’t mix business with personal when it comes to your bookkeeping.
If you’re unlucky enough to have your business sued, and the question comes up about how you might have to pay, having mixed accounts will be disastrous. Think about it. If your business finances are all mixed in with your personal finances, who’s to say how much money you have and what it’s for? By keeping the two very separate parts of your life in one place,
you could run the risk of losing assets like your home.
With everything jumbled into one account, being able to keep track of all that or make sure you’ve got a paper trail can be super tricky. Not to mention that kind of disorganization messes with your friendly bookkeeper’s brain (and mild OCD tendencies)!
Mixing business with personal accounts fudges up your year end taxes. I’m not a tax professional (nor do I play one on TV), but CRA wants to know about your personal stuff and your business stuff. And they want to know about them separately. In fact, they made forms for these things that they want you to use. So, to use them, you need to keep your business and personal bookkeeping separate.
With such disorganized numbers and accounts, it’s pretty obvious that mistakes can happen. Even us talented bookkeepers will struggle! And when it comes to the end of the year and filing your taxes, you may find you wind up paying more than you should, or you might end up owing more than you think.
Let’s say you’re registered for GST, and you’re calculating those ITCs (Input Tax Credits). But you’ve mixed your business with your personal transactions, and you’re not sure which is which. All of a sudden, you’re overstating your ITCs and not paying enough GST. Who’s to say the CRA won’t get curious about what you got goin’ on and trigger an audit?
What happens if/when you want to incorporate? Or say your business grows, and you want to get an operating line of credit? The bank will take one look at those mixed business and personal expenses and say “peace out”.
It’s Not Professional!
You should never mix business with pleasure. Or personal. Whatever.
Don’t do it! JUST DON’T DO IT, AIGHT?!?!
If you’re now having a mild panic attack at the thought of trying to run your business accounts, we should probably talk. So get in touch, and let’s see how we can help keep your accounts running smoothly.