Business Expenses vs Personal Expenses: What is the Difference and Why is it Important?
Written By Annette Hughes, Accounting Director at BEC CFO & CPA
Business expenses are costs to run your business. Some are easy to recognize – advertising, repairs to your rentals, materials for rehabs, office supplies, etc. There is no reason you would incur these expenses if you were not running a business.
Personal expenses are for your personal life. Some are groceries, clothing, haircuts, doggy daycare. If you worked for someone else, would they pay for these items?
What does it matter?
Recording personal expenses as business expenses can significantly distort the financial picture of your business. Here’s how:
Inflated Expenses: When personal expenses are incorrectly categorized as business expenses, it increases the total expenses reported by the business. This can make the business appear less profitable than it actually is.
Reduced Net Profit: When personal expenses are incorrectly included on the P&L the net income) will be artificially lowered. This could lead to misreporting of the actual financial health of the business.
Tax Implications: If personal expenses are claimed as business expenses, it will lead to incorrect tax filings. Overstating business expenses may result in paying less tax in the short term, however, if you are audited, the expenses will be disallowed and there will be penalties and interest.
Distorted Financial Ratios: Key financial ratios, will be skewed. These ratios are important for assessing the financial performance and health of your business. Misstated expenses can lead to incorrect management decisions and impact your ability to obtain loans.
Better information leads to better decisions.