ACCOUNTING TERM:  Commingle

In a business context, commingle means to mix business and personal items such as assets, cash, expenses, etc.

FEATURE ARTICLE:  Commingling Business & Personal Items

Commingling of various types of business and personal items usually occurs when someone is first starting out in business. Things have not really gotten off the ground yet, so the personal checkbook is still being used for business purchases. Or, if a business account is set up it seems too inconvenient to have to write checks out of two separate accounts.

In either case, unless the owner understands enough about accounting, the books can become a real mess. This is especially true when the owner records both business and personal items into a computerized accounting system such as QuickBooks. Car payments get recorded to Auto Expense even though no Notes Payable for the car were ever set up as a liability. Nor was a Fixed Asset for the original auto purchase recorded. The principal and interest for the auto note end up recorded into Auto Expense along with gas, maintenance, and insurance costs. Home mortgage payments, both principal and interest, get posted to Rent expense. Home property taxes are recorded into Taxes, License & Permits. Personal utilities such as water, garbage, electricity, and gas are all lumped into the Utilities account. Money received from a personal loan is sometimes recorded as income. These examples are a gross form of commingling and occur when someone really has no concept of how a business financial statement is prepared.

More common forms of commingling occur when the owner buys food for personal use and picks up some batteries for business purposes. Or, when a personal credit card is used to purchase business expenses or vice versa. Another example is when a business vehicle is used for personal purposes. A more subtle form of commingling is when the owner uses business products for personal use. This often occurs in multi-level marketing businesses where the owner is required to buy inventory but then uses part of it personally.

It is not hard to imagine how impossible it is to determine what the true net profit or loss might be in a business that commingles business and personal items. Or, to determine what the equity is in a business whose assets and liabilities include personal items. 

You may have done this sort of thing in the past but then discovered the error of your ways and now maintain a separate checking account for personal and business purposes. However, it might be a surprise to know how many folks still mix the two items together. For those that do, read on, hope is on the way.

QUESTION:  One Of The Main Problems Of Commingling?

First, financial statements prepared from a computerized accounting system that contains commingle items will make no sense. In fact, it is useless. Maybe even worse than useless because it will take extra work to try and ferret out the true business items from the personal ones. This is known as a “pain in the behind,” to put it diplomatically. It is not unlike having to untangle a knotted-up ball of string. Even though an accountant/tax person gets paid by the hour, he/she would prefer not to have to deal with it.

TIP:  Keeping Commingled Items Separate

It is inevitable that there will be some occasions when personal money is used for business purposes and vice versa. It is not a problem if handled correctly. Here are some examples of how to record commingled transactions:

• Out of pocket expenses – This is the common situation when you pay for business items out of personal funds. Keep track of your receipts and do one of two things. (1)  Write a business check to yourself for the amount of the receipts and code it to the appropriate expense accounts. (2)  Write a general journal entry with a debit going to the expense accounts and the credit to Owner’s Draw (if a sole proprietorship).

• Credit card purchases – If you have a business credit card and some personal items are on it simply code the personal items to Owner’s Draw when coding all the charges on the card for the month. If you used a personal credit card and have some business expenses, make a copy of the statement, circle the business items, and reimburse yourself or write a journal entry as explained above.

A person could use the same checking account for both business and personal items, IF, they know enough about accounting to keep the items separate within the company books. For that to happen, all the personal items need to be recorded to the Owner’s Draw account. This requires a careful assessment of the nature of each transaction and good accounting technique. Seems like a hassle to me.