One of our goals at Liberty Accounting is to help small businesses identify opportunities to better understand their finances. Sometimes, we are invited to weekly meetings with small business partners to help us discover more about the needs of the clients so we can provide solutions to help them meet their financial goals. During one of these meetings, an Independent Consultant for a direct sales company asked questions about how to distinguish personal finances from business finances. While the answer that I overheard in the meeting explained the difference between two company-provided tools, I felt that a change of overall finance strategy could help the consultant rethink their business expenses.
Sorting out personal finances from business finances is a must-do—especially for tax purposes—and there’s an easy way to do this. When you start a business—especially as an Independent Consultant—you can choose to use your personal account for your business finances, or establish a separate account. While it is possible to use your personal account when your business is small, it’s best to set up a separate account as soon as possible.
I discussed this at length with some of the other consultants from the company. Many of the consultants I spoke with discussed how their personal accounts helped them meet daily needs like checking and savings transactions, debit cards, and ATM access. When they started their businesses, it was easy to see which income came from the business and which income came from elsewhere—namely their wages from their primary jobs. As the business began to grow and the consultants began investing more money by doing more transactions for their business, they found it difficult to understand which expenses were classified as personal, and which were classified as business, especially because the consultants used the products they sold at home and for the business. Let’s explore the benefits of using a separate account for business.
Easily Identify Business Expenses and Purchases
Periodically, you will use your account records to reconcile your bank statements. When you use your personal account for business expenses, the business purchases are mixed with your personal payments. Since most people have more personal expenses than business expenses, it’s difficult to separate the purchases you made for your business, especially if you buy personal and business items from the same source. If you purchase food from the grocery store to entertain your employees at a work-related function, it is a business expense. If you somehow misplace the receipt, however, it is difficult to tell from your bank records whether your trip to the grocery store was for personal or business use.
Credibility and Professionalism
When your business pays someone for anything from refunds to contract labor, having your business name on the checks will make your business even more established. This is also true when customers write checks to you. Your bank may experience issues with checks made out to your business name when you use a personal account.
Track Taxes Easier
As a business owner, taxes and tax planning should be on your mind all year long. The number and type of taxes depends on your business, but common taxes include income taxes, property taxes on real estate the business owns, and collection of sales tax from customers.
With a separate business account, you can deposit the tax money you collect in an account that you touch only to pay the sales taxes due. Having a separate business account also provides a clear audit trail if you are investigated by the Internal Revenue Service (IRS) or a state tax agency.
Reduce Your Rates for Accounting Services
Whether you choose to use your own accounting software to keep your books, hire your own accountant, or take your records to an accounting agency, handling your accounting will take much less time when you have a separate business banking account.
Liberty Accounting is a simple, cloud-based, double-entry bookkeeping software solution that can help you spend less time managing your books and more time creating relationships with your customers.