How should I keep the books when one owner runs more than one business, and one of them pays costs that belong to another?

What does keeping the businesses' books apart mean day to day?

IRS Publication 583 says that if you are in more than one business, you should keep a complete and separate set of records for each business. Whether your businesses should share one set of books is covered in the question on that choice; where they already keep separate books, four habits keep them apart day to day:

• Each business pays its own bills from its own bank account and cards wherever it can.
• Every transaction is recorded in the books of the business whose account it went through, even when the cost belongs to another.
• Each set of books has an account for each sister business, such as Due from Pier Catering or Due to Harbor Bakery, and every amount between the businesses passes through it.
• Each cross-business item is entered on both sets of books at once, from the same document.

Whether a balance between the businesses is a debt one legally owes the other, and whether that turns on how each is organized, is a question for your attorney or tax preparer. Keep the Due from and Due to accounts either way, because they hold each business's costs in its own books.

Why isn't a payment for another business's bill the payer's expense?

Because the cost belongs to the business it was for — part of that business's costs of doing business — whichever business was invoiced or paid. The SEC's Staff Accounting Bulletin Topic 1, written for financial statements filed with the SEC, says that, in general, the SEC staff believes a registrant's historical income statements should reflect all of its costs of doing business, and that in specific situations the staff has required a subsidiary to revise its statements to include expenses its parent incurred on its behalf. The same reasoning holds between sister businesses.

In the payer's books, the payment is an amount due from the other business. PwC's guide section on related-party presentation, summarizing U.S. GAAP, says a reporting entity should separately identify receivables from officers, employees or affiliated entities on its balance sheet, not under a general heading such as accounts receivable. So the payer records the amount in its Due from account for that business, not among customer receivables.

The common mistake is letting the payment land as an expense of the business whose account it left, often while categorizing bank transactions in bulk. That overstates the payer's costs and understates the other's, so both sets of books are wrong at once.

The entries depend on whose cost it is and whose money paid it:

What entries go on each set of books when one business pays another's bill?

Suppose Pier Catering LLC receives a 1,240.00 van repair invoice, addressed to it, on March 2. Harbor Bakery LLC, which has the same owner, pays it from Harbor's account on March 5, and Pier Catering repays Harbor on March 31. On accrual-basis books, Pier Catering records:

Harbor Bakery records:

From March 5 until March 31, each side shows 1,240.00 between them; after the repayment both balances are zero. The repair reaches Pier Catering's expenses once; Harbor never records an expense, and the repayment is not income to Harbor.

The accounting basis changes when Pier Catering records the cost. On cash-basis books, Pier Catering does not record the invoice when it arrives; it records the cost on March 5, when Harbor pays it, so that its Due to Harbor Bakery matches Harbor's Due from Pier Catering from the same date:

If Pier Catering's system already holds the invoice as an unpaid bill, skip the Mar 5 entry above and post Harbor's payment against the bill, as in the accrual entries' Mar 5 lines, so the repair is counted once and the bill closed.

Harbor's entries are the same on either basis. If the payment and the repayment fall in different tax years, ask Pier Catering's tax preparer which date the cost counts as paid. On either basis, enter both sides from the same invoice, with the same date, amount and reference, so they correspond.

How do I split a cost the businesses genuinely share?

Charge each business directly for anything you can trace to it, and allocate only what is common. The SEC's Topic 1 bulletin takes the same order: it recognizes that where specific identification of expenses is not practicable, a reasonable method of allocating common expenses must be chosen.

AccountingTools' definition of an allocation base describes it as a quantity, such as machine hours used, kilowatt hours consumed or square footage occupied, and says the base should be a cause, or driver, of the cost being allocated. It adds that a good indicator is when changes in the base roughly correspond to changes in the actual cost.

Then keep the basis. AccountingTools' definition of the consistency principle says that once you adopt an accounting principle or method, you should continue to follow it consistently in future accounting periods, and fully document a change's effects. The definition warns that the principle is most frequently ignored by managers trying to report more revenue or profits than the accounting standards strictly allow. For an allocation basis, change only when a new measurement reflects use better, such as after one business takes more space, never to reach a preferred split. Record the date and reason for any change.

Write the basis down with the entry. For statements filed with it, the SEC staff has required an explanation of the allocation method used. The small-business equivalent is a note on each allocation entry naming the basis, the measurements and when they were taken.

How would a shared cleaning contract be split?

Harbor Bakery holds the cleaning contract for a building both businesses use and pays the 1,500.00 monthly invoice. The written basis is floor area: Harbor occupies 1,800 square feet and Pier Catering 1,200, 3,000 in all. The calculation is:

• Pier Catering. Its share is 1,200 ÷ 3,000 = 40%, and 40% of 1,500.00 is 600.00.
• Harbor Bakery. Its share is 1,800 ÷ 3,000 = 60%, and 60% of 1,500.00 is 900.00.
• Check. The shares add back to the invoice: 600.00 + 900.00 = 1,500.00.

Harbor Bakery records, when it pays the invoice:

Pier Catering records, the same day:

On accrual-basis books, where Harbor enters the invoice when it arrives, both businesses make the same split on that date, with Accounts payable in place of Cash in Harbor's entry. Harbor's entry carries the invoice, its bank record of the payment and the calculation; Pier Catering's carries a copy of the invoice, the same calculation and a reference to Harbor's entry, and the written arrangement setting floor area as the basis is kept with both.

