The best practice for managing business and personal expenses is to avoid intermixing the two. All new and existing businesses should have a separate business-only checking account. And if you plan to use a credit card for purchases, open a business credit card account. Then, use this business bank account and the business credit card for all business expenses… and use your personal bank account and personal credit card(s) for personal expenses. Easy peasy. Income earned through the business should be deposited into your business checking or savings account and non-business income earned should be deposited into your personal checking or savings account. But the reality is it isn’t always easy peasy. Sometimes the wrong credit card is pulled from its safe spot in your wallet to pay for a … This is when it is important to notify your accountant or bookkeeper that you mistakenly used the business credit card for a personal purchase, or vice versa. Your accountant or bookkeeper can do a journal entry to adjust your accounting records to account for this. But don’t, at all costs, make this a habit.
Co-mingling personal and business expenses in the same account sets you up for potential legal trouble too. The term for this co-mingling, if you were to ever be sued, is called ‘piercing the corporate veil.’ When a judge is evaluating the business or individual that is being sued, they may look at your banking records and see all this co-mingling going on and decide to hold you personally liable for the claim. This means that your personal assets (your home, your car, your checking account) could all be used to pay the debt you owe if the lawsuit is not in your favor. But if you keep business and personal separate, the courts can only go after the assets in the business accounts and not be able to touch your personal assets.
Besides, co-mingling makes bookkeeping and tax time a nightmare. The time to sort through the business and personal stuff is a headache. And it has to be done. And if you want to be able to trust your financial reports, you can forget it when personal junk is intermixed.