B.3 Keeping Separate Personal and Business Bank Accounts, and Recording Owner’s Contributions and Draws

Good bookkeeping requires a business bank account that is used only for business transactions. This means that business owners really need to have at least two bank accounts, one used for personal transactions, and the other used for business transactions. 

If you use a credit card in your business be sure it is a dedicated credit card and you do not use it for any personal transactions and do not pay it directly from your personal bank account. 

Accidents happen though, and sometimes you will use the wrong card. If you accidentally use personal money for a business expense, that is recorded as an owner’s investment. If you accidentally take money from the business for a personal use, that is recorded as an owner’s draw. 

Owner’s Investments and Draws

When a business owner puts their own money into the business that is called a capital contribution of an owner’s investment. When the owner takes money out of the business that is called an owner’s draw. 

Best Practice: The business never pays directly for the personal expenses of the owner, and the owner never pays directly for the expenses of the business. 

The only transactions between a business owner’s personal bank account and their business bank account are contributions and draws. If the business is short on cash the owner makes a transfer from their personal account to the business account and records it on the books of the business as a capital contribution. If the business owner wants to take money from the business they make a transfer from the business account to the personal account and record it on the books of the business as an owner’s draw.

OK Practice: Sometimes the owner forgets, and accidentally uses personal money to pay a business expense or uses business money to pay a personal expense. They record the accidental personal payment of a business expense as a business expense and a capital contribution. They record the accidental business payment of a personal expense as an owner’s draw. 

Bad Practices: 

• There is only one bank account and it is used for business and personal transactions.
• There are business and personal bank accounts but the owner frequently deposits business receipts directly into their personal account and frequently pays personal expenses directly from the business account, and sometimes pays business expenses directly from the personal account, or using cash. 

If a business owner needs to take If you already have one bank account open a second for your business

• It does not need to be a “business” bank account, just a second bank account 
• Why? 
  
  • Helps with good / accurate records
  • You may need to grant access to your business accounts for purposes such as applying for credit, working with a bookkeeper, or complying with an audit of your business. If you put business and personal transactions in both accounts then you can not limit the access to just your business accounts, and others may be able to see your personal transactions. If you keep your business and personal transactions separate you will be able to maintain more privacy around your personal transactions.