Commingling your personal and business accounts is a serious flaw in your bookkeeping system. And it can result in very serious financial problems. That’s why we call it the king of bookkeeping errors. We cannot overemphasize this point. Some of the resulting problems really can result in dire consequences.
In our previous blog, A.P. Accounting and Tax Service revealed several general accounting problems. These included unstructured or confused records. This included tax errors. We also introduced the common–and tragic–error. It was the blending of your personal and business funds.
In Commingling, AP Accounting Sees the King of Fatal Bookkeeping Mistakes
In Part II of this topic, we will examine several specific and threatening situations.
Don’t let commingling, king of bookkeeping errors, ruin your business game.
Many of these can arise from mixing or commingling of personal and business assets and expenditures.
The heavy consequences of commingling include:
- personal liability,
- loss of taxable write-offs,
- lost documents or records,
- and bookkeeping errors.
Commingling Can Lead to Personal Liability
First, the phrase “Piercing the corporate veil,” is a rather poetic name for a legal concept. Quite simply, it means that commingling your personal and business accounts exposes your personal and company assets to lawsuits.
In simple terms, anyone with a legal claim against your company’s debt could hold you personally liable. This would only occur if a lawsuit were filed. So, if your personal and company debs are all mixed together, your legal protection as a company would be destroyed. So would your personal protection.
Making the owner of a corporation personally liable for a corporation’s debt is known as “piercing the corporate veil.” To do this, your prosecutors would simply prove that your company is not a business. Here’s how:
They could claim that your company name was just another name for “you,” like an alias.
The experts at Cornell Law define it thus, “Piercing the corporate veil” refers to a situation in which courts put aside limited liability…And they add, that the court will “hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts.”
AP Accounting Truth A: You play right into that legal trap if you do not keep business and personal accounts as very separate entities. Separating your accounts is simply protection for your business and yourself.
AP Accounting Truth B: Good business dictates that we must protect ourselves. We must avoid personal liability for business debts. And especially avoid claims such as, “Debts and mortgage obligations to third parties and vendors, claims for damages caused by your employees, product or professional liability and consumer-protection issues.”
Mistake # 2 Possible Loss of Write-offs
Big booking mistake number two grows right out of commingling. What about those write-offs? You need receipts which means records that can be retrieved. Sooner or later you will miss an opportunity to write-off a tax deduction—or maybe several opportunities. That could be costly.
Of course, this error could relate back to commingling. Try juggling receipts when you have spent from both personal and business funds.
Commingling could cause you and your business to drown in a sea of incorrect paper work.
And you say to yourself, “Where did I put that air conditioning receipt?
where did I put that air conditioning unit?
And was that an air conditioner for my personal workshop at home or for the construction workshop at my business? Ouch!
Mistake # 3: The Bookkeeper’s Nightmare–Lost Documents, Records, Receipts
Our third-ranked bookkeeping mistake involves the overuse of paper. In this day of digital supremacy, paper is a less and less efficient way to maintain records.
Avoid the Paper Chase. Avoid costly mistakes, lost time, and Lost Journals. Important receipts can easily come up missing. We can show you
Chad makes a good example but shows bad business practice. An old-school type of business owner, Chad kept absolutely meticulous journals. This was in spite of his bad habit of mixing business and personal purchases. He often bragged about the legendary age-old respect the IRS has for personal journals.
Chad carried a little leather-bound, yearly journal. He worried himself into an ulcer by making constant tiny notations about his purchases. But Chad was always commenting about how the journal would protect him in an audit.
IRS Respect Personal Journals
It is true the IRS respects your personal journal notations. However, one year, on a fast-paced business trip, Chad lost his journal in a taxi-cab.
The Best Practice Post-it Note is our invitation to learn the power of best practices of business for your company. We’ll teach you!
You guessed it. That’s right. That was the year the IRS audited Chad.
As a result of his horrifying experience, he outsourced his bookkeeping. And yes, Chad came through the audit with flying colors. But he never recommends his old system.
Eventually, he realized his most valuable resource cannot be bought or made. That resource is time. Outsourcing saves time.
He was actually surprised. It was easier, faster and more profitable to separate business from personal expenses. And he realized outsource the business bookkeeping to a Certified Public Accountant.
Outsourcing and learning about Best Practices in business gave him more time to lead his company.
There was one other pleasant side effect. He stopped worrying about notes and his ulcers. With his ulcer healed and his business under control, Chad’s profits went up. And now, he’s enjoying life much more. And all of that is because ultimately he outsourced his bookkeeping, and learned to cease his bad business habit of commingling personal and business expenses.
Special Formula: Prevent Mixing Business and Personal Accounts
We have seen a lot of business owners get into this kind of trouble by indulging in commingling during visits to in electronics stores.
Outsourcing lets you join a professional team to handle your bookkeeping, taxes and accounting.
They are just starting out or they forgot to bring their business account credit card. However, they
just have to get that computer now. So, they plunk down that personal credit card.
Here’s what they should have done instead:
- Transfer the actual money from the personal account into the business account. (click)
- Buy the computer using a business check from the business account. (click)
- The bank documents the movement of the money. (click)
The computer belongs to the business. The tax is deductible. The business account has proper records. (click!)
In best business practices, how a purchase is paid is just as important as the purchase itself.
Mistake #4: Bookkeeping is not a DIY (Do it yourself) Skill
We listed commingling the number one mistake in bookkeeping. Now we have moved on to mistake number four, which goes hand-in-glove with commingling: The D.I.Y. or Do-it-Yourself bookkeeping delusion.
A.P. Accounting and Tax Service feels that business owners who do their own bookkeeping are committing an essential error. It’s no secret that many business owners neglect the importance of good bookkeeping. They do it when they’re tired or multi-tasking. They dread it and hate it. So…
You might think bookkeeping is easy. Someone, back at the dawn of time someone must have instigated this rumor. And it might even be “relatively easy” until you get too busy. A business owner simply does not have the time. Processing expenditures and liabilities do take time. So does learning or processing all the newest professional solutions in the accounting and bookkeeping industry. But, at AP Accounting. bookkeeping is a professional art-form.
Doing your own bookkeeping can be a crucial error. You might not know all the possible tax deductions associated with your business. Likewise, you might not understand how to categorize all of your purchases and transactions. Remember, if entries are incorrect, then all the financial reports are incorrect. And if you are busy writing the financial reports, you are sacrificing the time you need to use leading your business.
For You, the Business Owner
At A.P. Accounting and Tax Service, we really respect business owners. They are the experts that excel at inspiring their employees. These owners have a passion for what they do. They are creating new products and services and motivating sales. To do all these activities, they must become experts at the delicate art of delegation.
Discover the he Advantages to Outsourcing Your Bookkeeping.
So, why do so many business owners resist delegating their bookkeeping? Properly qualified, trained and talented bookkeepers solve this problem. Why do they insist on a DIY approach to this crucial element of their businesses?
After careful consideration, we know. It’s natural to feel like you are yielding control of your finances. It’s in our DNA that finances are deeply personal. That is why A.P. Accounting and Tax Service maintains maximum integrity and confidentiality. We know the high level of trust you require.
Thank you for reading our blog this week. And we leave you with the words of Benjamin Franklin. “An investment in knowledge pays the best interest.”
By the way, AP Accounting and Tax Services is here to assist you. Please consider this as your personal invitation. Check out the pages of our website. Give us a call. We’ll prove worthy of your trust. And if you are commingling, we can help you stop.
