Wrong Account Corrections

by Wendy
(Canada)

I work for two separate companies (and it is important that they are kept separate) that are owned by the same person. However, the owner continually uses the wrong debit card/credit card to make purchases for the other business or withdraws money from one company's account and uses that money to pay for expenses of the other business. For example:

Buys paint for company A with company B's credit card.

Withdraws $400 from company B and purchases $350 worth of supplies for company A and pockets the change.

How can I fix this on the books? Thanks.

Hi Wendy,

I will assume the business structure of both companies is one of incorporation.

You need to create an account in both companies to handle the inter-company transactions. It can be a current asset or current liability account. (I usually choose whatever I think is most likely going to be the account balance - assets if likely to be a receivable and liability if likely to be a payable.) Call it something like "Due to/from Company A" or Due from (to) Company B.

Once a month, reconcile both inter-company accounts and physically pay (as in a banking transaction not a journal entry) the amounts outstanding between the two companies just like you would with any of your other suppliers.

Ensure any funds pocketed by the owner are charged to the Shareholder's Loan account of the appropriate company .... and hopefully this loan account is in a credit position.

Continue to try and educate the owner why s/he wants to keep each business's transactions and funding separate. If the owner feels it's not important (which is implicit in the transactions s/he generates) why did s/he bother to go through all the additional expense of creating and maintaining two separate companies. These types of transactions also increase the administrative burden for both companies. I liken it to having a mission statement that says, "Let our company policy be just toss profit out the window whenever possible!"

Small business owners need to get all their ducks in a row because during an audit ... if it looks a duck, walks like a duck and sounds like a duck, it is a duck.