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My Business Racked Up Personal Credit Card Debt. Now What?

My Business Racked Up Personal Credit Card Debt. Now What?

| 2 min read

So you used a personal credit card to pay for business expenses. Whether a one-time event or an ongoing practice, if you charge business purchases to your personal credit card, you’ll have a bit of monetary housekeeping to do.

Personal Perks vs. Business Benefits

The fact is, many small business owners prefer to use a personal credit card for company purchases because their card is linked to a great rewards program. Quite often, these programs are superior to anything offered by the typical business card. As long as you follow proper bookkeeping practices in allocating and accounting for your company expenses, it’s perfectly legitimate to rack up travel points and other perks on your personal card to benefit your business activities. 

Personal credit cards also offer the Ill_just_put_it_on_my_personal_credit_card-1.jpgadded bonus of providing consumers with a certain level of legislated protection from unjustified hikes in annual fees and interest rates. Business cards do not. But charge cards that are linked directly to your company do provide their own set of advantages for the small business owner. These include higher credit limits, and the opportunity to have multiple user cards issued to key employees. Company credit cards can also make reconciling your business bookkeeping accounts a much more streamlined process.

Whether you choose to use a personal or business credit card for your company expenditures, the vital point is understanding how and when to best introduce those expenditures into your bookkeeping system.

The “How” Factor

When you use a business credit card, your company pays all relevant charges directly to the credit card company. In this case, only the card issuer need be set up as a vendor in your bookkeeping system. If, on the other hand, you use a personal credit card for business expenses, and you’re the one paying the credit card company, you’ll have to set yourself up as a vendor and include appropriate expense references with your entries, in order to get reimbursed.

In either case, entering the credit card charges as vendor invoices, by debiting the various expense accounts involved - such as office supplies for example, will result in a correlating credit to your accounts payable balance. When you issue payment to either the credit card company or to yourself, you’ll simply be debiting accounts payable, and crediting your business bank account for the same amount.

The “When” Factor

The two most common ways to account for credit card expenses and payments in your bookkeeping system are: a) working from the credit card statement as a single invoice when you make your monthly payment, and b) entering each expense as an invoice from its receipt at the time the transaction occurs. While the second method may seem more time-consuming at first glance, it often ends up being far less work in the long run. This is especially true if you don’t make a habit of paying off your credit card balance in full each month.

Avoid problems mixing up personal and business credit cards with outsourced bookkeeping services.

If you enter the various charges on your credit card statement as a single invoice, and you only pay a portion of your credit card balance, you’re likely to end up with a very messy attempt at connecting this payment to the appropriate expenses. This type of allocation problem only gets compounded with every new statement that’s entered, and every partial payment that’s made. By waiting to debit all of your monthly charges at once, you’re also likely to inherit a confusing collection of unrecorded expenses at the end of the year.

But if you debit each business expense to the appropriate account as it’s charged, you’ll always know exactly how much you owe and, come year-end, you won’t be left with an unknown credit card balance to account for. Just don’t make the mistake of mixing personal and business expenses on the same card. Separating these costs at the source will not only significantly increase the likelihood that your expenses will be entered, reconciled, and paid in an accurate and timely manner, it will also make it much easier for you and your accountant to spot potential business deductions, and avoid potential headaches, when tax time rolls around.

Learn 8 Reasons you should Avoid Year-End Bookkeeping!

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