Category: Bookkeeping

If you’re running a small service-based business, chances are you’ve pulled money out of the business. Maybe it’s monthly, maybe it’s whenever cash builds up. But if you’re recording those owner draws the wrong way, you’re setting yourself up for headaches, both in your financials and with the IRS.

Here’s what most firm owners get wrong, what it does to your books, and how to fix it.

As a FreshBooks certified Collaborative Advisor, I see this happen far to often.

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1. What Is an Owner Draw—And What It’s Not

An owner draw is a distribution of equity. It’s not a business expense. It’s not payroll (unless you’re an S-Corp and paying yourself through W-2 wages). And it’s definitely not something that should show up on your profit and loss (P&L) statement.

But too often, that’s exactly what happens.

When owner draws are misclassified, say, coded to “Owner Salary,” “Contractor Pay,” or even just dumped into a generic expense bucket, they artificially lower your net income. That messes up your profitability metrics, confuses your tax picture, and throws off any benchmarking you do for valuation or growth planning.

Bottom line: If your draws are hitting the P&L, you’re doing it wrong.

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2. The Right Way to Record Owner Draws

The correct bookkeeping treatment depends on your entity structure.

Sole Proprietor or Single-Member LLC (Schedule C)

• You don’t pay yourself a salary.
• You take owner draws, which come out of equity.
• In QuickBooks or Xero, use an equity account like “Owner’s Draw” or “Owner Distributions.”
• These transactions should never hit the expense accounts or P&L.

S-Corp

• You’re required to pay yourself a reasonable salary as a W-2 wage.
• Additional distributions can be taken as owner draws, assuming the business has profits.
• W-2 wages go through payroll and are tax-deductible.
• Owner draws are not expenses and should be coded to an equity account, same as above.

Rule of thumb: Only payroll wages go to your P&L. Everything else belongs in equity.

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3. Why It Matters: Real Consequences of Bad Coding

Let’s say you draw $10K/month and mistakenly classify that as an expense. Here’s what you’ve just done:

• Inflated your overhead. You’ve artificially reduced your net income by $120K annually.
• Messed up your margin analysis. Your firm looks less profitable than it really is.
• Created tax confusion. Your books don’t match your tax return. That’s a flag.
• Thrown off your compensation benchmark. You’ll be comparing apples to oranges against industry data.
• Distorted EBITDA. If you’re ever planning to sell, you’ve just skewed your valuation metrics.

That’s a lot of pain for a simple misclassification.

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4. Cash Flow Still Matters, But Track It Separately

Just because draws don’t hit the P&L doesn’t mean they’re invisible. They show up on the statement of cash flows and your balance sheet.

In fact, tracking draws accurately can tell you a lot:

• Are you over-drawing relative to profit?
• Are you eating into retained earnings?
• Is your compensation mix (W-2 vs draw) tax-efficient?

These are key questions for financial advisors who want clean books, better decision-making, and an easier time at tax season.

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5. How to Clean Up the Mess

If your books are a mess right now, here’s a simple action plan:

1. Run a report of all transactions coded to anything like “owner pay,” “personal,” or “draw” in your P&L.
2. Reclassify them to an equity account on your balance sheet.
3. Create clear rules for how draws are tracked going forward.
4. Automate transfers from business to personal if you’re a sole prop, label and track every one.
5. Work with a bookkeeper who understands advisory firms. The nuances matter.

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Final Thought

You work hard to help clients make smarter decisions with their money. Don’t let a sloppy owner draw process undermine your own financials. When your books reflect reality, clean, accurate, and tax-compliant, you can actually use them to run a better business.

Owner draws aren’t complicated. But they are easy to get wrong. Do it right and your books will stay clean, your CPA will stay happy, and your firm will stay on track.

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Need help untangling your owner draw mess? At Becker & Ledger, we help advisors. Reach out and let’s get your books working for you, not against you.

Most bookkeepers are generalists. They understand restaurants, plumbers, retail shops, but RIA firms? That’s a different animal.

If your bookkeeper doesn’t understand the realities of a registered investment advisory (RIA) firm or wealth management practice, you could end up with bad data, missed deductions, or even compliance headaches that ripple into audits or regulatory scrutiny.

