Company money, kept apart
Company money lives in company accounts. Mixing it breaks the books, weakens the tax return and puts the liability shield at risk.
Northwind's first entry is the founders paying $60,000 into the company's bank account for their shares. That entry is only possible because the account is the company's, in its legal name and under its EIN. Before then there's nowhere for the company's money to be.
The founders pay $60,000 into the company's bank account for their shares.
| Account | Debit | Credit |
|---|---|---|
| 1000Cash — operating | 60,000.00 | |
| 3000Common stock | 60,000.00 | |
| Balanced | 60,000.00 | 60,000.00 |
Cash arrived, so cash is debited. It did not arrive from a customer and it is not a loan — the founders now hold a claim on the company, and that claim is equity.
JE-1: the founders buy their shares.
What commingling breaks
Commingling is running company money and personal money through the same account or card. It looks harmless at the start, when the founder's card is the only one that works. It breaks three things.
Every crossing gets an entry
Separation doesn't mean money never crosses between a founder and the company. It means every crossing is a recorded transaction, with a document behind it and an entry that says what it was.
Northwind's board declared a $500 dividend on September 30. It isn't an expense, and it doesn't come out of a founder's card: it's a board decision, recorded as a liability on the day it's declared and paid from the company account in October.
The board declares a $500 dividend to the founders, payable on October 15.
| Account | Debit | Credit |
|---|---|---|
| 3200Dividends | 500.00 | |
| 2500Dividends payable | 500.00 | |
| Balanced | 500.00 | 500.00 |
JE-14: money to the owners, through the front door.
Wrong
The founder puts the subscription on a personal card and, at year end, the bookkeeper is asked to "add it in somewhere."
Right
The software subscription goes on the company card. When a founder has to use a personal card, they submit the receipt and the company reimburses them from its own account.
The fix isn't to stop founders spending. Give the spending a channel: a company card, a receipt, and a reimbursement that's recorded.
The setup
The company's money lives in the company's accounts. Anything that crosses to or from a founder is a transaction, with a document and an entry.
Where this goes next: the bank reconciliation in Closing the month is the monthly proof that company money stayed company money. Paying through the right channel is payment runs and fraud controls, and putting more money in is the ways to raise startup capital.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- IRS guidance
- IRS Pub. 583 (12/2024), Recording Business Transactions — Business checkbook (opens in a new tab)Open a business account, and keep it separateFree to read
- Background reading — not an authority
- Wikipedia, “Piercing the corporate veil” (opens in a new tab)Piercing the corporate veilFree to read
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- ComminglingRunning company and personal money through the same account or card, so the books can no longer show whose a transaction was. The fix is a separate business account and a recorded entry — a reimbursement, a loan from the founder or a contribution — for every crossing
- ReconciliationComparing our record to an external party's
- Audit trailThe immutable record of every state change
- EvidenceDocumentation supporting a recorded amount
- EquityThe residual interest in the assets that remains after deducting liabilities (FASB CON 8 ¶E61)
- DividendA distribution of earnings to shareholders, declared by the board — a liability from the declaration date and a reduction of retained earnings, never an expense
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Cash & treasuryCash is the only balance sheet account where an independent third party, the bank, says what the balance should be. That makes it the easiest account to verify and the one where a break hurts most.
- Journal entry for issuing common stockWhen shares are issued for cash, debit Cash for the proceeds, credit Common stock for the par value of the shares, and credit Additional paid-in capital for everything above par.
- Journal entry for credit card expensesFor each company card charge, debit the expense it paid for and credit Credit card payable. When the statement is paid, debit Credit card payable and credit Cash.
- Journal entry for dividendsWhen dividends are declared, debit Dividends declared (or Retained earnings) and credit Dividends payable. When paid, debit Dividends payable and credit Cash. At year-end, close Dividends declared to Retained earnings.
- Company cards and receipts: coding, matching, reconcilingCompany cards without the month-end receipt chase: how to code card spend, match receipts, handle missing ones and reconcile the card to its statement.
- Employee expense reimbursements and accountable plansHow to reimburse employees tax-free under an IRS accountable plan: business purpose, timely receipts, excess returned, mileage and sales tax on receipts.
- Bank reconciliation step by stepMatch the bank statement to the books, clear deposits in transit and outstanding checks, book the fees, and reach a $0.00 difference every month.