Commingling of Funds: Oh What a Tangled Web We Weave...

"Oh what a tangled web we weave, when first we practice to deceive!" is a quote from a little known poem by Sir Walter Scott. In short it refers to the effects of lying. Often, one lie leads to more, similar to how a spider weaves a web; and as the lies multiply, the web becomes more and more tangled creating a trap of dishonesty. If business owners and managers of nonprofits are honest with themselves and their bookkeeper, there is little chance of being trapped by dishonest books. Sometimes, we may not even understand or intend to deceive, but it may be perceived when commingling personal and business funds. And, the results can be devastating!

Merriam Webster dictionary defines commingle as "to blend thoroughly into a harmonious whole." If you read this definition with no financial background whatsoever, you will understand the commingling of personal and business expenses as blending two very distinct things into one "harmonious whole." For the small business and non-profit alike this can bring your bookkeeper to their knees. Hours and hours of sorting things out, multiple questions about each and every expense, unnecessary journal entries, and the extra scrutiny of an auditor when they encounter it in the books. ​

The commingling of business and personal funds has several negative effects on your business or nonprofits health. First, auditors will perceive that your books are most likely not reliable, which can result in legal ramifications. You're making your accounting more difficult and inaccurate, which can leave your bookkeeper at a loss for how to untangle things. And finally, if you are a small business, you can't deduct what you don't document. So if you pay for an expense using your personal accounts and it never  makes it to the bookkeeper, you miss out on the deduction which results in you paying more taxes. And if you are a custodian of a nonprofit's funds, it might be perceived as fraud. In the end, your books might appears as if you wove a tangled web. So create a professional mindset with a separate business account for your small business or nonprofit expenses and avoid even the slightest of appearance of deception. 

If you are just starting, set up a business bank account and credit card account for your business or nonprofit. It's easy and will save everyone a lot of headache right from the start. If you've been at things for years, do the same - set up a business bank account and credit card. Then ask your bookkeeper to connect them to an online accounting software and clean up the commingling issue. 

Small Businesses
One way to clear up the commingled funds issue is to be sure you have the following equity accounts set up in your chart of accounts. T

Equity Accounts:
1. Owner's Investment (Equity Account Type)
2. Owner's Pay or Personal Expense (Equity Account Type)

Nonprofits
In the U.S., you must follow certain reimbursement procedures or include the payments in reportable compensation. Reimbursements made under an “accountable plan” as defined by the IRS allow for reimbursement of business-related expenses without including the expenses as compensation, which might be subject to payroll taxes. Always requiring documentation to comply with the accountable plan is key to clearly defined reimbursements for expenses vs. compensation. Read more about best practices for accountable plans using the links below. 

Accountable Plan Links: 
https://www.missionbox.com/article/191/us-nonprofits-best-practices-for-expense-reimbursement

https://www.irs.gov/charities-non-profits/exempt-organizations-compensation-of-officers

Are you a nonprofit or small business struggling to fully grasp the unique differences  between your personal finances and  your organization's finances? Do you need some help getting your financials in order, so they clearly reflect your commitment to your mission, vision and goals? Please contact me! I'd love to hear your nonprofit or small business story, and see if I can help liberate your time and efforts to fulfill your mission, vision and strategic goals. 

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business adviser, or tax adviser with respect to matters referenced in this post. Candance Weaver Bookkeeping assumes no liability for actions taken in reliance upon the information contained herein.