Untangling Personal and Business Income/Expenses

#1

Hey guys - could use some help here.

For the past 3 years, I’ve been a complete moron and been operating my freelance web-design business out of my personal bank account.

I’ve finally gotten a business bank account - like last week - now that things are starting to pick up and realising the accounting horrors of mixing personal and business finances.

Time for a fresh start!

Sooo… Can you smarter folks please help me untangle this mess? Where do I start?

  1. Invoice payments went straight to my personal bank account
  2. Business expenses came out of my personal bank account
  3. Personal expenses came out of my personal bank account

Wondering what to put it and what to leave out (if anything?!) Should I even add my personal account as a bank account or cash account?

Help an accounting noob please and I’ll be in your debt

best
Jon

#2

you can just add another bank account for the business account.
do not mix the transactions made between personal and business bank accounts.
if you will not be having any more transactions in your personal bank account, just set that bank account as inactive.

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#3

Firstly, there is nothing wrong (moronic) with running the business & personal from the one bank account as long as you setup the accounting software (chart of accounts) to record the transactions appropriately. Such a joint account is the only way I have operated for the past decade or so.

However, having now setup this business account then there is going to be a transitional period.

You didn’t mention, have you also being using Manager with the personal account or are you starting new with Manager - knowing how you have been operating to date will assist with the guidance to be given.

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#4

I’m brand new with Manager - everything previously has been completely untracked and usually left until the month before my taxes were due - at which point I’d put all my business income/expenses into a spreadsheet and just use those figures for the tax man.

Right now, there’s nothing in my Manager - I’ll add my new Business bank account but I’m not sure how to account for all of the previous activity.

PS: Didn’t know a personal/business account mix could actually work well for others - again I am a totally new to “proper” accounting so do forgive my remarks. Just been reading (and experiencing) the horror stories!

I do appreciate the help Brucanna

#5

Where are you relative to your financial (tax) year end ?
Did you have a date in which you planned kicking off with Manager ?
By previous activity, did you mean from the start of the current year or ?
Was your spreadsheet cash basis (only what you received / paid) or accrual basis (included what you haven’t received / paid) at that particular date.

These questions are just to establish the framework (options) for how best to move forward.

There are many, but with correct setup and “discipline” it’s achievable but not necessarily simple, a business bank account certainly simplify matters.

#6
  1. My tax year runs 6 April 2017 - 5 April 2018 - So I’m about 6 months in.

  2. I’d like to start using Manager ASAP - and ideally I’d like the records to start from the beginning of the 2017 tax year. (So I’m ready for the tax man)

  3. Previous activity = yeah exactly, the previous transactions this tax year.

  4. My spreadsheets were on a cash basis

Thanks for your help Brucanna :slight_smile:

#7

Since you didn’t have another formal accounting system, your situation is simple. Read the various Guides about setting up your chart of accounts and any necessary starting balances.

The important point is there are no previous bank or cash account records to incorporate or reconcile. So either deposit whatever money you want into the business bank account and call that the starting balance, or receive money as a contribution to capital or owner’s equity, depending on how you are organized.

You could also treat all previous transactions in your personal account as having happened in a petty cash account of your business. But I would only do that if you plan on using a petty cash account in the future, because one used, it will remain forever.

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#8

Okay, to set you up as from Apr 6 we need to the following steps as we are going to be leaving your personal bank account and personal expenses out of Manager altogether.

While I am going to outline the overall process below, the actual steps can be staged over a period which will be determined by the volume of transactions to catch up and your available time.

1 - As your spreadsheets were cash basis, then we need to identify if you had any unpaid Customer or Supplier Invoices dated last financial year but not paid until this financial year, if yes, then we need to a) enter them into Manager using their actual dates and b) go to Setting - Start date and enter Apr 6 2017.

Did you have any unpaid Customer or Supplier Invoices as at Apr 6 ?

So now we have two piles of information to catch up on a) the Customer & Supplier Invoices and b) the business only receipts and payments - dated this financial year.

2a - Create Customers and enter their Sales Invoices issued this financial year

2b - Create Suppliers and enter their Purchases Invoices received this financial year
This only applies to where there is a date difference between the invoice and the payment (buy now pay later) - not for cash purchases (buy now pay now).

For the business only receipts and payments we are initially (temporally) going to be using your Manager Business Bank Account - so as to maintain your cash basis but also so you don’t get stuck with a redundant Manager account.

As for your actual Business Bank account, just start using it for all your money transactions as from a set date, say Oct 9 being a Monday.

