Answers to common entrepreneur bookkeeping questions
Commonly asked bookkeeping questions
Once I finally got setup to do my business’s bookkeeping and learned the basics, I thought I’d be all set. Yet every time I went to manage my books a new question would arise and finding answers to them all took forever.
In my years of being an entrepreneur and business owner, I’ve repeatedly heard these four bookkeeping questions being asked over and over again - the same ones I wrestled with:
What do I do if I accidentally put a business purchase on my personal card or vice versa?
How do I account for barters in my financials?
How do I pay myself or contribute money to my business?
Can I get reimbursed from my business for mileage, cell phone, internet, home office expenses, etc?
To save you the trouble I went through to figure these out, I’ve compiled simple answers to these four commonly asked questions*, so you can feel confident in your bookkeeping.
Bookkeeping setup and basics
If you’re not yet setup to start bookkeeping or don’t know bookkeeping basics, read my article on 5 easy steps to getting setup for bookkeeping and my bookkeeping tutorial, then continue reading this article for answers to these advanced questions
Note: I use Xero to manage my books, so that’s what the screenshots are below, but the process should be similar for other accounting tools and the concepts still apply no matter what method or software you’re using.
Accidental mixing of business and personal purchases
I’m a big fan of having a separate business bank account. It’s so much easier to keep things separate but this also means that occasionally you’ll have a business purchase that went on your personal card or vice versa that you’ll need to reconcile. Here’s how:
Getting reimbursed from your business
SOLUTION: Submit an expense report (with the proper expense category for what the purchase way) and pay yourself back
HOW TO DETAILS:
Have you ever had to file an expense report as an employee to get reimbursed for a purchase you paid for but the company should have?
You guessed it! It works the same to reimburse yourself from your business for something you paid for personally, except you’ll not only be the one submitting the expense claim, but also approving, authorizing, and paying it.
Find the Expense Claims section in your accounting software and click Add Receipt.
You’ll then need to fill in the information shown and attach your receipt where the paper file icon is in the top right-hand corner. Here’s an example:
If the receipt contains multiple items that you’d want to categorize in your books separately, you’ll want to add a new line so you can choose a separate Account (from your Chart of Accounts) for the different receipt line items.
When you’re done you can save it and add another receipt if you have more things that need to get reimbursed.
You’ll then need to select your expense claims by checking the box and clicking Submit for Approval.
IMPORTANT! If you have more than one to submit and want them dated differently in your books, SUBMIT EACH SEPARATELY.
For example, if one receipt will get reimbursed for an expense in January and the other in February, submit them separately since when you approve them, you can only choose one reporting date for each submission. Things submitted together get approved together and all have the same reporting date.
A reporting date determines what date (most people look at things monthly) something gets categorized. In order to stay organized and compare month-to-month or see trends over time, you’ll want to make sure the expense was reported on the correct date. This happens automatically when you purchase something through your business account, but has to be done manually with an item submitted through an expense report. Make your reporting date the date the purchase actually happened, not when the expense report was submitted or paid.
Once you’ve submitted for approval, it’ll show up in the Awaiting Authorization tab like above.
Click on the report to open it up, select what you want to approve and click the Approve button.
IMPORTANT! Remember, if you have more than one submission and want them dated differently in your books, APPROVE EACH SEPARATELY. You cannot undo this and will have to start from scratch.
Authorize Expense Claim will pop up at the bottom and you’ll need to add a date by when you intend to make your payment and the date you want it reported. Then hit Authorize. As mentioned, I suggest reporting the expense when the purchase actually happened.
You will not be able to change the reporting date later (you’d have to start from scratch), so make sure you get this right.
Once you do this, it will get moved to the Awaiting Payment tab.
Now, transfer money for the exact same amount from your business bank account to your personal bank account through your online bank or app. When this transactions shows up in your reconciliation dashboard, it’ll automatically guess that it’s the payment to the expense report since the numbers will match and you just have to hit OK.
Paying the business back for a personal expense
SOLUTION: Pay your business back and categorize both transactions (the original purchase and the reimbursement) under Drawings (a liability category)
HOW TO DETAILS:
When you accidentally put a personal purchase on your business account you’ll want to categorize the expense under a Liability account category called Drawings. You can make a note that it was an accidental personal purchase that will be reimbursed.
Then simply transfer money from your personal bank account to your business bank account for the correct amount.
When the transaction shows up in your accounting software, do the same thing and categorize the expense under a Liability account category called Drawings. The positive and negative cash flow will cancel out, leaving your Drawings liability at $0.
SOLUTION: Create an invoice in your accounting program for the service you are providing and what you’d charge for it and then add another line item for what you’re getting in return (with the proper expense category chosen) with a matching negative value.
HOW TO DETAILS:
It’s very common for a new business or entrepreneur to barter for things. For example, a photographer doing a photo shoot in exchange for logo design. This way, two parties that find value in each other’s services can take advantage of what the other has to offer without exchanging cash, which you may not have.
Choosing when and how to barter is a whole other topic, but if you do it thoughtfully, I suggest that these transactions DO make it into your business books.
Contrary to popular belief, bartering will NOT affect your taxes as long as the dollar amount of value you are providing is equal to the dollar amount of value you are getting in return - which is the definition of a fair barter anyways.
To add a barter to your books, create an invoice in your accounting program with the services you are bartering. Then add a line item for what you’re getting in return for the same negative value and categorize it under the proper expense category. These numbers will balance and the invoice will be $0, but the amounts will show up in your revenue and expenses respectively. It’s up to you if you actually send this invoice to your bartering partner, but I think it’s helpful to set the tone for a healthy relationship where you treat each other like real clients.
