Separating personal and business money: the mistake that hides whether your business makes a profit

Karen's shoebox

Karen Hughes owns a flower shop. Sales go into a metal cash box; from that box, now and then, also come the week's groceries, the Sunday petrol and her son's school fees. When the box runs short of what the rose supplier is owed, Karen pays with her personal card. The receipts for everything end up in a shoebox.

One December evening her sister asks how much the shop makes. Karen does a quick sum: about 2,000 a month. Her sister presses: with or without the groceries? With or without the roses paid on the card? Karen cannot answer. And that simple question is the one that matters for setting prices, applying for a loan or deciding whether opening on Sundays is worth it.

The business is a separate person

Accounting starts from a principle called the entity concept: the business is a person separate from its owner, even where the law does not separate them, as with a sole trader. What the business owns and owes goes in its books; what its owner owns and owes does not. Whatever passes from one to the other is recorded as what it is: a contribution or a drawing.

What mixing costs

• Nobody knows the real profit: a personal expense paid from the till reduces it, and a business expense paid with a personal card inflates it.
• Prices are calculated wrongly, because nobody knows what each bouquet really costs.
• A personal expense recorded as a business expense can become a problem with the tax authorities.
• The bank does not see a healthy business, only money moving in ways nobody can explain.
• If a partner ever joins or the business is sold, nobody can prove what it is worth.

How to record what the owner puts in and takes out

For the books, money the owner puts in is a contribution to equity, and money the owner takes out is a drawing. Neither is income or an expense of the business. A business expense paid with personal money is an expense, balanced by a contribution. Here are four of Karen's situations:

The drawings account reduces equity and is closed against it at year-end. The groceries never appear as an expense: they are not one.

A salary for yourself

The healthiest drawing is a planned one. Set a monthly amount the business can sustain, take it on a fixed date and always record it the same way. In a sole proprietorship it is a drawing; if the business is a company and you are paid a salary, it is an expense with its own tax and employment obligations, which vary by country. Ask your accountant which applies to you.

Five habits to stop mixing

1. Open a bank account for the business only, and use a card for the business only.
2. Take every sale into the business's account or till, never into yours.
3. Count the till at the close of each day and note any difference.
4. Keep a document for everything that goes out, even a handwritten receipt.
5. If you ever mix them, record it straight away as a contribution or a drawing, not at year-end.

What Karen found out

Karen opened an account for the shop and set herself a drawing of 1,200 a month. Three months later, with the books separated, her income statement told her something she did not expect: the shop made 1,450 a month, not 2,000. Wedding bouquets left a thin margin; arrangements for companies, a wide one. She raised the price of the first, went looking for more of the second, and by spring the profit truly passed 2,000. The shoebox now holds only shoes.

Where Aconta Online comes in

In Aconta Online you can open the equity accounts you need, such as Capital and Owner's drawings, and record every contribution and every drawing with its entry. The income statement shows only the business's income and expenses, and the balance sheet shows what the business owns, what it owes and what is yours. Every entry is recorded with its date and is never edited afterwards. The first company is free, no card required.