#9

Hello Brucanna!
I am new to this forum and I have been researching using Manager for my husbands business.
Sole proprietor - Trucking Pickup and Delivery - Cash Based Accounting

I like the idea of leaving our bank account for both personal and business, and i was wondering if you would be able to share or give me an example of your chart of accounts that you use for this purpose.
I would like to have all personal and business finances in one place and see what is owing and when accordingly, if possible. Or at least what invoices we are waiting to be paid for, and how to incorporate home based business expenses (Utilities, phone) into manager as well.

It would be great if you could share your some of your knowledge, and give me your opinions.

#10

@Nieve, read this Guide: https://www.manager.io/guides/10809. Your husband is a self-employed service provider.

My forceful advice is, whatever you do, do not mix your business and personal finances. That will make recordkeeping and tax filing a nightmare, because you will have to separate your business information at tax time. Yes, it’s possible to run a proprietorship out of your personal bank account. But it makes everything so very much harder.

In most jurisdictions, home office expenses are not handled as business expenses, but as separate deductions from your personal income. This is almost universally true when the expenses are shared with personal use (like utility bills). Only expenses exclusive to the business would be entered as business expenses (like a dedicated business phone line). So typical home expenses must be kept separately, then deducted proportionally at tax time. Check with a local accountant or your tax authority for specifics.

You can keep personal records in Manager, just not in the same business entity as your personal accounts.

#11

No problem, the real Brucanna, will respond here and I wont be as negative as others, firstly there is absolutely no issue with maintaining both private and business within the one set of accounts - that is how I have always operated - a form of consolidation.

Business expenses go to P&L accounts and private expenses go to BS accounts therefore this resolves the “recordkeeping and tax filing … nightmare”.

Lets assume you have the business side, via the P&L, understood, therefore its just how you handle the personal side we will mostly explore. There is two ways, needing to see the personal expenses in broken down detail or all lumped together via a common drawings account - once we have understood then crafting the COA is the next step.

Posting both private and business expenses via Purchase Invoices enables you to “see what is owing and when accordingly”. So there is no problem here.

Furthermore, incorporating "home based business expenses’ aren’t an issue either, they are just handled on a case by case basis.

So happy to explore the COA once I have a clearer picture of “private reporting” requirements.

Not only is this statement totally false but contradicts every reference you have put on the forum regarding the usage of Expenses Claims, where one (regardless of their identity) can get reimbursed for spending personal funds on business expenses, be it mileage allowance or shared administration costs.

In fact I will go this far, there is not a jurisdiction in the world which prevents you from transferring to the business legitimate costs (albeit proportional) which aren’t directly in the business’s name. You have a choice of methodology not a limitation of.

But then you can’t operate from a single bank account which was the point “I like the idea of leaving our bank account for both personal and business” Such simplicity.

@Nieve , while some express “forceful advice” I am happy with offering flexible opportunity.

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#12

Hello Brucanna! :boom:

1st I would like to say how much I appreciate your knowledge, and especially with regards to your open minded flexible advice, that is really needed at times in my real world.

A bit about me. The only actual accounting training I have was in high school, but I won’t say how long ago that was. So in my head I use categories and sub categories. And I will probably use the wrong terminology below too. :laughing: I have a full time job for 25 years, and was sucked into doing my husbands Bookkeeping since 2005, whom has no financial capabilities what so ever. Finding receipts seems to be quite the challenge too. He’s terrible. :frowning:

Iv’e spent a small fortune on trying to find better, quicker ways to get the results that I want. Eventually I researched and learned how to create an Access Database for myself that has done the job for the last few years. Transactions were categorized and sub categorized. However I am not smart enough to incorporate the downloading of transactions from the bank into it. And that would save me sooooo much time! :slight_smile:

Hence my further research and goal for this year. In fact I was quite excited at first, to find Quicken Business & Personal. Unfortunately I have had nothing but problems with it and called multiple times for help, and was therefore scared to use it. After an update to my computer yesterday and downloading Manager, I went to open quicken, and it was as if I was starting from scratch and everything was gone. I am also in the process of scanning everything and going paperless, although I am keeping originals for 1 year.

I have multiple bank accounts, and a credit card that I try to use for specific business and personal purposes. However as the business has it’s busy and slow times, we end up mixing business and personal transactions.

The Business:

  • It is a sole proprietorship trucking (semi) pickup and delivery service business in Canada.
  • We have a business GST number, so we track, collect, pay accordingly.
  • I do the bookkeeping ONLY and an accountant does our personal tax returns.
  • I use cash accounting method to record income and expenses as they are received and paid.
  • We own the semi, but have a loan for the semi trailer.