Here’s an example invoice that will properly add a barter to your books.
The reason for adding bartering to your books is that you’ll get a more clear picture of your sales if you account for the revenue from your barter and get a more clear picture of where you’re choosing to spend your hard earned money by counting whatever you’re getting in return as an equal expense.
Some people just barter all their time away. This will help you make more informed decisions on when and how to barter by making sure you feel the value you’re getting in return is something you feel is worth it and equal to the value you’re providing.
Because you have an expense (what you’re bartering for) that decreases your taxable income by the same amount as your income increase (what you’re bartering with), there is no tax downside to accounting for bartering in your books and so I always recommend it.
Adding money to or pulling money out of your business
SOLUTION: Transfer funds through your bank (or your method of choosing) and categorize it as an Owner’s Draw
HOW TO DETAILS:
If your business is a pass-through entity like a sole proprietorship or LLC (meaning your business doesn’t pay income taxes, you pay those personally on your income taxes), paying yourself and tracking it in your books is super easy.
All you have to do is transfer money from your business bank account to your personal bank account by your way of choosing. If you setup a business bank account at the same bank you do personal checking, which I highly suggest if there aren’t fees involved, you can do this instantly and without any fees with the click of a button by transferring funds from one of your accounts to another in your banks online system.
When this transaction shows up in your accounting program, you’ll simply mark it as an Owner’s Draw which is usually a standard line item in the Equity section of your Chart of Accounts.
Contributing money to your business
SOLUTION: Transfer funds through your bank (or your method of choosing) and categorize it as an Owner’s Contribution
HOW TO DETAILS:
If you have a separate business banking account and are just getting started so you have more expenses than revenue, you’ll need to add funds to your business.
You do this the exact same way as paying yourself, just the opposite. Transfer money from a personal account to your business account and mark the transaction in your accounting program as an Owner’s Contribution.
Mileage, cell phone, internet & home office expenses
SOLUTION: Purchase home office expenses like any other business purchase (unless they are very expensive, then you can depreciate them to spread the expense out over time) and reimburse yourself for business mileage, cell phone, and internet usage (if you don’t want to wait to take it as a tax deduction) by calculating what was used by your business, submitting an expense report (with the proper expense category for what the purchase was) and paying yourself back.
HOW TO DETAILS:
Did you know that you do not need to wait until tax time to take these deductions?
You can purchase things for your home office (furnishings, technology, supplies, etc.) through your business. I have an expense category for my home office in my Chart of Accounts so I can see how my spending in this area stacks up and make wiser decisions about investing in this area of my home.
You can also submit an expense report (see the first tip) for your business miles, usage of your cell phone for business, and home internet if you work from home.
I like to reimburse myself for these things monthly (thus reducing my taxable income) instead of waiting until tax time to take a deduction - under current tax laws there will be no difference in your taxes paid.
For me it keeps things cleaner because my annual numbers will look the same in my books as they do on my taxes and it gives me a more clear picture of my profitability by accounting for all expenses that my business has as if it were a standalone company having to pay for phones and internet separately anyways.
If you’re still building up your revenue though, you may not want to take these funds out of your business monthly and instead just use them as tax write-offs to reduce the taxes you pay. Your choice!
For mileage, track what you drive for business (keep records via spreadsheets or use an app like MileIQ) and multiply that by the annual mileage rate (usually changes each year). For 2019 this is 58 cents per mile. So if you drive 100 miles for business, you could reimburse yourself $58 (or take the exact same deduction at the end of the year).
For your cell phone and internet, experts suggest estimating the percentage used for business and deducting that same percentage of the cost. Some people are more aggressive with this, some are more conservative. You have to decide where you fall.
RECAP: Answers to commonly asked bookkeeping questions
Paid for a business expense with personal funds: Submit an expense report (with the proper expense category for what the purchase was) and pay yourself back
Paid for a personal expense with your business funds: Pay your business back and categorize both transactions under Drawings (a liability category)
Accounting for barters: Create an invoice in your accounting program for the service you are providing and what you’d charge for it and then add another line item for what you’re getting in return (with the proper expense category chosen) with a matching negative value.
Paying yourself: Transfer funds through your bank (or your method of choosing) and categorize it as an Owner’s Draw
Contributing money to my business: Transfer funds through your bank (or your method of choosing) and categorize it as an Owner’s Contribution
Home office expenses (furnishings, supplies, etc.): Purchase them like any other business purchase (unless they are very expensive, then you can depreciate them to spread the expense out over time)
Reimburse yourself for business mileage, cell phone, and internet usage (if you don’t want to wait to take it as a tax deduction): Calculate what was used by your business and submit an expense report (with the proper expense category for what the purchase was) and reimburse yourself
Set your business up for success in other ways too
If you found this helpful you should also download my free Step-by-Step Checklist to Set Your Business up for Success below. I walk you through my Foundational Five™, the essentials I believe every entrepreneur should have figured out in order to be set up to succeed.
I’m Stacy, an entrepreneur, strategist, and adventurer dedicated to helping entrepreneurs figure shit out and build kick-ass businesses.
You are meant to do important and amazing things in this world and I’m here to help.
A Note About Financial Advice
*Please note that I am not a professional tax preparer, accountant, or bookkeeper. I am an entrepreneur and business owner sharing what I’ve learned about managing the finances for my businesses. You are still responsible for ensuring you are properly managing your business’s finances and complying with tax laws. This article is for informational purposes only and is not intended to replace the need for a financial professional or to provide official accounting or tax advice.
MY AFFILIATE PROMISE
Occasionally you’ll see links to resources and products in my articles. Some of these are affiliate links, but I only recommend things I have personally used and highly recommend.
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