Mixed Personal and Business accounts

[Karl Grant]

Hi again,
I'm trying to separate my (very small, side-) business and personal
accounts. Currently they have been together in the one file although the
base accounts (assets / liability etc) are duplicated; My thinking was that
anytime I purchases something for personal use I could enter the transaction
as follow:

Credit Business Assets:Current Assets:Current AC;
Debit Personal Expenses:Gifts

Thought that was a good idea until I sat down to work out my taxes and found
that there was no way to track the money in and out of my business!

I would like your learned opinions on the following before I implement it,
advice, criticism or general mockery accepted :-)

1) Separate the business and personal accounts into two separate files
2) Any money spent on personal use, by cheque or credit card, is entered
into a Equity:Drawing account
3) this amount is entered into the personal set of accounts under
Income:FromDrawings and as an Expense in the relevant account
4) Money going the other direction (probably cash) Personal to Business is
entered into a Expense:ForBusiness account (is this right?)
5) the same amount is entered into a Equity:Personally Added Capital (any
better names?) and the relevant business expense

Sorry if the terminology is a bit all-over-the-place, but I've no formal
experience with accounting.

[Andrew Sackville-West]

Post by Karl Grant
Hi again,
I'm trying to separate my (very small, side-) business and personal
accounts. Currently they have been together in the one file although the
base accounts (assets / liability etc) are duplicated; My thinking was that
anytime I purchases something for personal use I could enter the transaction
Credit Business Assets:Current Assets:Current AC;
Debit Personal Expenses:Gifts
Thought that was a good idea until I sat down to work out my taxes and found
that there was no way to track the money in and out of my business!
I would like your learned opinions on the following before I implement it,
advice, criticism or general mockery accepted :-)

okay... your mother was a hamster and your fa... oh, that was a
joke. sorry...

Post by Karl Grant
1) Separate the business and personal accounts into two separate files

definitely the right move, always.

Post by Karl Grant
2) Any money spent on personal use, by cheque or credit card, is entered
into a Equity:Drawing account

yup. and it becomes income to you.

Post by Karl Grant
3) this amount is entered into the personal set of accounts under
Income:FromDrawings and as an Expense in the relevant account

okay.

Post by Karl Grant
4) Money going the other direction (probably cash) Personal to Business is
entered into a Expense:ForBusiness account (is this right?)

depends on what you want to do with it. If you are investing it in the
business, then it is not an expense. THis is where I get fuzzy on it,
but it becomes some kind of asset as shares of the company. Might be
better to call it a loan. Then the money above, coming back out of the
business is a return of principal (and thus not income) until you've
paid it all back.

Post by Karl Grant
5) the same amount is entered into a Equity:Personally Added Capital (any
better names?) and the relevant business expense

only if you're investing the money. If you're loaning it, then it is a
liability.

Post by Karl Grant
Sorry if the terminology is a bit all-over-the-place, but I've no formal
experience with accounting.

IANAA

A

[AC Marsh]

I have a small consulting business which is an LLC (me 99%, wife 1%)
that gets taxed as a partnership (1065).

The wizard (before I discovered the power of GnuCash) in Quickbooks Pro
2007 set me up as (roughly translated):

Equity:Opening Balance
Equity:Me:Draws
Equity:Me:Equity
Equity:Spouse:Draws
Equity:Spouse:Equity
Equity:Retained Earnings

I would think that I might change the names to be:

Equity:Opening Balance
Equity:Me:Draws
Equity:Me:Contributions
Equity:Spouse:Draws
Equity:Spouse:Contributions
Equity:Retained Earnings

or something similar.

Post by Andrew Sackville-West

Post by Karl Grant
Hi again,
I'm trying to separate my (very small, side-) business and personal
accounts. Currently they have been together in the one file although the
base accounts (assets / liability etc) are duplicated; My thinking was that
anytime I purchases something for personal use I could enter the transaction
Credit Business Assets:Current Assets:Current AC;
Debit Personal Expenses:Gifts
Thought that was a good idea until I sat down to work out my taxes and found
that there was no way to track the money in and out of my business!
I would like your learned opinions on the following before I implement it,
advice, criticism or general mockery accepted :-)

okay... your mother was a hamster and your fa... oh, that was a
joke. sorry...

