Why it’s Important to Track Inter-entity Loans
Do you own more than one business? If you have related entities that pay for expenses on behalf of the other businesses you own, getting the bookkeeping and accountancy right for all inter-entity loans is essential to accurate financial reporting.
It’s important to enter the same transaction into the accounting file of both entities to track who owes who money and to ensure the BASs are correct. It can be easy to mix up which expenses belong to which entity, and it’s also easy to get the GST wrong – either missing it entirely or duplicating GST claims.
On The Money Bookkeepers Melbourne are highly experienced at looking after related entities and providing financial reports that show you the true picture of your inter-entity transactions. We’ll work with you to give you reports that assist you in tracking assets and liabilities and making informed business decisions.
What are Related Entities?
Related entities arise when you move from being a sole trader to operating a company, when the same directors run several businesses, or when separate entities are controlled by another entity. These are sometimes called connected entities by the Australian Taxation Office.
A typical example occurs when you move from being a sole trader to a company. There is often a crossover period during which the sole trader pays for setup expenses that belong to the company. The company may also pay for expenses on behalf of the sole trader; for example, when the tax return is completed for both entities, it could be the company that pays the tax bill for both. It’s also not uncommon that customers continue to pay into the sole trader bank account instead of the new company bank account. In this example, getting the income and expenses allocated correctly for both GST and tax return purposes is vital, as different tax rates will apply for each entity. The transition period may involve payments and receipts for both entities and may take many months before the sole trader operations are complete.
Another example is when the same directors operate separate businesses; it’s common for them to transfer funds between companies, especially in the start-up phase of a new business. Once that business is established, it usually pays the loan back to the other entity.
Tracking Inter-entity Loans
Tracking the transactions against each entity means your GST will be correct in all related entities, and the tax returns will reflect real income and expenses. It also makes tracking who owes who money that much easier!
You’ll need to check your chart of accounts and ensure you have the relevant general ledger asset and liability accounts for each entity affected by the inter-entity transactions.
If Company A pays for expenses on behalf of B, C and D, you’ll need separate asset accounts for B, C and D to track the amount loaned to each entity. The loan accounts in the accounting files of the other entities will be liabilities, showing how much each entity owes to Company A.
If Company A pays for an expense on behalf of Company B, it is Company B that should claim the GST. Company A’s transaction should be recorded as BAS excluded. You can’t claim the GST for both companies as the expense belongs only to Company B. Company A is simply making the payment on behalf of Company B.
Let’s say Company A pays a marketing consultancy bill for Company B. The bank feed transaction contact should be the marketing company, but the account allocation will be Company B Loan (asset), and it will be BAS excluded.
In Company B’s accounting file, you should have a Company A Loan account (liability) set up with payments enabled. The bill should be entered as usual, including GST if applicable, and then paid from the Company A Loan liability account on the same date that the bill was paid by Company A.
This way, the expense is included in the BAS of Company B but is excluded from Company A’s BAS.
At On The Money Melbourne Bookkeeping Services, we recommend doing monthly reconciliations for reporting accuracy. It’s simpler to keep track of inter-entity transactions on a regular basis rather than trying to capture everything at the end of the financial year. It also helps ensure that GST reporting is accurate for each entity. For example, if a customer has paid an invoice to the wrong entity, that deposit must be taken up via an inter-entity loan transaction in the books of the company that issued the invoice so that it can be reported on their BAS.
A common error with inter-entity loans is that Company B, in our example, makes payments towards the amount loaned from Company A, but the transactions are allocated to income in Company A rather than to the loan account as a repayment. This means Company A’s income is incorrectly overstated, and the loan amount does not reflect the correct balance owed.
If the transactions for each entity are not entered into both relevant accounting files immediately, it’s less efficient and more prone to errors when you have to backtrack and reconcile the transactions for both parties. This is particularly true when there are many transfers to and from entities and multiple bank accounts are used.
Always use clear notations in your banking transactions to show which entity the payment belongs to. For example, in Xero, you can set up bank rules to make transfers between accounts quick to allocate. If you’ve used consistent notations, Xero will correctly apply the bank rules.
Examples of Inter-entity Loans on Financial Reports
When you run reports for both entities, you should see the same amount reflected on the same date as asset and liability, respectively.
To check the entries for each entity, run reports such as the account transaction report in Xero and compare the line items and total value of the loan account in each entity’s file. This way, you’ll see if any transactions are missing or duplicated.
The balance sheet of ABC Unit Trust shows a loan to GHI PTY Ltd for $305,000 on 30 June as an asset.
The balance sheet of GHI Pty Ltd shows the loan from ABC Unit Trust as a liability, with the same balance of $305,000 on the same date of 30 June.
Integrate the Bookkeeping for All your Business Entities with OTM Bookkeepers Melbourne
Inter-entity bookkeeping and accountancy are easy to manage when you have the same bookkeeper for each entity, but when you have different bookkeepers for each entity, it can be trickier. You’re relying on extracted reports, and it can be more time-consuming to address missing or duplicated transactions. If you have multiple business entities, consider integrating the bookkeeping to being looked after by one provider, so it’s easier to track and report the inter-entity transactions. It is more efficient when the same bookkeeper has access to the accounting software files for all related entities.
If you have several businesses and you’re not sure that your inter-entity loans are being tracked correctly, book a time for a review and On The Money Melbourne Bookkeeping Services can quickly assess whether the transactions match up in each account. We’ll also let you know if the GST has been claimed correctly for each entity and whether your financial reports show the correct balances for all the inter-entity loans.