INVOICES include:

  • GST (5%), Fuel Sur Charge (Current Weekly Rate), and Carbon Tax (2.55%)
  • Rates are based on destination, with extra mileage, extra drops, and tarping costs added.
  • I will continue to use my database to create the invoices as they are complicated.
  • I will enter the monetary values of the invoices in MANAGER.

DIRECT BUSINESS EXPENSES Include:

  • Advertising, Bank Fees, Business Fees & Dues, Cell Phone, Donations, Entertainment
  • Meals (Calculated using log book trips - # of meals that can be claimed for the trip)
  • Delivery / Freight Expense (eg. Purolator)
  • Management & Admin Fees (eg. Fee deducted from income payments for processing income)
  • Semi Trailer Loan Interest
  • Semi Fuel, Semi & Trailer Insurance, Plates, Maintenance & Repairs
  • Office Expenses (eg. Paper, toner, pens, etc)
  • Shop Rent, Supplies & Tools
  • Sub Contractor Expense (eg. Husband on holidays, and someone does his run for him)
  • WCB

HOME USE EXPENSES Include:

  • Mortgage Interest, Property Taxes, Property Insurance
  • Utilities (eg. Electricity, Heat, Internet)

MOTOR VEHICLE EXPENSES (Personal Vehicle) Include:

  • Loan Interest, Insurance, Fuel, Maintenance, License & Registration

ACCOUNTANT:
So I gave the totals above to the accountant, and he does his thing.

My Goals - To Be Able To:

  • Track all income invoices and payments, expenses, and GST (business + personal)
  • Download bank and credit card transactions, and track account balances
  • Track the Home & Motor Vehicle Expenses for accountant
  • Print appropriate reports for the accountant, instead of just giving him totals
  • Categorize and track personal expenses

PERSONAL INCOME & EXPENSES:

  • Credit Card, Loan & Mortgage (Transactions, payments, balances owing)
  • Monthly Bills (Transactions, payments, balances owing)
  • Auto (Fuel, insurance, maintenance, plates)
  • Events, Gifts, Health, Kids, Pets, Shopping
  • House (Insurance, Maintenance, Property Tax)
  • Utilities (Drainage, Electricity, Natural Gas, Phone Television, Water, Waste)

Sorry about the book, but I thought the more information the better to try and understand what I am trying to accomplish!

Brucanna, if you can figure this out for me, I would forever be indebted to you.

#13

I think the initial decision revolves around why you are using accounting software at all. For a sole trader the options are;

  1. You want to organise and monitor all of your finances, government reporting requirements are just a side effect of your organisation.
  2. You are doing it to achieve taxation reporting and monitor business performance.
  3. A bit of both, you need to achieve business reporting requirements and you also want to know what’s happening with personal finances but don’t want to be tied into doing the later long term.

Optimal set up is different for each.

For case 1, having every thing in one Manager.io “Business” could work well. The government reporting schedule ensures your personal finances are also maintained, various physical bank accounts can be used to help organise transactions but if the wrong account is used it can be easily corrected. Also for a sole trader it doesn’t make much difference if personal or business cost are out of control, there is still a cash flow and long term viability problem so tracking both makes sense. The disadvantage is you have to put all personal transactions through the accounting software, every account needs to be reconciled and this needs to be done to government business deadlines for ever. It also doesn’t scale well should you want to run your business as a company in the future.

For case 2, have separated physical business bank accounts and only enter Business transactions into the “Business” you create in Manager.io. Any transactions done with the wrong physical bank account are manually handled. The advantage of this approach is it minimises book keeping work and is the most common approach.

For case 3, use a similar approach to case 2 but also have a Manager.io “Business” for home finances. Again transactions done with the wrong physical bank account will need to be manually handled but in both Manager.io “Business”. Having multiple “Business” in Manager.io is free. This approach has the advantage personal financial tracking can be stopped in the future easily and timely reconciling the personal accounts is not needed to submit government tax forms.

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#14

Ok @Nieve, thanks for the book as it really assists. For your situation I am going to modify the standard approach as your “goals” are more detailed then normal, (requiring personal P&L) and that is not a issue.

To start with, lets name the business “Marriage” but it could be “(surname) Enterprises”.
Instead of categories and sub-categories Manager uses “Tracking Codes” - read this https://www.manager.io/guides/8956.

