We have 5 companies that we run. The companies are all independent from each other. We outsource the payroll for all the companies. The payroll bill is paid by one company and the other companies reimburse this company for there portion of payroll. Is it correct for me to recognize this as revenue in the company that pays the payroll bill. If not, please advise
Inter Company Payroll
Answers
You wouldn't recognize revenue no, but I would split the cost of the bill to the IC accounts when you pay it
IE:
Payroll Processing: 2,000.00
Credit cash for the whole 2,000 of course then
Debit: Company A
Company B (IC)
Company C (IC)
I agree that you would not recognize revenue but set up a contra expense account where the pass-through chargeout expenses would offset the incoming payroll fee expense. I presume you are using a reasonable allocation key, like headcount, to allocate the total cost among the companies.
If this was not a pass-through type of expense from a third party but some service that one company is providing to the others, it might then be appropriate to charge a mark-up on the base expense.
Would it be revenue if the payroll company charged a small mark up "for admin services"?
Hi Len,
Generally, if it's BILLING from a profit center, meaning the service is a core profit-generating function, then credit a Revenue account. If it's ALLOCATION from a cost center then credit a contra expense Allocation account, as seems to be the case here.
However, if it's an intercompany loan, even if pass-through, I would say use different accounts for intercompany interest income and expense.
Just a note.....
The mark-up is usually the source of "balking" by subs. The bottom line is, because of efficiency and size, the overall cost to the parent company AND to the individual subs should be lower than if the individual companies were to do it themselves or subcontract the process. If the parent company is "saving" because of the structure, it should share those savings down the line.
What is the basis for the mark up? Do you add any value to the process? I don't agree that the savings should be shared just because a contract was negotiated. Revenue or a mark up should be for services only. If the companies are truly independent of each other, the payroll company could bill each company independently.
Any inter-company profit would be eliminated upon consolidation in any event.
Thank you everyone for your answers and suggestions.
I think you need to distinguish between intercompany charges on a legal entity or tax basis that should conform to arm's length principles vs.
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Accounting