Post by Karl Grant
1) Separate the business and personal accounts into two separate files

definitely the right move, always.

Post by Karl Grant
2) Any money spent on personal use, by cheque or credit card, is entered
into a Equity:Drawing account

yup. and it becomes income to you.

Post by Karl Grant
3) this amount is entered into the personal set of accounts under
Income:FromDrawings and as an Expense in the relevant account

okay.

Post by Karl Grant
4) Money going the other direction (probably cash) Personal to Business is
entered into a Expense:ForBusiness account (is this right?)

depends on what you want to do with it. If you are investing it in the
business, then it is not an expense. THis is where I get fuzzy on it,
but it becomes some kind of asset as shares of the company. Might be
better to call it a loan. Then the money above, coming back out of the
business is a return of principal (and thus not income) until you've
paid it all back.

Post by Karl Grant
5) the same amount is entered into a Equity:Personally Added Capital (any
better names?) and the relevant business expense

only if you're investing the money. If you're loaning it, then it is a
liability.

Post by Karl Grant
Sorry if the terminology is a bit all-over-the-place, but I've no formal
experience with accounting.

IANAA
A
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[Andrew Sackville-West]

Post by AC Marsh
I have a small consulting business which is an LLC (me 99%, wife 1%)
that gets taxed as a partnership (1065).
The wizard (before I discovered the power of GnuCash) in Quickbooks Pro
Equity:Opening Balance
Equity:Me:Draws
Equity:Me:Equity
Equity:Spouse:Draws
Equity:Spouse:Equity
Equity:Retained Earnings
Equity:Opening Balance
Equity:Me:Draws
Equity:Me:Contributions
Equity:Spouse:Draws
Equity:Spouse:Contributions
Equity:Retained Earnings
or something similar.

sure you could, but that doesn't change what they are. There are other
ways to get equity besides contributions. And your equity fluctuates
depending on stuff. Consult an accountant.

A

Post by AC Marsh

Post by Andrew Sackville-West

Post by Karl Grant
Hi again,
I'm trying to separate my (very small, side-) business and personal
accounts. Currently they have been together in the one file although the
base accounts (assets / liability etc) are duplicated; My thinking was that
anytime I purchases something for personal use I could enter the transaction
Credit Business Assets:Current Assets:Current AC;
Debit Personal Expenses:Gifts
Thought that was a good idea until I sat down to work out my taxes and found
that there was no way to track the money in and out of my business!
I would like your learned opinions on the following before I implement it,
advice, criticism or general mockery accepted :-)

okay... your mother was a hamster and your fa... oh, that was a
joke. sorry...

Post by Karl Grant
1) Separate the business and personal accounts into two separate files

definitely the right move, always.

Post by Karl Grant
2) Any money spent on personal use, by cheque or credit card, is entered
into a Equity:Drawing account

yup. and it becomes income to you.

Post by Karl Grant
3) this amount is entered into the personal set of accounts under
Income:FromDrawings and as an Expense in the relevant account

okay.

Post by Karl Grant
4) Money going the other direction (probably cash) Personal to Business is
entered into a Expense:ForBusiness account (is this right?)

depends on what you want to do with it. If you are investing it in the
business, then it is not an expense. THis is where I get fuzzy on it,
but it becomes some kind of asset as shares of the company. Might be
better to call it a loan. Then the money above, coming back out of the
business is a return of principal (and thus not income) until you've
paid it all back.

Post by Karl Grant
5) the same amount is entered into a Equity:Personally Added Capital (any
better names?) and the relevant business expense

only if you're investing the money. If you're loaning it, then it is a
liability.

Post by Karl Grant
Sorry if the terminology is a bit all-over-the-place, but I've no formal
experience with accounting.

IANAA
A
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--

[Beth Leonard]

I'll take a stab at this, because we also have two small
businesses, and I actually did ask our accountant how to
set things up. Again, I am not an accountant, so you
may wish to ask yours what applies to your specific situation.

Post by Karl Grant
Credit Business Assets:Current Assets:Current AC;
Debit Personal Expenses:Gifts
Thought that was a good idea until I sat down to work out my taxes and found
that there was no way to track the money in and out of my business!

Depending on exactly what you did, the cash flow report might
help you, but you are best off to keep a separate set of books.
Cash flow works by drawing a circle around a set of accounts and
tracking all money that flows in or out of the circle.

