Accounting question...any help would be great!

Question

Michelle and Michael Fisher, who operate a dairy farm, also operate a part-time catering business from their home. They purchase the groceries for their business at a wholesale outlet and stock the foods in their family refrigerator and freezer. All six members of the Fisher family eat the groceries, and the family uses the catering van to run other errands. When cash is received from catering jobs, it is placed in the family bank account, along with funds from the sale of dairy products. At the end of the month, the Fishers have been having a few problems reconciling their bank account. Now they discover that their last three years of tax returns are being audited by the government. They have come to you for assistance. Outline several steps you think this family could take to assist them with their financial management.

Thanks so much for your help!

Answer 1

First they need to expect to get hammered by the IRS agent on the Audit.  They are mixing the family and business expenses to the point that they will have a very difficult time proving any cost deductions on the schedule C.

They need to have a separate company bank account and deposit those funds received there and use those funds to purchase food for catering.  They should consider a seperate refrigerator/freezer as well.    The catering van should be used only in the business, but if that isn't practical they should track mileage.  

They have too many activities in the bank account.  Period.  They need to seperate and keep better track of the inflows and outflows of the cash.