Here are five advisor-specific rules every bookkeeper handling an advisory firm must know and apply.

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1. Revenue Must Match Your Custodian Reports Exactly

For an advisory firm, revenue isn’t just a pile of deposits from various sources. It’s tightly tied to quarterly fee calculations from custodians like Schwab, Fidelity, or Pershing.

A bookkeeper not used to RIA businesses might miscode this revenue or treat advisor fee income like generic service income. Big mistake.

Why this matters: Your firm’s revenue records should precisely match your custodial payout reports, not estimates, not “close enough” numbers. Any difference can flag problems during audits, surprise the SEC, or create confusion when calculating KPIs like revenue per client.

Action:

• Reconcile revenue quarterly with custodial fee statements.
• Book revenue using the exact timing and amounts from custodian payouts, not just bank deposits.

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2. Direct vs. Pass-Through Expenses Must Be Split Clearly

Advisory firms often have expenses that serve both the firm and individual owners, such as insurance, tech subscriptions, or even travel costs.

A generalist bookkeeper might lump these together, missing the crucial distinction between firm-operating expenses and pass-through (personal or owner benefit) expenses that should hit distributions or shareholder loans, not P&L.

Why this matters:

• Misclassification here distorts the firm’s profitability and operating margins.
• This can directly impact firm valuation (if selling) or tax deductions (if audited).

Action:

• Require detailed coding of expenses, including owner draws or personal benefits passed through the firm.
• Separate legitimate firm-level expenses from those benefiting owners personally.

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3. Compensation Must Reflect Industry Structure (Not Payroll 101)

Advisory firms handle pay differently than standard small businesses. There’s typically a mix of W-2 wages for owners, guaranteed payments (for partnerships), and distributions, not just plain salary.

A generalist bookkeeper may not grasp how these fit together, or why the mix matters for tax planning and benchmarking.

Why this matters:

• Advisory firms live and die by clean owner compensation data—especially for valuation, growth benchmarking, and tax prep.
• Wrong categorization can mess up retirement plan contributions or cause IRS scrutiny on “reasonable compensation” rules for S-Corps.

Action:

• Maintain clean, separate records for W-2 wages, guaranteed payments, and equity distributions.
• Benchmark advisor pay against industry norms (FP Transitions, Schwab benchmarking reports) to ensure reasonableness.

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4. Marketing, Sponsorship, and Client Event Costs Need Special Handling (With Examples)

RIAs spend on relationship-building in ways that don’t fit the generic “marketing” category your average bookkeeper knows. These costs are often partially deductible (only 50%) depending on IRS rules, not fully deductible like digital ads or print marketing.

Common Examples Bookkeepers Must Handle Properly:

Google Ads, LinkedIn Ads, Website Development – Advertising Expense (fully deductible) 100%

Client Appreciation Dinner at a Local Steakhouse – Meals & Entertainment Expense 50% deductible

Golf Outing or Sporting Event Tickets for Clients – Entertainment (non-deductible or 50% in rare cases) Often 0%

Sponsoring a local charity event with firm branding – Advertising or Marketing – (fully deductible) 100%

Hosting a Retirement Planning Seminar (with food) – Split: Food under Meals (50%), room rental under Advertising/Marketing (100%)

Employee-Only Holiday Party – Employee Benefit Expense (fully deductible) 100%

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5. Custodial Fee Reimbursements and Client Credits Require Tracking

Sometimes RIAs cover trading costs, wire fees, or credit back certain charges to clients. These adjustments flow through custodial statements but rarely through the general ledger unless the bookkeeper knows to look for them.

Generalists miss these. Advisor-focused bookkeepers track them, so they match actual client reimbursements against firm expenses.

Why this matters:

• Missing these can distort margins or create a regulatory mismatch if client disclosures don’t square with books.
• SEC audits sometimes review these reimbursements for accuracy.

Action:

• Track and reconcile custodial fee reimbursements separately from standard expense lines.
• Ensure these adjustments match disclosures and client agreements.

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The Bottom Line

Most bookkeepers are not trained for the nuances of advisory firms. But you can’t afford sloppy financial records or tax errors in this business.

