Intercompany Expenses and Transfers

by Melissa
(Toronto ON Canada)

I need help in understanding how to record the following in QuickBooks (QB).

The owner has two companies, Company A & Company B. S/he has been using the Company A Visa to pay for Company B business expenses. Cheques have been issued to the owner personally AND payable to Company A but not for the exact amount of the receipts - rather it has been recorded as Petty Cash advances to Company A and the owner which go against receipts s/he has/will hand in.

At this time all the expenses have been entered using Write Cheque, bank being Petty Cash Owner's Name, and Expense Account (i.e. office supplied, meals etc.). When A cheque was issued to the owner or Company A, it was Expensed to Petty Cash Owner's name. This needs to be corrected as it should be going to Due To/From Company A (liability). My other challenge - I don't know which receipts are Company A credit card transactions.

Small business owners who are sloppy with paperwork should not operate corporations in my personal opinion. This business owner is begging the CRA for an audit ... and maybe a cardiac arrest. When it happens, s/he will likely have financial problems for years to come.

Let's list the issues so that all small business owners understand the consequences of their sloppy paperwork.

1. You are correct in saying ALL inter-company transactions must be run through the due/due from accounts. The inter-company account must also be reconciled BETWEEN the two companies. Small business owners forget that each corporation has a SEPARATE legal identity (which is probably why they chose this business structure to begin with) from them and that the funds are NOT "community funds". It is not the case that's what yours is mine!

2. Petty cash has certain procedures to follow for good management. Following the procedures should alleviate the petty cash advances and chit differences. These procedures include submitting petty cash vouchers with receipts attached and returning unused petty cash advance funds. Purchases made on the company credit card should not be recorded through petty cash. They should be recorded in a "credit card type" of account for each specific business card.

3. Amounts paid to the owner irregardless of whether the funds are for personal use or for the other company are seen as personal use funds. Withdrawal of corporate funds for personal use have tax consequences (and not in a good way) if the shareholder loan account is not in a credit position.

4. To claim an expense for a particular company, the receipt / bill / invoice must be in the company's name especially if you want to claim any input tax credits. Petty cash is meant to be used for occasional or small amounts only. It is not meant to be used for business purchases in general. Is there a reason the owner can't use a company debit or credit card to make these purchases?

5. Although this was not specially addressed in your write-up, all personal use components of business expenses must be removed and charged to the shareholder ... sometimes with taxable benefit consequences. The company vehicle is a common one but this also applies to businesses operating their business from their home.

If this were me, I'd break the exercise down into small doable parts. I will assume you are working in an open accounting period.

I'd start by reconciling the petty cash account in QB (hopefully it was setup as a bank type account). What this does is put a "c" in the Clear column for matched items while the reconciliation is in progress. This let's you see where your problem transactions are when you review the ledger and / or print a transaction report for the account. I like to customize and memorize a report so I can use it on a recurring basis. I do this by going to the chart of accounts and running a Quick Report for the account - in this case the petty cash account. I put in an appropriate title and sort it by payee. You may want to sort it differently to suit whatever problem you are trying to reconcile.

Next, I'd reclassify any Visa purchases to the Visa "credit card type" of account. (I'm assuming the Visa purchases were run through petty cash.) This will enable you to reconcile the account to the actual credit card statement.

Look at the cheques paid to "Company A" or the owner and edit them when necessary to code to the Visa account, the Petty Cash account or both if appropriate.

I'd tackle inter-company transactions next by making the known inter-company correcting journal entries (or directly edit transactions) charging any entries that should have gone into the inter-company account. None of Company A expenses should hit the Company B P&L. If you have the Accountant's version of QB, you may be able to do this using the client data review feature.

I'd probably go do something I like for a break and then dig into the mismatches next. Any mismatches or unaccounted funds would be charged as a withdrawal / shareholder loan. I'd probably consider charging all withdrawals made in the owner's name to the shareholder loan account so I didn't have to spend time reconciling the mismatched receipts and/or unused petty cash funds not returned to petty cash. Once I had accounted for all the petty cash receipts, I'd make a journal entry to the shareholder's account to clear these receipts as "already reimbursed".

Setup a clearing / suspense account for receipts where the appropriate company is not known or apparent. Code them to this account then print / send the report to owner ... or sit down with the owner to ... asking the owner to determine which company the purchase was for. When the owner gets back to you, edit the transactions to book to the appropriate spot. IF the owner doesn't get back to you and it's time to close the books for the year, I'd make sure the accountant is aware of the account and the problem.

Politely ask the owner on a "go-forward" basis if they could write the pertinent company on the receipts or credit card statement. Gently (at first) explain why the best practice procedure is to not purchase Company A expenses through Company B (the least of which is the additional bookkeeping and accounting fees this method causes due to the inter-company tracking requirements)... and perhaps it would be better to use the appropriate business debit or business credit card for purchases. This may require having the cashier to ring through three separate transactions - one for Company A,one for Company B and one for personal purchases. Not doing this could create the dreaded "TAX" problems. (Think of the H&R Block commercials to get a feel for what kind of health problem this is!)



My advice Melissa ... get a nice hot cup of tea, take a few deep breaths then dive into this dog's breakfast. Handle it one receipt and one entry at a time. While this will be time consuming, if the books are not closed and the owner cooperates (and why wouldn't s/he as you are trying to keep him/her out of trouble with the CRA), it should be "fixable". Stop every once in a while to do some deep breathing so you don't take on the owner's stress of poor record keeping habits. Keep the line of communications open with the owner. Post back in the "Comments" section below if you have more questions.