Post by Karl Grant
I would like your learned opinions on the following before I implement it,
advice, criticism or general mockery accepted :-)
1) Separate the business and personal accounts into two separate files

Good idea. Recommended by my accountant.

Post by Karl Grant
2) Any money spent on personal use, by cheque or credit card, is entered
into a Equity:Drawing account

On the business books she said to create an "Equity:Draw" account, but
yes, this is a good idea. On the business books if I use money from
my personal account (we didn't have a business credit card for a while)
to pay for anything, the expense balanced with Equity:Draw. Likewise
if I pulled money out of the business petty cash account (some customers
pay cash and taking it is easier than going to an ATM) the transfer
account is Equity:Draw. Also note that the cash originally came in
as Income:Business Income -> Assets:Petty Cash. When I take it out
for personal use I transfer Assets:Petty Cash ->Equity:Draw.

Post by Karl Grant
3) this amount is entered into the personal set of accounts under
Income:FromDrawings and as an Expense in the relevant account

Maybe. On the personal side of the books I don't account for the
petty cash.

Laws may vary from country to country, and it depends a little on
your corporate structure, but if you are a sole proprietorship
in the US, you don't need to record this on the personal side as long
as the business income was properly accounted for as going out to
Equity:Draw on the business books. On the personal side, you don't
want to list it as an income, because you are not paying income
taxes on this money. It was already listed as an income to the
business on the business books. If you want to record what you
did with the money, I'm guessing it would be a transfer from
Equity:Business Equity -> Expenses:Lunch (or whatever you paid
for with the business money)
Note: If you have a bigger business or an LLC you do get taxed
twice and need to record it twice, once as business Income, and
once as personal salary income (or benefits if you bought yourself
lunch on the business dime). Ask your accountant. (The flip side
of LLC is that the personal salary is also a business expense,
so it's not quite as bad as it seems.)

Post by Karl Grant
4) Money going the other direction (probably cash) Personal to Business is
entered into a Expense:ForBusiness account (is this right?)

If you can manage it, it's best to keep all of the business expenses
on one set of books, so in your business books if you paid for
a business expense (i.e. company letterhead) with personal money out
of your personal bank account then you should record it as an
Equity:Draw -> Expenses:Supplies transaction.

On the personal side of the books, yes, you can record it as
Assets:Bank Account -> Expenses:Business Expenses
In our case there were a few from
Liabilities:Credit Card -> Expenses:Business Expenses. At tax
time I made sure that all of those (downloaded from the CC company)
got recorded into the business set of books. I also kept all
the receipts in a separate folder and checked all of them. I used
the little y/n/c button in the reconcile column to check them off
and make sure I had everything properly recorded.

Post by Karl Grant
5) the same amount is entered into a Equity:Personally Added Capital (any
better names?) and the relevant business expense

I'm not entirely sure what amount you're talking about, but our
accountant recommended closing the business books every year by
transferring totals from each expense and income account to an account
called Equity:Owner's Equity that has a description called "Retained
Earnings"

--Beth
Beth Leonard
http://www.LeonardFamilyVideos.com
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[Karl Grant]

Thanks for all your replies regarding the set up of the accounts; I've got
the accounting stuff more or less figured out (BTW: the accountant seemed to
think it was funny that I was going to such trouble considering the meager
income from this business :) )

However, now I'm stuck on a technical point, is there anyway I can link two
separate files! For example, I've recorded a transaction in the Business
accounts which I need to mirror in my personal accounts (this is the reason
I had the two sets of account in the one file to start with!)

I know that there is no export function for transactions (can anyone say
lock-in :-) ) so I can't export the account and import it into the other
file. But could I cut and paste from the XML or would that break
relationships?
--
Karl

PS: appologies to the developers for the cheap dig re: lock-in
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[Andrew Sackville-West]

Post by Karl Grant
Thanks for all your replies regarding the set up of the accounts; I've got
the accounting stuff more or less figured out (BTW: the accountant seemed to
think it was funny that I was going to such trouble considering the meager
income from this business :) )

better to be separate now then to try and separate it when the
business takes off and you've got employees and investors etc etc
etc... :)

Post by Karl Grant
However, now I'm stuck on a technical point, is there anyway I can link two
separate files! For example, I've recorded a transaction in the Business
accounts which I need to mirror in my personal accounts (this is the reason
I had the two sets of account in the one file to start with!)