What paperwork supports the payment and the split?

IRS Publication 583 says supporting documents include paid bills, invoices, receipts and canceled checks, and that your supporting documents should show the amount paid and that the amount was for a business expense. It also says proof of payment of an amount, by itself, does not establish that you are entitled to a tax deduction, and that you should also keep other documents, such as invoices, to show that you incurred the cost. The same publication says specific recordkeeping rules apply to travel, transportation and gift expenses (see Publication 463) and that you must keep specific employment tax records (see Publication 15); where a cross-business cost is one of these, ask your tax preparer what those records must show.

When one business pays for another, the proof of payment sits in the payer's bank records while the invoice shows what was bought; if it names the paying business, note on both entries which business the cost was for. Then link the records:

• The vendor's invoice goes with the entry of the business the cost was for, and a copy goes with the payer's entry.
• The payer's bank or card record of the payment is referenced on both entries.
• For a split, the calculation, with its basis, measurements, percentages and amounts, goes with both entries.
• For a standing arrangement, the written arrangement is kept with both sets of records.

Publication 583 does not address payments, cost splits or written arrangements between commonly owned businesses; the list above is a record-keeping practice for linking payment, invoice and the business bearing the cost, not something the publication prescribes. A state tax agency's record rules are a separate question. Which business may deduct a cost, and how the arrangement is treated for tax, are for your tax preparer to decide.

How and when should the balance between the businesses be settled?

Set the terms when the balance first arises. Among the related-party disclosures U.S. GAAP lists in ASC 850-10-50-1, as PwC's guide section on related-party disclosures quotes it, are amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement. Your terms should say when the owing business repays, such as by the end of the following month, and how.

Each way of clearing the balance leaves a different position on the two sets of books:

Whether the resulting amount with you is a loan or equity is covered in the question on putting your own money into a business; its tax effect is for your preparer.

If each business owes the other, you can offset the two amounts, but record the offset as an entry on both sets of books, naming the items it clears. Netting informally, by skipping entries, leaves neither ledger showing the position and nothing to check.

A balance that only grows harms both businesses: one is financing the other without terms, the payer carries an asset it may not collect, and soon nobody can say what the balance comprises. Review the balance every period against its terms, and ask your tax preparer before writing off or forgiving any of it.

How do I prove at period end that both sets of books agree?

Compare the two sides at every period end. For SEC filings with no interest charged on intercompany debt, the SEC's Topic 1 bulletin describes, as a disclosure, a listing of intercompany transactions for each period reconciled to the intercompany balances. Built from both sets of books and compared, such a listing becomes a check for sister businesses:

1. Run each business's account for the other at the same date, such as Harbor's Due from Pier Catering and Pier Catering's Due to Harbor Bakery.
2. Confirm they are equal and opposite: if Harbor shows 600.00 due from Pier Catering, Pier Catering must show 600.00 due to Harbor.
3. List each side's items for the period, including payments, allocations and repayments, and match them one to one by date, amount and reference.
4. Go through each business's bank and card statements, pulled from your own bank access, and its expense entries for the period, and pick out every payment for the other business's costs; confirm each appears on both lists.
5. Tie every payment and repayment to the statement of the account it went through, pulled from your own bank access rather than from either set of books.
6. Correct any difference in the set of books that is wrong, from the underlying document, and file the comparison with the period's records.

Causes of a difference include the following:

• An item was entered in one set of books and not the other.
• The two sides dated an item on opposite sides of the period end.
• The amounts differ, often because a split was applied on one side only.
• The payer recorded the cost as its own expense instead of as an amount due; unless the other business recorded its side, only step 4 finds this.

If someone else keeps either set of books, do the comparison yourself. Reconciling other balance-sheet accounts at close is a separate routine.

What changes when one business routinely pays rent, insurance or staff for all of them?

An occasional payment for another business is handled transaction by transaction, as in the repair example. When one business routinely pays rent, insurance or payroll that benefits all of them, bill-by-bill handling lets the balance drift, so put a standing arrangement in writing. It should set out:

• The costs it covers
• The allocation basis for each cost, how it is measured and when it is re-measured
• A monthly cross-charge entry on both sets of books, with its calculation attached
• The settlement terms: when the owing business repays, and how
• Who records the entries, and your own comparison of both balances each period

Arrangements that carry staff costs across businesses need professional input before you set them up: which business employs the staff, and what each business's payroll records must show, are not questions a bookkeeping rule can settle.

Run the routine monthly: record each cross-charge when it happens, post the standing cross-charge, compare the two balances and settle on the agreed terms. Once a year, re-measure each basis and update the written arrangement.

What if one business owns the other, or I pay a business's bill myself?

If one business owns the other, each business's own books are kept exactly as above. AccountingTools' definition of intercompany eliminations says they are used to remove from the financial statements of a group of companies any transactions involving dealings between the companies in the group, so the Due from and Due to balances are eliminated in any combined presentation. How to prepare that presentation is a separate question.

If you pay a business's bill from your own money, no balance between the businesses arises: the amount is between you and the business whose cost it is, which records the cost. Whether the money is a loan or your equity is covered in the question on putting your own money into a business.