Wednesday, May 23, 2012

Tip for Tracking Owner-Paid Business Expenses Using Your Qbooks

Authored by: Rod Washausen, CPA. Rod is a Senior Accountant in the Logan office of Cook Martin Poulson, PC. He specializes in the taxation of small businesses and individuals as well as QuickBooks setup and training. Rod is a CPA in Utah, Missouri and Illinois and a Certified QuickBooks ProAdvisor.

Small business owners frequently purchase inventory and pay company bills with their own money instead of through the business. Keeping business and personal funds separate is extremely important for a number of reasons. In an ideal world every business owner would have separate credit cards, loans and bank accounts for their businesses. In practice, that often is not the case. However, it is rarely appropriate to add an owner’s personal accounts to the business’ books.

There are several methods for keeping track of and entering owner transactions into QuickBooks. Most accountants would likely prefer to use journal entries. However, journal entries can easily become confusing for those with little or no accounting background. Further, journal entries have important limitations such as not being able to purchase inventory items or pay more than one vendor in each journal entry.

Another option is to use a separate account to track owner purchases. This method will allow you to easily account for these purchases without using journal entries and will greatly simplify your accounting for owner purchases. You will be able to use this account in the same fashion as a regular credit card account, which will be much more familiar for every day QuickBooks users.

Following are the steps you would take to use this method:

1. Create a new Credit Card account named “Purchases by Owner”
2. Use this new “Credit Card” account to record all of the business bills paid by the owner when using the “Pay Bills” function
3. To enter expenses paid with the owner’s personal funds (but not entered as a bill), just use the “Enter Credit Card Charges” screen like you would with any other business credit card

Using this method will allow you to track the total purchases by the owner and reimbursements paid by the business. At the end of your accounting period (i.e. month, quarter, year) you or your accountant can simply create a reimbursement check or move the amount to a capital or liability account of your choosing. Alternatively, you may choose to leave the outstanding balance in the credit card account as a running total.

Reimbursements can be made simply by writing a check payable to the owner, using the new credit card account on the Expense tab.

When using this method, make sure to use a Credit Card account and not a Bank account. It may be tempting to use a Bank account so that you can use the “Write Checks” feature. However, if you use a bank account, the account will almost always have a negative balance and will require frequent journal entries to move the balance around. Using a credit card properly shows a liability balance and limits the number of adjustments required. You can enter just as much information into the “Enter Credit Card Charges” screen as you can in the “Write Checks” window.

We hope you find this tip useful. If you have any questions or need assistance in setting up accounts for your company, please feel free to give us a call. We’re here to help!


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