Imagine that you are somewhere that might qualify for a business expense but you are unsure, such as at a restaurant or parking before an important client meeting across town. The question you ask yourself: Should I use your business or personal card? Unfortunately I have found people default to the business card when making questionable purchases when in reality you should make the alternative choice. Let me make my case as someone who is both a bookkeeper and small-business owner.
Show me a client that regularly makes personal purchases on their business cards and you’ll see me bang my head on my desk… repeatedly. If you’re a sole-proprietor it actually isn’t that big of a deal–it just requires a journal entry and you can call it a day. But these transactions can become ‘hair-pulling’ nightmares quickly when you complicate both the organizational structure and the frequency of your purchases.
Organizational Structure Affects Accounting Treatment
First let me start with the accounting effects that making personal purchases on your business credit cards has based on your organizational structure. As I mentioned, sole-proprietors (and partnerships too) have it pretty easy. But if you have are a corporation or LLC then you should be very careful about how often you mix your business and personal expenses. If your business is ever sued, you could lose the very “limited liability” feature you wanted from the LLC by co-mingling assets (aka Piercing the Corporate Veil). When you “pierce the corporate veil”, you make your personal assets in addition to the business assets available as a liability; and while I am not an attorney (and my brief explanation doesn’t do it justice) I must warn you how serious an issue that is. This is true by the way if you’re a single-member or partnership setup as an LLC.
Once we move on to business setups that are different from sole-proprietors, the accounting treatments become more difficult to work through. Many personal expenses paid by the company would not be considered deductible expenses from a tax standpoint and the disallowed payments would most likely be considered a form of dividend or wages earned depending on the actual setup and individual. I’ll keep this explanation pretty general because, as I’ve mentioned, this can get complicated quite complicated (should you withhold taxes on these payments?!).
Reconciling Credit Card Statements With Combined Purchases
To reconcile the business credit card statements when purchases have been co-mingled, you’ve got to debit an Accounts Receivable account with the net amount of personal charges and credit the card card. At this point hopefully the personal charges have been reimbursed to the business (debit cash and credit that AR account); the individual should not be sending funds directly to the business card. Then to wipe off the debt you debit the credit card and credit cash like normal.
Business Expenses on a Personal Card
What would have happened if the individuals above would instead have made the business expenses on their personal card? Rather than have to deal with the complicated accounting treatment based on the organizational structure, the individual would only have to submit their receipts for reimbursements. It doesn’t matter that you’re an LLC, Corporation, Partnership or Sole-Proprietor; if you default to thinking your expense is not deductible, and save it for reimbursement later, then the accounting treatment is not complicated and you can save your bookkeeper from going through a lot of stress.
If your potential expense does in fact turn out to be business related, the business should never pay directly to the vendor in question when the individual accrued the expense on a personal card. Individuals and businesses must pay off their respective credit cards regardless of what the expenses were for. If a business owes money to an individual, then they must reimburse them directly and the same holds true if an individual owes money to the business. You want to stress out your accountant? Write a check to ‘Visa’ and not break out the individual charges–you will see the hair turn gray almost immediately.
So the next time you or your employee are at a store/restaurant and you’re unsure of whether the expense is personal or business related, put it on your personal credit card. Keep your receipts and submit them for reimbursement or, if you’re a sole-proprietor, submit them to your tax accountant to see if they qualify come tax time.
By following this strategy you will save your bookkeeper both stress and time correcting errors. A happy bookkeeper means happy clients :).