In The Hitchhiker’s Guide to the Galaxy, Arthur Dent said, “You know it’s at times like this, when I am stuck in a Volgon air lock with a man from Betelguese, about to die of asphyxiation in deep space, that I really wish I’d listened to what my mother told me when I was young.” The Ford Prefect asked, “Why? What did she tell you?” Arthur responded, “I don’t know. I didn’t listen.”
Like your mother, there are things that your accountant will tell you that you may wish you had listened to when you are sitting in an IRS office being audited about to die of asphyxiation. If I were only allowed to give one piece of advice to any business owner it would be this – Keep your two lives (business and personal) separate.
Keep a business bank account and a personal bank account and keep them separate. Deposit your business revenue into the business account. Pay your business expenses from the business account. Deposit your personal revenue or your draw or paycheck from the business in to your personal account and spend that money on personal expenses. Do your absolute best to keep them separate. If you have multiple businesses, keep them separate from each other as well. The same goes for business and personal credit cards – keep the use separate.
I understand that there may be things that are combined use, that are both business and personal. These can be treated in two ways, paid for by the business and then reimbursed for the personal use (via direct reimbursement or accounting classification) or paid for personally and reimbursed by the business for a portion attributed to business use. Does this always happen, no – I am a realist, but it should.
I also understand that we screw up and pull out the wrong credit card once and awhile. All is not lost. When this happens, the business should pay us back via an expense reimbursement or we should pay the business back via a direct reimbursement (the business charges us) or an accounting classification such as an owner’s draw or distribution.
Why is this important? For starters, it will give you a clear picture of how your business is doing when it isn’t subsidizing your personal life. It makes your accountant happy and your fees generally lower as he or she has greater confidence in you and your records. It also prevents big penalties and elimination of your deductions should you ever be audited. Should an auditor begin finding personal expenses deducted on your business return, they can disallow the entire category of the expense leaving you to provide receipts and records for all items in order to keep the deduction. The auditor can also expand your one year audit to a three year audit should they find transactions that cause them to doubt the accuracy of the deductions potentially tripling the tax assessment and penalties.
One of the things my mother said that I did listen to is “If you start now, you’ll never be further behind than you are at this moment.” I invite you to start now if you haven’t already and keep your business and personal lives separate. It beats death in Volgon air lock.
This blog allows you to experience the raw, gut wrenching drama of human conflict through accounting in each of its three stages: preparing to do battle, the thrill of victory and the agony of defeat.