This way you can just use just one account, say Insurance, and allocate a tracking code to it rather then having sub-accounts Insurance Truck, Insurance House etc. This doesn’t mean you can’t have more than one Insurance account if your design of the COA requires it.

The tracking codes could be as basic as Business & Personal or more in depth such as Business, Wife Personal, Husband Personal and Shared Personal. Or even going further, such as Business, Wife Tax Return, Wife Personal, Husband Tax Return, Husband Personal and Shared Personal.

Now I am going to assume that you don’t (for the sake of the marriage) want to track the number of your cocktails v’s the number of his beers therefore I am going to suggest the following tracking codes - Business, Wife Tax Return, Husband Tax Return and Household (everything that doesn’t relate to a tax return). This way the accountant gets their required data via the tracking code reports. For you to ponder upon.

Furthermore, it doesn’t matter what bank or credit card has been used as it just becomes a P&L account plus tracking code allocation for that transaction.

Once again, for the P&L COA design it can be as basic (Income less Expenses) or more detailed (Income less Direct Expenses less Variable Expenses less Overhead Expenses) as you like. The important thing here is to get the actually required (transaction) accounts set up now, the rearranging of their groupings can occur at any time.

For the BS COA you have various options:
Account is first and foremost a Management reporting system and becomes only a Taxation reporting system on the final day of the financial year.

The bank and credit cards can be displayed so as to give you (the manager) the best information. On the Summary tab they can be grouped under one heading or individually shown.

For Suppliers, their Accounts Payable can be grouped as one or divided and displayed as two, Business Accounts Payable and Personal Accounts Payable.

Here I will write about a (wee) contradiction from your good self:
In your first post you wrote “and see what is owing and when” and in your second post you wrote “I use cash accounting method”. With cash accounting you can’t see the "what is owing. Perhaps your Access Database exposed both but that is not traditional accounting.

I forcible recommend accrual accounting and if I ever become Master of the World, I would as my very first act - ban cash basis accounting.

Hopefully this is giving you some direction, as Manager won’t give you the same problems.
Don’t hesitate to ask further.

When you start doing bank downloads, using bank rules is your friend but there are some tricks which can be discussed later.

PS (as an aside) “was in high school, but I won’t say how long ago that was” + “I have a full time job for 25 years” - so mid forties. See, ac-counting can be fun.

#15

@Nieve, rather than get general tax and financial advice from people who have not met you, do not know your situation in detail, and may never have done business or filed tax returns in your country, let me suggest you spend a little for an hour of your accountant’s time. Ask him how he would like things to be organized. Whatever he wants, Manager will be able to do it.

Yes, you will spend some money now on your accountant. But the time saved at the end of the year when he has things organized in the manner he likes will be worth it. And if he steers you away from a single thing that might have gotten you into trouble with the tax authorities, he will have saved his fee many times over.

Ask him to help you with a simple task: design a chart of accounts. Then come back and ask questions if the Guide on how to build it isn’t enough: https://www.manager.io/guides/9181.

#16

No one, repeat, no one has being offering “general tax and financial advice”.
If you had read and understood the posts, (which obviously you haven’t), the only thing being offered, repeat, being offered is assistance on how to set up accounting software, note, accounting software (which is what this forum is about) to suit their circumstances. If they accept or reject that assistance is their choice.

I understand that you have a personal hate rid of mixing business and non business within the one accounting structure, but this forum is NOT about stating (enforcing) personal preferences but assisting users with their Manager questions. Meeting their legal obligations is up to them as you have been repeatedly told in the past.

Furthermore, many users see their entire life as a single “business” of which going to work is but one division, running the house could be another division and social activities being yet another division, as they only operate one bank account embracing all activities…

The only things that gets you into trouble with the tax authorities are the following:
A) Failing to declare income
B) Falsely claiming expenses
C) Keeping incomplete records

Therefore, as long as your tax related business transactions are correctly and appropriately recorded, and can be clearly reported in the tax return or a tax audit, then no tax authority is going to punish you just because you recorded your personal transactions in a separate (non contaminating) accounting division.

And finally, in case you hadn’t noticed, all the user is trying to do is replicate their existing Access Database accounting system (that has done the job for the last few years) when transferring to Manager. Therefore, operating a blended accounting recording system doesn’t appear to an issue for them, their accountant and by deduction their tax authorities.

Even user Patch (an accountant I understand) stated “For case 1, having every thing in one Manager “Business” could work well” - therefore you are the only one having any difficulty with it.

