As a business owner, you will have to make several tough choices. One of these is whether or not to keep your personal and business expenses apart or together. We certainly get how tempting it is to go for the latter option, but it’s the wrong option, nonetheless.
But you’re the business owner, so why must it be separated from your personal expenses?
Why Your Personal and Business Expenses Should be Separate?
There are many reasons why it’s an excellent idea to keep your business and personal expenses separate. We will briefly examine a few.
1. Better Bookkeeping and Business Management
Perhaps the biggest issue with having your personal and business expenses together is keeping transacting categorized correctly. This is even more particular for businesses that have to handle lots of transactions in short periods.
Yes, you can create as many accounts as you want to categorize the expenses but this also creates very lengthy financial statements. Also, when you are recording deposits into your personal accounts, it could be mistaken as business income. Keeping business and personal expenses separate will help you better manage your business as you have a clearer idea of the cash flow in your business.
2. Efficient Tax Returns
When running a business, you need to understand that tax season is always around the corner. We’ll be honest with you, filing your taxes isn’t the easiest thing in the world, but it will get even more tasking if your business and personal expenses are together.
Businesses have to sift through tons of transactions and receipts to make sure everything is accounted for. This process becomes easier when all of these transactions are in one place. But in a situation where you aren’t even sure which transactions are for your business, tax season will be a nightmare for you. The more accounts the CPA has to review to verify the accuracy or separate co-mingled funds, the higher your tax bill. And we aren’t even being dramatic.
We also don’t need to remind you of the consequences of filing inaccurate taxes, do we?
3. Audit Safety Net
Keeping your personal finances separate from your business shows that you are invested in knowing exactly how your business is doing financially. It would also be beneficial because if by chance your business was to ever be audited by the IRS, you could be confident in sitting down with the IRS and showing your books without them being in your personal affairs as well. The IRS looks down on businesses who co-mingle funds.
Conclusion
Keeping your personal and business expenses together may seem like a good idea on paper, but trust us, it’s not. Things can get really messy really fast. Business owners often get overwhelmed, especially when there are lots of transactions. It’s just easier and better for the business to have both expenses separated.
Are you committed to developing your business and navigating the hurdle-filled business world? We are too! 3zprobooks is here for you if you need online bookkeeping and financial management assistance, particularly as a small business.