Self-employed using personal bank accounts - The Book-keepers Forum (UK)

Laura Holmes · Member

Self-employed using personal bank accounts

Athena · Member

I'm interested in hearing the answer for this, too, as I also use my personal accounts for business expenses. I'm just not making enough money yet to justify having two accounts.

Accountsguy · Moderator

Hi Laura

If at all possible get a separate business bank account set up ASAP. It's the best way to keep personal and business transactions separate. Most high street banks will offer you a period of free banking, I know HSBC are offering 18 months at the moment.

With regards to QuickBooks, it's up to you. You can either post all the transactions (business and personal) from the bank statements to the relevant nominal accounts, with personal expenses being posted to drawings. Or you can go through your bank statements and enter only those transactions which relate to your business. Both methods are acceptable, as long as the analysis is correct.

Posting all the transactions will mean you can reconcile the bank each month, but this will be more time consuming if you have a lot of transactions going through your personal account.

To prevent personal transactions getting muddled up with business ones, remember to write the date, purchase invoice number/expense detail and amount on the cheque stubs.

All the best,

Guy

Laura Holmes · Member

Thanks Guy, that's really helpful.

I may set up a business bank account for myself because I do prefer things to be kept nice and clear. However, I am planning to take over the bookkeeping for a couple of self-employed family members and friends that I know don't have separate accounts and wouldn't be particularly keen to set them up, so I need to get it clear in my head how to handle it.

I just can't get my head around how to make it work if I post personal transactions as drawings, and it would mean having loads of irrelevant customers and suppliers set up in Quickbooks. Also, as my 'business' (bit of an extravagant term for it at the mo!) does not make nearly enough money to cover my expenses I can imagine that it would give a bit of a skewed picture of how the business is doing. I suppose the unrelated income and personal expenses should cancel each other out but I can just imagine it being a bit messy.

Sooo, if I just post transactions that relate to the business, can I 'reconcile' bank statements by manually totalling business transactions on my statements and calculating a hypothetical closing balance? I could then keep copies of bank statements with business transactions highlighted. Would that be an acceptable way of doing things?

Thanks for your help, it is invaluable! Having done a bookkeeping role for a year and started my studies I am quite comfortable with the day-to-day aspects of a system that is up and running, but setting up from scratch is a different matter! It's just impossible to find a textbook that answers all the weird and wonderful questions that you have when setting up new accounts books in the real world so I think this site is going to be of great use to me!

Cheers,
Laura.

-- Edited by Laura Holmes at 21:09, 2007-03-29

-- Edited by Laura Holmes at 21:10, 2007-03-29

Accountsguy · Moderator

Hi Laura

On QuickBooks there would be no need to set up customers and suppliers for personal transactions. Any personal expense would be treated as a bank payment/receipt (not a supplier/customer transaction) and the nominal account would be drawings. You would only need to set up a customer/supplier account for business transactions.

Therefore, only business income and expenses would be included in the Profit and Loss account, which should give you an accurate picture of the business trading position. Obviously the drawings account (i.e. the owners capital account) will be messy if you post all the bank transactions, but this is not a problem as it is kept separate on the balance sheet.

The method you suggested for reconciling the bank statement would be acceptable, however it isn't strictly necessary, as the bank account balance does not actually belong to the business but the owner. Therefore you could (if you want to) just treat the bank account as the owners capital account (perhaps even call it this in the nominal ledger) and therefore there would be no need to reconcile it. The closing balance would be what the business owes (or is owed by) the owner.

I appreciate how it's a bit different setting up books in the real world, as opposed to text book theory. Give me a shout if you need any more info.

Cheers,

Guy

Laura Holmes · Member

Thanks again Guy. Just got a few (very) basic questions of clarification...

Accountsguy wrote:

On QuickBooks there would be no need to set up customers and suppliers for personal transactions. Any personal expense would be treated as a bank payment/receipt (not a supplier/customer transaction) and the nominal account would be drawings. You would only need to set up a customer/supplier account for business transactions.

So, I would enter the details of each transaction directly into the bank register. Should I input appropriate payee details e.g. "Boots" and let QB quickadd the name onto the "Other Names" list?
Sorry, dumb question I know but need to make sure I'm getting it right!

Therefore you could (if you want to) just treat the bank account as the owners capital account (perhaps even call it this in the nominal ledger) and therefore there would be no need to reconcile it. The closing balance would be what the business owes (or is owed by) the owner.

If I was going to do things this way would I set up my bank account as though it were an equity account? Would I still be able to do things like deposit cheques into it?

At the moment, I've got a 'Business Owes Me' Other Current Liability account set up to track items that I have bought from personal funds but using other accounts (or my husbands credit card!). Would I move these transactions into the above equity account?

Thanks for your time and patience!
Laura.

Accountsguy · Moderator

Hi Laura

Yes I would enter the details of each transaction direct into the bank register, and it's a good idea to add the payee details to the other names list (it will make it quicker for entering future transactions).

I would keep the bank account as is i.e. dont move it in your chart of accounts, just treat it as a notional equity account. Renaming it was just a suggestion to make this clearer.

As you've already got a liability a/c set up to track other funding sources, its prudent to keep these separate from the main bank account if you want to reconcile it. But if it makes it simpler for you combine them, it's no problem.

Cheers,

Guy

Laura Holmes · Member

OK, so to summarise, the options are:

a) Keep a full record of the personal bank account, entering details of personal transactions directly into the bank register against the drawings account. The bank account can then be reconciled at the end of each month. In addition, have a 'Business Owes Me' account to keep track of any items bought for the business using other personal accounts.

or

b) Treat the bank account as an owner's capital equity account and only enter details of transaction relevant to the business, allocating all items bought from personal sources to this account. The account cannot then be reconciled against statements but will give a clear picture of what the business owes (or is owed by) the owner at the end of each period.

Does that about cover it?

So, last question (I promise!) - if setting up the books from scratch for another self-employed person, would you set the account described in (b) up as a bank account or as an equity account? Can QB do everything it needs to do if there is no bank account set up in the books?

Thank you!

Accountsguy · Moderator

No probs, yep options a and b cover it. In b you need a bank account set up to make payments in QB, so if I was you I would always set it up as a bank account.

All the best.

Guy

Laura Holmes · Member

Perfect

Thank you for your help!

startingout · Member

Hi.. I have a legal background and i definitely agree with what is stated above -y ou really need to have two separate accounts. Doesn't really matter if you are only making a small amount of money. Commingling business and personal funds is just asking for trouble!

dif24766 · Newbie

I have been reading all the replies, and have one query, I have only a small fund to start my business, and most banks need a large sum to open an account, can i run my business from a personal account until i have sufficint funds to open the business account, or does anyone know of an account I can open with a nominal amount?
Excellent site
Wish I found it 4 weeks ago, when I was working out my business plan, now need to budget in for MLR, but will need to have it!!!!

Thanks

Dale

Julie · Senior Member

Hello Dale,

Yes, its a great site for top tips - a little gem !

I opened my business account with Lloyds TSB ( June 08, they were offereing 18 months free banking) and I was not asked for a specific amount to open up my account.

It was not until I had received my cheque book, debit card and internet access that I actually put money into the account, and even then it was only £100.

I would of thought that banks would be falling over themselves to sign up new businesses !! surprised you are having problems.

Have a look at their site - they are still offering 18 months free banking for start up business - whether you like the bank or not, if its free - go for it. Ive not had any problems with them, so Im a happy customer.

Good luck with your business.

Julie