#17

@Tut In a perfect world, having separate personal and business accounts would work great! Unfortunately, we don’t live in a perfect world, and life in general, creates challenges that we have to figure out and overcome. I can only control what I do!

I have read numerous posts, and you are correct in saying My Forceful Advice. In my humble opinion (IMHO) - You have the ability to scare people instead of helping them. However you would make a excellent salesperson.

In regards to recordkeeping and tax filing, IMHO anything to do with income tax is a nightmare. As for separating your business information - You have to do so at one point anyway. If you go to a Home Depot and purchase supplies / parts required for business and personal in the same receipt (which my husband after telling him multiple times to get 2 separate receipts does), they need to be separated when you make your entries in Manager. Then at tax time, depending on how you have things set up, you can rely on the reports that you have created with categories or using Manager’s tracking codes, to make it easy at tax time.

I don’t think this is 100% correct. I believe you can use a portion of your personal utilities. (in my case for my office space in the house used to do business, and has nothing to do with my personal income, but again I am not the accountant, I just give him the totals) So as a result you still have to pay your utility bills, and you still have to track them in some way, so you can get the deduction. So IMHO it’s easier to have them paid out of one account, use categories or tracking codes to distinguish between personal and business expenses, and then just print the report at tax time. This way you don’t have to track your utility bills somewhere else like in Microsoft Excel as well as your bookkeeping software. I hate duplication, and prefer not to handle a piece of paper twice, if I don’t have too.

After reading about Expense Claims in the guides and the forum, and then reading your posts, I have to say I was confused with the concept. In fact I started second guessing my understanding of them, until I read Brucanna’s post above.

@tut. You make a very good suggestion, in fact I will probably do just that. But before I do so, I would like to understand a bit more about Manager and what it can do, before I do so. Hence, my posts here. However even though I haven’t had the pleasure to meet @Brucanna, I believe that she understands what I am trying to accomplish, she has in fact has been extremely helpful, and I love her personality.

I don’t want to forget to thank @patch for giving me the options that he mentioned as well. Different ways to think about, that I never thought of.

In summary @Tut, I have to confess that I have one other reason for researching Manager’s abilities, and how it can help me reach my goals. Some may say that it is a bit morbid, but in this world, you just never know.

Of course I want Manager to help me in the future, but I am also trying to help my family too. Worst case scenario is if something happens to me. My husband will still need to make a living. As I have posted earlier on, my husband has no knowledge of how things are done regarding the bookkeeping, and he doesn’t always get separate receipts for business and personal expenses. So as a result, wouldn’t it be more beneficial to my family to have everything solidly in place? With the ability to see what was done in the past, so that they could continue to do so in the future? Use the bank accounts that I have set up for specific purposes the same way? Keep things as close to what they are used to, as I can? I believe so. :smile:

#18

This is purely a personal decision, of course. You might, however, ask your accountant whether it is easier to sort out an estate when business and personal finances are separate or mixed together. I suspect an accountant would say the former. When they are mixed as you have described, you are really the only one who knows what was done. When they are cleanly separated, an executor or accountant would probably have less trouble understanding the history. Remember, if something happens to you, it is your portion of the mixed finances that would have to be separated from the combined records of your personal, your husband’s personal, your joint, and the business accounts. Personally, I would rather leave my heirs with already-separated accounting records. That way, they will not be stuck trying to figure out how you were filtering everything. I’ve done that, and it wasn’t easy. Seeing what was done in the past one entity at a time is much easier than prying things apart after the fact.

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#19

First and foremost, thank you for your reply. I really appreciate it! :smile:

Case 1:

Putting all personal transactions through the accounting software and specifically reconciling the bank accounts, is what I do anyway. I want to know what we are spending personally to help with budgeting purposes. I do the reconciling anyway to ensure that I haven’t missed anything to record, that is business related.

I am not sure you mean by this! Are you referring to, if I chose to stop entering personal transactions and just continue business transactions? I am not sure how this would be a problem?

Case 2:
This is ultimately easier, but doesn’t give me the personal budgeting / reminders of what needs to be paid. I would then need to track personal somewhere else.

Case 3:
If I am understanding correctly, you mean to use Manager, but set it up so that I have 2 businesses within? One called Business, and the other Personal, for example.

If so, this is the part I don’t understand. As I noted above in Case 1, Why would my personal finances need to be submitted on government tax forms in the first place? Would I not be able to create reports in Manager that would enable me to only report the business transactions?

#20

Hmmmm. I never thought of it from that perspective.
It makes sense to consider your comments.
Thank you.