QuickBooks is an accounting software package designed for small- and medium-sized businesses, and it is one the most widely used in business worldwide. It offers tools for business payments, the management of accounts, bookkeeping and payroll functions to save you time through easy automation of certain data entries and helps you to better understand your business’ financial health.
When starting out with your own small business, your business’ cashflow is in limited supply. Paying for things needed for the office or covering business expenses sometimes comes out of our own pocket as that is oftentimes the only option we have available to us in that moment.
However, it is important to keep your personal and business finances as separate as possible for tax purposes and you can do this by opening bank accounts for the business.
A common mistake among business owners is “commingling your books.” This happens when you don’t keep accurate records of your personal and business finances, and the IRS can’t distinguish between expenses that are legitimately business-oriented or personal expenses.
Personal expenses aren’t recognized as business expenses and these can’t technically be deducted from your business’ accounts.
If the business reimburses the business owner, that payment might be considered a fringe benefit – and those fringe benefits (deemed as payments in the performance of services as a compensation for salary) are taxable for the business and the person.
Recording and tracking those business expenses to the correct expense account is critical in avoiding penalties and fines from IRS.
For times and cases other than preventing the commingling of your books, why is it important to track your personal and business expenses? Tracking all expenses allows you to record and reflect your business’ finances in an accurate manner to enable you to file eligible tax returns and also for providing you with an overview of your company’s financial health.
Thanks to QuickBooks it isn’t actually that difficult to track your personal and business expenses; you need only to get into the habit of strict bookkeeping practices.
As we’ve mentioned, you need to create a daily routine and habit of recording and tracking your personal and business expenses in QuickBooks. Simply keep all of your receipts and enter their data into QuickBooks.
Pro Tip: To make it even easier to reconcile your accounts, file your expenses according to the date and the credit card or bank account used for the purchases and payments.
For that QuickBooks has a tool to make it even more simplified. If you’re using their cloud-based service, you can take a photo of the receipt with your phone to scan and upload it directly into the correct expense account.
However, that is jumping a few steps. Create an accounting cycle for your business – that is to set the accounting period of when transactions start and finish within QuickBooks be it weekly or monthly. The most accurate way to track personal and business expenses in QuickBooks is with the accrual accounting method.
Don’t worry, we’ll walk you through this process so that you can accurately track your business’ financial condition.
Steps to Tracking Personal and Business Expenses in QuickBooks
To simplify this process to make it easier for you to follow, we’ll deal with personal and business expenses separately.
1. Collect Expense Documents
Capture all your business’ expenses from the source documents (those are invoices from suppliers or receipts generated from purchases) into QuickBooks and then sort them according to your expenses and incomes and bear in mind their tax implications. This is undertaken by creating account names and account numbers to reflect all the various expenses of your business.
2. Create and Refer to Your Chart of Accounts
Without getting too technical for the DIY Bookkeepers, at this stage you should create and refer to your Chart of Accounts. The Chart of Accounts is, simply put, a list of all the accounts and names that are relevant to your business.
These fall into four main categories:
- Asset Accounts;
- Liability Accounts;
- Income Accounts;
- Expense Accounts.
When you create a Chart of Accounts, you will need to create accounts for all categories. Each line item in QuickBooks will then be regarded as a specific account, and each of those line items represents an account within each category.
Within the Chart of Accounts, is a representation anything that remains after accounting for all operating expenses and revenues. The Chart of Accounts helps to track the Balance Sheet Accounts and to generate Income Statement Accounts.
Your expenses are reflected as Income Statement Accounts and these enable you to accurately track finances through QuickBooks.
3. Keep a Record of Transactions
A journal is a record of transactions that you have entered into the various expense accounts, but here they are listed in chronological order to help you sort your accounts accurately according to your accounting cycle. These journal entries and their records of transactions serve as expense trackers. Naturally, the expense accounts are increased with a debit entry while cashflow is reduced through a credit entry.
4. Create a General Ledger
Record those transactions using a journal entry and then posting that same information to your General Ledger. The General Ledger is a list of every transaction ever created by your business.
5. Generate a Trial Balance
From the General Ledger, you can generate a Trial Balance (a list of each account that you used to post transactions into) as it displays that current account’s balance to provide a quick outline of current financial records.
6. Produce Accurate Business Financial Statements
You’re not done just yet. The Trial Balance is then updated and adjusted to create a Financial Statement, a Balance Sheet, Income Statement and a Statement of Cash Flow to provide you with a more focused and more accurate overview of your business financials.
7. Track Expenses by Date
Here is where your accounting cycle comes into effect. If you’ve set your accounting cycle to end on the last day of the month or the first day of a new month, using that date to sort and filter your expenses will enable you to track your personal and business expenses accurately.
As we have established, it is advisable to open separate bank accounts for business expenses but it isn’t always that straightforward. Keeping a detailed and accurate record of your personal expenses by booking them into separate expense accounts is the best practice.
- Book your personal expenses in as receivables account which shows the business owner is personally owed money form the business.
- You will then need to repeat the above steps and insert your personal expenses accounts into your General Ledger to then reflect on your Trial Balance and Financial Statements.
QuickBooks is able to save you time and increase the accuracy of your accounting records by using the tools of their software package such as scanning of source documents, downloading your bank statements and credit card transactions directly into the accounting records to save you time when it comes to reconciling your accounts.