Keeping business and personal finances separate is one of the simplest ways to make your bookkeeping, GST and year-end accounting easier.
For small business owners, it can be tempting to use the same bank account for both business and personal spending. Over time, however, this can make it harder to understand what the business is actually earning and spending.
Inland Revenue recommends keeping clear banking records and says it can be helpful to use separate bank accounts for business dealings and tax payments. Personal money taken from the business should also be clearly identified as drawings, while personal funds put into the business should be recorded separately.
Why separate business and personal finances?
Using a separate business bank account can make it easier to:
- identify genuine business income and expenses
- prepare GST returns
- complete bank reconciliations
- track drawings and personal spending
- understand business cash flow
- prepare annual accounts and tax returns
- reduce questions and corrections at year-end
Business.govt.nz also recommends using a separate bank account for work income and expenses so business owners can track their spending more clearly.
What if you pay a business expense personally?
Sometimes a business expense is paid from a personal account or personal credit card.
That does not necessarily mean the expense cannot be recorded as a business expense. Keep the invoice or receipt and make sure the transaction is properly recorded in your accounting records.
Likewise, if money is transferred from your personal account into the business, it should be clearly identified as personal funds introduced rather than business income.
What if you use business money personally?
If you take money from the business for personal use, it should be clearly identified rather than coded as a business expense.
For example, depending on your business structure, this may need to be recorded as drawings, a shareholder transaction or another appropriate account.
Keeping these transactions clear helps avoid personal spending being incorrectly treated as deductible business expenses.
Keep good records
Inland Revenue requires businesses to keep records of income and expenses, including bank statements, invoices, receipts and other supporting information. Most tax records need to be retained for at least seven years.
A few simple habits can make a big difference:
Keep a separate business bank account, save your invoices and receipts, reconcile the account regularly, and add clear descriptions to unusual transactions.
Keep tax money separate too
It can also be helpful to have a separate tax savings account.
GST and PAYE collected on behalf of the Government should not be treated as available business cash, and putting tax money aside regularly can make upcoming payments easier to manage.
A simple habit that makes accounting easier
Keeping business and personal finances separate gives you cleaner records and a clearer picture of how your business is performing.
It also makes GST returns, bookkeeping and year-end accounts much easier to prepare.