Ask your bookkeeper:

• “Do you reconcile to custodian reports?”
• “Do you separate owner expenses from firm expenses?”
• “Do you code advisor-specific costs the right way?”

If they blink, hesitate, or deflect—it’s time to get someone who understands your world.

Because in wealth management, clean books aren’t just good practice, they protect your firm’s value, your regulatory standing, and your peace of mind.

Your profit and loss (P&L) statement isn’t just a compliance document, it’s your financial scorecard. But if you misclassify even one transaction, that scorecard becomes unreliable. The result is that your P&L is off, so are your decisions.

Here’s the truth: small bookkeeping mistakes don’t stay small. They ripple through your business, showing up as skewed margins, flawed cash flow analysis, and inaccurate tax estimates. Below are essential, field-tested strategies to keep your books clean, accurate, and decision-ready.

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1. Start With a Chart of Accounts That Reflects Your Business Model

Service-based businesses don’t need inventory categories or retail sales tracking. What they do need is a tailored chart of accounts that clearly separates:

• Fee revenue (services, consulting, hourly, etc.)
  
• Owner draws/distributions
  
• Marketing and business development
  
• Technology stack (CRM, social platforms, email integrations)
  
• Professional services (compliance, legal, accounting)
  
• Continuing education and licensing
  

The mistake most advisors make? Using the default chart of accounts in FreshBooks or QuickBooks. Customize it. A generic structure leads to generic insights and misclassification.

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2. Treat Owner Expenses Like the IRS Will See Them

It’s easy to blur the lines between business and personal when you’re solo or small. But sloppiness here creates two problems:

• It invites audit risk.
  
• It distorts your operating margin.
  

If you pay for something personally that should be reimbursed (e.g., a business meal on your personal Amex), log it correctly as an owner contribution + business expense, not as income or a loan.

On the flip side, if you expense something borderline (e.g., a golf outing that wasn’t client-related), and your bookkeeper logs it under “Marketing,” you’ve artificially inflated your spend.

Build a policy and stick to it. Consistency beats creativity when it comes to classification.

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3. Know the Difference Between Cost of Goods Sold and Operating Expenses

This one trips up a lot of service-based businesses. You typically don’t have a Cost of Goods Sold (COGS) section because they don’t sell products. But some tools, like creative platforms or client portal software, can blur the line.

Here’s the rule of thumb:
If the expense scales directly with client count or revenue, consider treating it as COGS.
Otherwise, it goes in operating expenses.

Example:
A performance reporting tool that charges per household might reasonably belong in COGS, while a flat-fee compliance consultant does not.

Getting this wrong affects your gross margin, which influences how you benchmark yourself against peers or set pricing.

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4. Reconcile Monthly. Review Quarterly. Never Skip Either.

Reconciliation isn’t optional. Every account, bank, credit card, and payment processor should be reconciled monthly. Otherwise, small errors (double entries, uncategorized deposits) accumulate fast.

Then, do a full P&L review quarterly. Look for:

• Weird spikes or drops in categories.
  
• Expenses logged to “Ask My Accountant” or “Miscellaneous.”
  
• Negative numbers where they shouldn’t exist.
  

And don’t just glance, ask why. Fixing one miscategorized transaction now can prevent hours of correction later. More importantly, it can stop you from making a bad decision based on flawed data.

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5. Avoid Over-Automation Without Oversight

Bank feeds and rule-based categorization save time, but only when managed.

If your system auto-categorizes Stripe deposits as “Sales,” but part of that money is client reimbursements or pass-through fees, your revenue is overstated. The fix? Audit your rules every month and disable any that no longer apply.

Automation without review is just an automated error.

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The Bottom Line

Bookkeeping isn’t just about staying compliant—it’s about staying sharp. Many businesses live and die by data-driven decisions. A clean P&L helps you price services right, control costs, and grow profitably.

So don’t treat bookkeeping as a back-office chore. Treat it like the foundation of your strategy. Because the moment you misclassify a transaction, you stop managing your firm based on reality and start managing based on fiction.

When you’re ready to spend less time keeping the books, reach out.