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What it the proper process for accounting for business purchases made on a personal credit card?

LeighLLeighL Member Posts: 8
I purchased a bunch of start up equipment before I had a business bank account and business credit card in order. So far I have created a liability account under my business profile of "Credit Card - Personal" and have applied those transactions to it but that is clearly not correct as that makes it look like a liability on the business' books where it should be some sort of owner's investment.

What it the proper process for accounting for business purchases made on a personal credit card for which I plan to have the business pay me back for with the income it earns?

Thanks
edited February 23, 2019 in Accounting Technical Support

Comments

  • MikegMikeg Member Posts: 995 ✭✭✭

    LeighL
    To record items paid outside the business you would debit the appropriate expenses or fixed assets and credit owners equity or due to owner. When the business pays you back, you would debit owners equity or due to owner and credit the business cash account. If you are posting the credit card debt, you would credit "Credit card payable" and a debit to owners equity. This is because you are contributing a liability to the business (reduces your investment).
    Mike G, CPA
    www.mgfinancial.net
    Better Service - Better Pricing

  • LeighLLeighL Member Posts: 8

    Thanks Mike -- appreciate the response.

    One question though. When the business pays me back I don't think I would want to credit the business cash account because that would be leaving it in the business. I want to pull the money back out to my personal bank account (not connected to Wave). What account do I "credit" in this case? Or for the double entry aspect of the accounting would I need to add my personal bank account to Wave in order to make this work?

    Thanks again.

    Leigh

  • MikegMikeg Member Posts: 995 ✭✭✭

    Leigh,
    If the business pays you back, wouldn't that be through the business cash account? if so, then you would credit cash and debit owners equity or due to owner (whichever you used).

  • LeighLLeighL Member Posts: 8

    Perhaps I'm just not thinking of this right. I think whats confusing it is the fact that I had initially added to personal accounts under the business in Wave -- one for my personal credit card under Liabilities - Credit Card, and one for my personal chequing account under Assets - Cash and Bank.

    When I made purchases on personal credit card I added the receipts under Purchases - Receipts and categorized them under the the appropriate Expense using either the personal credit card or personal chequing accounts I set up as the Payment Account. After realizing that was a bad idea I was thinking I should have used the "Owner Investment / Drawings" account when I processed those receipts but after some more research I read that for incorporated businesses that account shouldn't be used as it only applies to sole proprietors & partnerships (I am incorporated a sole owner CCPC). Now I am not sure if that advice is accurate however based on that I have now set up a "Shareholder's Loan" account under Liabilities - Due to You and Other Business Owners in Wave and changed the Payment Account for the earlier expense transactions noted above to that Shareholder's Loan account.

    Am I on the right track here or should/could I have just put them under "Owner Investment / Drawings" after all? Also I am assuming when I want to pay myself back for this "loan" I would reconcile the debit transaction from the business chequing account (linked in Wave) to the "Shareholder's Loan" account to bring the balance of it back to zero. I am just concerned on the tax implications as I want to make sure this doesn't get viewed as taxable income when I pull it out of the business since the purchases were made with post-tax personal funds.

    Thanks,

    Leigh.

    edited February 23, 2019
  • MikegMikeg Member Posts: 995 ✭✭✭

    Leigh,
    I'm getting a little confused myself and CCPC is not a term for incorporated that I'm familiar with. I'm here in the US. But typically for accounting, if an owner makes purchases on behalf of the business with personal funds then that is equivalent to either loaning the business money (shareholder loan) or an additional investment (owner equity), When the business pays the shareholder it would be the opposite either loan repayment or a drawing (dividend) treated as a reduction in equity. Here is the US there is more flexibility with owners draw and investments (sole proprietors and partnerships) over incorporated entities. So I think using shareholder loan would probably be most appropriate in your case Similar to the US with regards to corporations, owners should NOT treat the equity section like a revolving account. Free to make investments and withdrawals on demand.
    Mike G, CPA

  • LeighLLeighL Member Posts: 8
    Thanks Mike!
  • JamesNilsenMisraJamesNilsenMisra Member Posts: 8

    Hi @MikeG,

    Shareholder Loans vs Owner Equity

    I'm not a tax person, so this is always a little poetic for me, as I don't see things in black and white, but rather a little gutturally. :/

    Thanks for this, nice to see you endorsement of the Shareholder Loan/Liability account, which is not what @SophiaC tells us about the latest updates on Wave's new built in handling of Personal Transactions which seem to prefer the Equity account as a transactional account. See the new "Deposit From Personal" & "Personal Expense" drop down options when categorising transactions, which automate the double accounting processes through the Equity account on Wave's backend.

