Three : Business And Personal Funds
Keep personal and business funds separate.
A sole trader will most likely withdraw funds from the business account for personal use (drawings). This can be done in place of paying themselves a salary.
A good practice is to transfer one amount on a regular basis, such as once a week, from the business account into the personal account. The personal account is then used to buy the groceries, books, toys etc.
The business account can remain nice and tidy with only business transactions and the one regular drawing amount. This will also avoid the temptation to allocate a private expense to the business.
A business owner needs to know and recognize what type of expenses can be claimed (to reduce tax), and what can’t be.
- An expense that is directly related to the operation of the business and towards producing income is usually tax deductible.
- An expense that is for the owner’s personal pleasure is not.
- Mixing personal and business does not mean a full claim for business can be made. This includes taking a client out for lunch or buying them gifts.
If in doubt about whether or not to claim an expense, contact your accountant or tax department.
Sometimes the owner will use their personal funds for business purchases. These can and should be brought into the business bookkeeping system through bookkeeping journals so that all the expenses are being claimed and so reducing the amount of tax to pay at the end of the year.