Clearing Account Question
(Carlsbad, CA, USA)
Inter-company Recording Keeping
I have a client that his financial records for his business and his personal are kept in 2 different QuickBooks (QBs) files. He just changed to a bad practice: Using his business card 90% of the time to purchase personal items. To boot, he pays for the credit card out of the business. He has an AMEX card designated strictly for his business, but he's chose to use his Citicard Visa as the primary credit card.
The personal records have multiple class codings as the client is very particular about who pays for what between he and his wife. So, transaction entries can be intense in his personal recordkeeping.
Situational problem: He has several rentals and when the business credit card is used to purchase personal / rental property items, those need to get logged in his personal QBs file and class coded. Since the majority of the transactions are personal, I've decided to enter them in his personal QBs file.
Caveat: The personal use of the credit card can be 75 - 100 personal transactions per month and I want to reconcile it in the personal books.
Question: I've set up the Citicard account and all credit card charges are entered in the personal books. In order to reconcile this account, I've set up a Clearing Account and use that to pay the credit card (reminder credit card is paid w/business funds and in separate QBs file). Then I enter a bill in the personal books to reimburse the business and the offsetting account is the Clearing Account - in order to zero it out. When distribution funds from the business are deposited into the personal books, the bill gets paid and transaction is complete. Is this a good practice / use of the Clearing Account? Or does someone have a better suggestion?
Thank you in advance for your assistance!
It would be great if U.S. bookkeepers could chime in here.
You didn't mention the business structure of his business, so I'll assume it is a corporation and not a sole proprietorship. Setting up "Due to / from" accounts to track business transactions and shareholder transactions is how I handle this type of situation so I definitely think you are on the right track.
What I'm not sure about are the U.S. rules surrounding these types of transactions however ... particlulary as the U.S. has different kinds of corporate structures. So you need to do some research about the rules in the U.S.
In Canada, there are very specific rules on how money is removed from the corporation and when the withdrawal is taxable, non-taxable or tax-free. It is always advised that these types of transactions not be "settled" through journal entries but physical cash transactions either through writing a cheque or a bank transfer. I believe the purpose is to recognize and make it very clear that a corporation has its own separate legal identity. Shareholder's do not have free access to a corporation's cash and assets. Not adhering to the rules here is like sending a memo to CRA (or IRS in the U.S) saying, "Hey can you come audit me please!".
In Canada, I would separate the personal amounts due to the corporation into two different accounts - one relating to the rental transactions and one pertaining to the personal amounts. The only reason I'd do this is to make reconciling easier and also acknowledge the difference between business rental expenses (a separate tax form here in Canada) vs personal expenses. I would setup these accounts in the Corporation as "Bank " type to enable you to do reconciliations easily.
Current Asset Clearing Accounts:
Due From Rental Business
Due From Shareholder
On the Personal books, I would setup the accounts as a "Credit Card" type, again to make entering transactions and reconciling easier.
Current Liability Clearing Accounts:
Due to ABC Corporation-Rentals
Due to ABC Corporation-Personal
The purpose of these Due to/from clearing accounts is to isolate and capture the non-corporate transactions. So your approach seems reasonable. Are there any U.S. bookkeepers that can help Jim out and share their knowledge of the rules for these types of transactions?