Why separate?
Failing to separate personal and business accounts is a common and sometimes dangerous mistake people make.
To some, it might seem obvious to separate the two accounts. However, some people will expose their business to risks by combining the two accounts. Ideally, there should be two different bank accounts – one for business matters and one for personal matters.
These bank accounts should be accounted for separately. In other words, keep invoices for business and personal items separately.
Spending business money on personal stuff
When you don’t separate the two accounts, you might be at the risk of spending business funds on personal matters. The opposite can also happen and lead to confusion. This can lead unreliable accounting records that will be inaccurate and therefore will not be useful. This is why you should keep them separate.
Business owners often work long and hard but they don’t see the fruits of their labour in the profit of the company. They have this concern because they are spending “company money” on personal items. This creates the situation of decreased profit in the bank because of the increased expenses.
If your accounting is complicated, you are doing it wrong.
Having one bank account and the accounting records for the business alone will alleviate this concern. The owners should get paid a salary every month into a separate bank account to accommodate these expenses. One can also use a loan account system to achieve this. This in turn will create a more accurate picture of the fruits of their labour.
It may even highlight some “extra expenses” for both the owner and the company and they can be eliminated or reduced in the process. Once again the picture becomes clearer and profit should go up.
Keep It Simple
One more reason is to make it simpler for you. If your accounting is complicated, you are doing it wrong.
It is simpler for you and therefore simpler for the accounting firm to maintain and prepare annual financial statements at year-end. This decreases the time spent and could reduce the invoice you receive for this service.
This article was reviewed and updated in December 2021