    Incidentally, I was reading about how big the debt market is on the stock market, and how liabilities have a greater claim to revenue than Owner's Equity. In short, if you want the business to be able to pay you back, it seems best to record the funds loaned to the business as a Liability (Due To You/Shareholder Loan), than as Equity...(Business Owner Equity).

    But would it be true, that at Tax time, the Shareholder Loan account would need to be consolidated and update the Owner Investment/Earnings Account with a manual Journal Entry each year? (Perhaps Wave is wanting to avoid unnecessary Journal Entries?)

    To dig a little deeper, if a business expense is paid for with a personal card, then I can easily see that expense being added to a Shareholder Loan account, ready for reimbursement.
    However, say a business account sponsors a personal expense, perhaps to simply add that to the Equity account is OK, then it wouldn't need to be paid back to the business directly, but remain in the equity account, ready for being taxed as part of the full Owner's Drawings for that period.

    Personal Credit Cards for Business Transactions

    @LeighL I like your idea to import personal credit card statements, bulk edit the account to Shareholder Loan, and delete any personal expenses - mainly because Wave no longer supports transferring transactions from a Wave Personal Profile to a Wave Business Profile, as they used to, and the thought of having to manually add any transactions that were paid with a personal card (I don't have a business credit card just yet, and don't think I want one either).

    Questions

    My question in this regard to you, and all the others who write on this subject, @System @Salma @NicoletteB, @ConnorM, @BarsinA, @EmmaP, @AlexL, @ChelseaK, @JordanD, @ZoeC, @Samd, @Sophia, @Mani, @Erik is:

    1. How would you recommend one goes about this?
    2. What advice would you have?
    3. And what do we need to watch out for if we do this?
    4. How does changing the account from Credit Card to Shareholder Loan affect it,
    5. Did this process remove all the running balances, and other stuff that seem to be associated with Bank Accounts on Wave?
    6. I.E. Were there any precautions you might recommend?
    7. Did you go back to delete the original credit card account in Wave afterwards, or keep it for another import for the next month's transactions?
    8. If one has a dedicated (albeit personal) credit card for one's business, how is this a problem if only business transactions are processed on the card?

    Thanks for your help, in finding a smooth workflow!

    @Canaczech 's comment on a post by @AudreyS An easier way to manage personal transactions is also really interesting, and hasn't been answered yet, so I'm quoting it here:

    "I'm confused about what "Account" to use when accounting for a business expense paid with personal VISA. My business is a corporation. I occasionally use my personal VISA for business purchases.

    I have been importing personal VISA transactions into the Personal profile in Wave to keep personal and business bank and credit accounts separate. After categorizing business expenses made with personal VISA transactions to a Shareholder Loan on the Personal profile, the transactions do not appear on the Business income side. I need to be able to zero-balance the Shareholder Loan by each fiscal year and this method is clearly not working.

    I only have business accounts set up on the business side at the moment, and it's not possible to use "Shareholder Loan" as the deposit Account and also as a Category. So, given current set up, I don't know how to get business expenses paid with personal VISA to appear as transactions on the Business Shareholder Loan. Whether it's a journal entry, transaction generated from a receipt or just a new manual income entry made in the Business profile, I still have to assign an "Account" from which the transaction was made (eg. my personal VISA).

    So, what do I do?....

    (1) Do I download my personal VISA transactions into a Bank account on the Business profile, and assign the personal Bank account as the account for the transaction (eg. Personal VISA), and then categorize it as a Shareholder Loan or an equity account?
    (2) Do I need to reconcile all of the personal VISA transactions because it's in the business profile? Or, do I leave only the business-related transactions that I am accounting for?
    (3) Will the presence of personal account balances in the business profile affect the company's Retained Earnings totals?

    Thanks in advance for your feedback.

    April 17, 2020 edited April 17, 2020"

    Other articles on the subject

    @Mikeg comments on a post by @CharlotteKroukamp09 Shareholders loans
    @magicwill comments on a post by @SouthlandOutdoor Reconciling Auto Loan payments from personal account
    @System An easier way to manage personal transactions
    @salma Handling business expenses with a personal bank account

    edited April 21, 2020
  • JamesNilsenMisraJamesNilsenMisra Member Posts: 8

    Hi @LeighL I think I wanna try this, adding the personal credit card as a bank account, then bulk edit to Shareholder Loan. and do it each month, as a workflow. What recommendations would you have and what should I look out for?

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