You have to do this just like any other separate entities would. You
have to record the transactions separately in each location. Sort of
like when my company gets billed by another. They issue an invoice and
record the transaction in the A/R accounts. I recieved the invoice and
record it in my A/P accounts. When they send me a statement, which is
essentially a summary of the actons in their A/R, I compare it to my
A/P and make sure it lines up before paying.

Post by Karl Grant
I know that there is no export function for transactions (can anyone say
lock-in :-) ) so I can't export the account and import it into the other
file. But could I cut and paste from the XML or would that break
relationships?

not advised.

A

[Beth Leonard]

Post by Karl Grant
However, now I'm stuck on a technical point, is there anyway I can link two
separate files! For example, I've recorded a transaction in the Business
accounts which I need to mirror in my personal accounts (this is the reason
I had the two sets of account in the one file to start with!)

There's no automated way to do so. From time to time I start two copies
of GnuCash and manually compare the transactions in the Equity:Draw
account with the personal side of things. I use the 'c/y/n' in the
reconciled column to clear transactions I've manually checked so that
I don't check the same ones the next time. The other account to check
on the personal side is that any Expenses:Business Expenses made it
into your business books.

--Beth
Beth Leonard
http://www.LeonardFamilyVideos.com
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[Mike or Penny Novack]

I'm going to jump in here with a comment from the accounting/systems
perspective

Post by Beth Leonard

Post by Karl Grant
However, now I'm stuck on a technical point, is there anyway I can link two
separate files! For example, I've recorded a transaction in the Business
accounts which I need to mirror in my personal accounts (this is the reason
I had the two sets of account in the one file to start with!)

There's no automated way to do so. From time to time I start two copies
of GnuCash and manually compare the transactions in the Equity:Draw
account with the personal side of things.

You can't expect an automated linkage for one very simple reason.

Assume for a moment that you were doing the accounting for a number of
small businesses and personal accounting for a number of people. These
would of course be separate sets of books, no linkage between them. Any
of these persons would be obtaining income from various sources, you
would enter that as data is received. Likewise any of those businesses
might be supplying income to persons, "drawings" it is called.

The business writes a check to one of its owners, not an expense but a
draw against that owner's equity.
The person receives and deposits the check recording income.

See -- we haven't specified here that the books of the business and the
books of the owner are being maintained by the same accountant, on the
same computer, using the same software, etc. Whatever we do HAS to work
irregardless. The question being asked for an automated connection
represents a VERY special case situation where just by chance the same
person is doing both sets of books, on the same computer, using the same
application, etc.

BTW -- need to get an accountant to speak here as I am not qualified to
give tax advice, but I suspect that at end of year you would need to do
more than compare drawings and "income from business" (depending on the
form of the business, business income not yet distributed to the owners
but retained by the business might nevertheless need to be considered
"income from business" for tax purposes).

Michael
--
There is no possibility of social justice on a dead planet except the equality of the grave.

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[Anthony]

Post by Mike or Penny Novack
BTW -- need to get an accountant to speak here as I am not qualified to
give tax advice, but I suspect that at end of year you would need to do
more than compare drawings and "income from business" (depending on the
form of the business, business income not yet distributed to the owners
but retained by the business might nevertheless need to be considered
"income from business" for tax purposes).

The details depend greatly on the type of business: sole proprietor,
partnership, S-corporation, C-corporation (under the right
circumstances an LLC can elect to be treated as any of these).

In the case of a sole proprietorship, owner transfers to/from the
business are irrelevant from a tax standpoint. The business and the
individual are a single entity. Income to the business is income to
the individual, regardless of whether or not it is transferred to a
personal account or kept in a business account. It generally goes,
along with business expenses, on a schedule C (though there are lots
of situations where it might go somewhere else). If you're running
something other than a sole proprietorship, then the answers you've
been given so far about how to set up your books and record transfers
are really incomplete.

I'm an accountant specializing in taxes, but this is not a "covered
opinion". As such, nothing in this email is intended or written to be
used, and it cannot be used, by any taxpayer for the purpose of
avoiding penalties that may be imposed on the taxpayer.
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