Separate business and personal finances

When business and personal transactions share an account, every line on the statement has to be sorted before the books can be trusted. Keeping them apart from the start removes most of that work.

business.gov.au says a business bank account makes it easier to:

• track the business's income and expenses
• control the business's income and expenses
• show the business's finances clearly separate from your personal finances
• give your accountant the information they need.

The ATO adds that accurate and complete records help you monitor cash flow, keep track of money you owe and money owed to you, and know whether the business is running at a profit or a loss. Personal transactions mixed through the books blur every one of those.

An account used only for the business means its statements show business transactions alone, which makes the books quicker to keep. business.gov.au calls a separate account a good idea for a sole trader.

What you need to open one depends on the bank and the type of business. business.gov.au says it may include the business name, the primary business address, the ABN, the industry type and identification for all owners or partners.

Once the account is open, run every business receipt and payment through it, and nothing else.

• Have customers pay into the business account, and bank cash takings there.
• Pay suppliers and business bills from it, using a card linked to that account.
• Set up direct debits for regular business bills. business.gov.au notes that automatic payments for regular bills reduce the risk of errors.
• Use online banking to see every transaction, which makes each one easier to account for.

Keep personal costs on a personal account and card, even small ones. A single personal purchase on the business card means a correction in the books.

If you use one account for personal and business banking, business.gov.au says you must clearly identify any personal payments or expenses in your cash book. In practice, that means marking each personal transaction as you record it, so it never lands in a business expense account.

Only the business column counts as the business's income and expenses. The personal items stay marked in the cash book so they are kept out of the business figures. A shared account can work, but it takes more care every month, which is a good reason to move to a separate account as the business grows.

Some costs are genuinely shared, such as a phone plan or internet connection used for both work and home. The ATO's record-keeping rules say that where expenses relate to both business and personal use, you need clear documents that show the business portion. Its record-keeping tips add that the business portion should be worked out and recorded accurately.

Keep whatever shows how you arrived at the split, such as an itemised bill or a usage record, with the entry in your books. Your accountant can advise on how the business portion should be worked out in your situation.

Moving money between you and the business is normal. What matters is recording it for what it is.

• Personal costs paid from the business account: business.gov.au calls these drawings. Record them, and any money you transfer to yourself, apart from business expenses, and ask your accountant how they are treated for your business structure.
• Money you put in: if you pay your own money into the business, record it as money from you, not as a sale. Your accountant can advise how it should be classified.
• Business costs you pay personally: if you pay a business expense with a personal card, keep the receipt and record the expense in the books as paid by you, so it can be repaid or accounted for.

• Move money to yourself by transfer from the business account to your personal account, rather than paying personal bills from the business account.
• Keep receipts for every business expense, whichever account paid it.
• Reconcile the business account regularly, so a personal item that slips through is caught while it is recent.
• Follow the ATO's tip to check for mistakes when things don't add up, and move any personal item you find to the right place in the books.