Bookkeeping Best Practices
Finances are like friends. If you’re nice to them and treat them well, they’ll totally be there for you after one too many Pina Coladas. But, if you blow them off and act shady, they’ll become your frenemy and selfie your bathroom misadventures.
Treat your finances well by following these bookkeeping best practices.
Using Your Business Bank Account
Your business bank account is a fortress where only your business transactions live. It’s completely separate from your personal finances. Like Capulet and Montague separate- they don’t talk, text or DM.
So why all the Shakespearean drama between your business and personal finances? Because keeping them separated makes your bookkeeping WAY easier. Not only does it cut back on the amount of time you spend bookkeeping, it also cuts back on the frustration.
No more hunting for expenses, receipts, and trying to remember what’s a business expense and what’s not. All the transactions in your business account should be business related in some way. This, my friend, is how you get really clean books.
Also, as an S corp, your business is a separate entity from yourself. And just like it’s legally separated from the personal you, it’s finances are separate from your personal finances.
So what do you use your business account for? Business deposits and withdrawals. Let’s start with deposits.
You should only deposit the following into your business account:
Business income: This is any money you receive for the sale of your product or services. If you receive payment electronically (like through Stripe, Square, Intuit Payments, or Zelle), make sure these deposit into your business account.
Shareholder contributions: Anytime you’re putting personal money into your business, deposit that money INTO the business account.
Transfers from other business accounts: Examples are transfers from PayPal or your business savings.
Loan disbursements: If you receive a loan for your business, deposit into your business account.
Here’s what you should not deposit into your business account (unless you want a plague on both your houses):
W-2 income: Any income you receive via a W-2 is personal income and goes into your personal account.
Personal gift income: That $10 birthday check from your grandmother does not belong with your business income.
Personal reimbursements from friends/family: Did your bestie Venmo you cash from last night’s food truck extravaganza? That’s going straight to your personal account.
Next, you’ll use your business account for business withdraws, like:
Expenses: Everything you buy in your business should go through your business accounts.
Payroll: Wages and payroll taxes are both paid out of your business account.
Transfers to business savings
Business credit card payments: Don’t pay your business credit card with your personal money- that’s a hot mess nobody wants to walk into.
Shareholder distributions: Avoid taking shareholder distributions from you cash- it’s hard to track and easy to forget about. Instead, withdraw your shareholder distributions from a business bank account so you have an electronic record of your withdraws.
Income and Expense Tracking
All of your income and expense tracking will be in QuickBooks Online. Make sure to setup and connect all your bank and credit card accounts before you start doing your bookkeeping. You don’t want to lose expenses that could be valuable tax deductions just because you forgot to add an account to QuickBooks.
The information you are tracking in QuickBooks Online is:
Income or expense category
Luckily, the bank download features does most of the work for you. All you have to do is enter the payee, category, and if you want to be extra, a memo about the expense.
For cash expenses, you’ll manually enter those expenses into the system since there’s not way to automatically capture them. The easiest way to keep track of cash expenses is to take a picture of the receipt with the QuickBooks App and enter in the details, immediately following the purchase.
At the bare minimum, categorize and add your income and expenses from the bank review window once a week. Doing your bookkeeping weekly makes your bookkeeping less overwhelming and gives you up to date numbers that you can rely on.
Bookkeeping is a muscle. Like any muscle, the more often you exercise, the stronger and faster it’ll get. If you stick to a weekly bookkeeping schedule, you’ll be the next bookkeeping wiz in no time.
Handling personal deposits and withdraws in a business account
Mixing your business and personal accounts will cause the bookkeeping apocalypse. Fractions and decimals will fall from the sky in a fiery rage. The earth will open and molten formulas will spurt into the air. Winged sums and totals will fly through the sky, inflicting their wrath on bad accounting advisors.
Just kidding...we’re all human and make mistakes. That includes accidentally mixing up your personal and business expenses.
Before we get into what to do if you deposit or withdraw personal money from your business, we need to talk about equity. Equity is how much of your business is actually yours. It’s what you own after you take into account money owed to others (aka your liabilities).
Where this comes into play is that you’ll use the equity accounts Shareholder Contribution and Shareholder Distribution to categorize personal money you put in or take out of your business.
Equity accounts don’t show up on your Profit & Loss report because they’re not income or expenses. If you put $10,000 into your business, you don’t want to get taxed on that because it’s not actually income. Just like taking $10,000 out of your business personally isn’t a tax deduction.
We use Shareholder Contribution/Distribution to account for inflow and outflow that is tied to you, the owner. You’ll use Shareholder Contributions or Distributions if you:
Accidentally deposit personal money into your business account (Shareholder Contribution)
Use your personal account to pay your business credit card (Shareholder Contribution)
Contribute personal money to your business to cover costs (Shareholder Contribution)
Pay yourself from your business outside of your salary payments (Shareholder Distribution)
Use your business card to buy something personal (Shareholder Distribution)
Pay your personal bills or credit card from your business account (Shareholder Distribution)
If you find yourself in any of the above situations, whatever you do, don’t just delete the transactions. Remember, we need all of our financial data in QuickBooks Online to match the bank statements. If you start deleting transactions, it looks super sketchy and your books won’t balance.
As you’ve probably figured out by now, you can’t just delete transactions randomly. This is the number one way a clean bookkeeping systems goes from neat and orderly to a complete mess.
Deleting any of the following transactions can cause MAJOR problems if you’re not careful:
Payments that are applied to invoices
Payments applied to bills
Billable expenses linked to an invoice
So how do you delete responsibly? By going through a three-point check before deleting. For every transaction that you want to delete, ask:
Is the transaction reconciled? If it’s reconciled, deleting it has a 100% chance of causing a problem. Those odds are not good, friend.
Is it linked to an invoice? Transactions can be linked to invoices as payments, billable expenses, or as a credit. If you delete transactions that are linked to invoices, especially paid invoices, this can have unintended consequences.
For example, if you delete a billable expense on a paid invoice, QuickBooks will automatically create a credit for the invoice. If you delete a payment for an invoice, the invoice will revert to being open.
Is it a transfer? If a transfer is linked to a reconciled transaction in another account, will cause issues in that account.
If answer is no to all of these questions you can delete it! If the answer is yes to even one of these questions, contact the Collective bookkeeping team and we’ll walk you through how to delete the transaction safely.