Yes, your journal entry is mostly correct—but let’s refine it to avoid equity account confusion and IRS red flags. Here’s the simplified approach:

1. Debit Business Credit Card Expense: $150 (total bill).
2. Credit Business Checking: $100 (portion paid by the business).
3. Credit Shareholder Contribution (Equity): $50 (owner’s personal payment).

No need for “Personal Funds Clearing” or “Loans to Shareholder” accounts if the owner isn’t expecting repayment. Let’s break down the why and how with examples.

The Problem: Why Old Methods Create Chaos

Your client’s previous bookkeeper used:

• “Personal Funds Clearing”: A temporary holding account that complicates equity tracking.
• “Loans to Shareholder” (Asset): Incorrectly classifies owner contributions as receivables (risky if the owner isn’t loaning money).
• Missing Equity Accounts: Using only “Shareholder Distributions” skews equity balances and muddies audit trails.

Why This Matters:

• Tax Risks: Mixing loans and equity can trigger IRS scrutiny (e.g., reclassifying loans as taxable income).
• Equity Accuracy: Failing to track owner contributions distorts the business’s net worth.

The Fix: Clean Journal Entries (Step-by-Step)

Scenario: $150 Business CC Bill

• Business Pays: $100 from checking.
• Owner Pays: $50 personally.

Journal Entry:

Account	Debit	Credit
Credit Card Expense	$150
Business Checking Account		$100
Shareholder Contribution		$50

Key Notes:

• Shareholder Contribution: An equity account (not income!). This reflects the owner investing personal funds into the business.
• No “Clearing” Account Needed: Directly credit equity for simplicity.
• Avoid “Loans to Shareholder”: Only use this if the owner expects repayment (see “Loan vs. Equity” section below).

Loan vs. Equity: How to Decide

1. Owner Pays Personally & Doesn’t Want Repayment:
   • Use Shareholder Contribution (equity).
   • Example: Owner covers a $50 coffee shop bill for a client meeting.
2. Owner Pays Personally & Does Want Repayment:
   • Use Loan from Shareholder (liability).
   • Example: Owner lends the business $50k for equipment, with a formal repayment plan.

Mistake to Avoid: Never record owner contributions as a company asset (“Loans to Shareholder”). This implies the business is lending money to the owner—backwards!

Fixing Past Entries: Cleaning Up the Mess

If the previous bookkeeper used “Personal Funds Clearing” or misclassified loans:

1. Reverse Old Entries:
   • For a $50 expense previously coded to “Loans to Shareholder (Asset)”:
     Copy

     Debit: Loans to Shareholder (Asset) $50  
     Credit: Credit Card Expense          $50

2. Book Correct Entry:
   Copy

   Debit: Credit Card Expense       $50  
   Credit: Shareholder Contribution $50

Common Mistakes (And How to Avoid Them)

1. Using “Other Income” for Owner Payments:
   • Wrong: Credits “Other Income” (inflates revenue).
   • Right: Credits “Shareholder Contribution” (equity).
2. Overcomplicating with Clearing Accounts:
   • Wrong: Routing personal payments through “Clearing Accounts” creates unnecessary reconciliation work.
   • Right: Record directly to equity.
3. Ignoring Documentation:
   • Always attach a memo: “Owner paid $50 toward CC bill [Invoice #123] via personal funds. No repayment expected.”

Tax Implications: Keep It Clean

• Contributions (Equity): Not taxable to the business or owner.
• Loans (Liability): Must charge IRS-approved interest (AFR rates) to avoid “disguised equity” penalties.

Pro Tip: Have the owner sign a written note for loans (even small ones) to prove intent to repay.

QuickBooks Setup: Creating Missing Accounts

1. Add Shareholder Contribution Account:
   • Go to Lists > Chart of Accounts > New.
   • Type: Equity.
   • Name: “Owner Contributions” or “[Name] Investment”.
2. Retire Old Accounts:
   • Inactivate misleading accounts like “Personal Funds Clearing” to prevent future use.

Final Thoughts

Owner-paid expenses don’t need to be messy. Ditch the clearing accounts, use equity for true contributions, and document everything. Your future self (and your client’s CPA) will thank you!

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Stuck on tricky journal entries? Contact us for free QuickBooks templates, equity vs. loan guides, and 1:1 coaching.