Owner's Personal Credit Card

by Susan
(Canada)

Hi Lake,

I wanted to seek your opinion on something.

I am setting up the QB company for a client. He uses his personal credit card to pay for many of the company expenses as well as his personal expenses.

He pays the credit card balance from the company account (sometimes in full, sometimes not) and if he doesn’t pay the full balance, the interest was being posted as an expense. I have been thinking this over and want to know what you think the best way to account for this is?

Should I create a credit card account, so that when I enter bills, I can enter the payment from cc account – but then there is the issue of a full payment on the credit card from the company account, when only the company portion of the statement is entered as expenses, therefore there will be an overpayment – how do I account for that?

Very confused in this case. These are things that I did not come across in any of my courses – I expected that all businesses would be run efficiently and follow all the rules (was I wrong!)

Thank you for your time!


Susan

Hey Susan,

What a great question! Here's what I think ...

I know you already know this but let's start with what the owner should be doing ...

It would be nice if business owner's kept their business expenses separate from their own personal expenses. Why give CRA a reason to audit your personal affairs too if your business ever goes through an audit?

This means every business owner should have a separate chequing account and a separate credit card for your business. As sole proprietors are their business, it doesn't have to be the more expensive business accounts that banks have available. The business owner could open up the less expensive non-business accounts in their personal names to use as their business accounts.

When business owners mix accounts, they run the risk of CRA applying all deposits as business income during an audit, unless they have proof of the income source. It is wiser to have regular transfers from you business account to your personal account to cover your personal expenses and create an audit trail.

So to all business owner's out there ...

Mixing business and personal expenses is a NO-NO!

You are spending more than necessary having your books done ... because it is more work for your bookkeeper.

Ideally, if the owner has separate credit card accounts then the business credit card should be included in the company accounts. The personal credit card should stay off the books and not be part of the business records.



Setting Up Accounts

So now you have a decision to make as a bookkeeper because you only have one card. If you look at the owner's credit card that is being used for both personal and business expenses, what is the approximate split?


If over 50% of the card expenses are business related, then set up the card on the books. Any personal amounts will be recorded to the Owner's Draw account. Let the client know it costs extra to process all these personal transactions.

Reconcile the account to the statement. Code the bank payment of the business credit card to the credit card account, not an expense account and not to the owner.


If it is less than 50%, the owner in effect should submit expense reports to the business so you only capture business expenses. Personal expenses don't belong on the books.

I would set up an Owed To Owner account. In QuickBooks®, I use the credit card type of account for this instead of an other liability account.

If the owner is not willing to fill out an actual expense account form, have him / her write beside each item on the credit card statement whether it is personal or business. Only record the business expenses to the Owed To Owner account. You will have to pay the credit card company by coding the bank payment/cheque to clear the Owed to Owner for the balance in the account and the remaining to Owner's Draw.

For example, let's assume the statement has $2500 in expenses of which $1000 are business. Code the cheque to DR Owed to Owner $1000 DR Owner's Draw $1500 CR Cash in Bank $2500 when you pay the bill.



Interest Expense

IT-533 deals with Interest Deductibility and Related Issues. Section 39 deals with interest on credit card transactions.

It is common for small business owners and proprietors to use a credit card for both business and personal use. The amounts charged for business and personal use can readily be determined. Generally, where the credit card balance is not paid in full, the payments are applied firstly to interest and secondly to the oldest charges, with the result that the outstanding balance on which interest is charged can be divided between amounts owing for business and personal use. Adequate records must be kept to verify the interest deduction in these circumstances. In situations where this cannot be done, the CCRA will allow the interest to be apportioned according to its use (business vs. personal) based on the proportion of total business charges to total personal charges on the credit card for the period in question.



Hopes this helps Susan!



QuickBooks® is a registered trademark of Intuit Inc.