Related Companies Owe Each Other Money: Reconcile Both Sides of the Ledger

Due to and due from should describe real transactions

Owners with several companies often see an intercompany account grow without a clear explanation. One company pays a vendor for another, payroll is charged to the wrong bank, or cash is moved to cover a temporary shortage. Each transaction needs its own purpose and supporting record. IRS recordkeeping guidance emphasizes records that explain income and expenses; a net intercompany balance alone does not explain what created it.

Create a transaction-level schedule showing paying entity, benefiting entity, date, amount, vendor or recipient, underlying purpose, approval, and expected settlement. Distinguish a loan from a shared expense allocation, a capital movement, or an error correction. The owner’s common control does not make those categories interchangeable. Ask the advisor and counsel to review arrangements that create financing or contractual obligations between companies.

A hypothetical three-transaction mismatch

Assume Company A pays a $12,000 software invoice used by Company B, transfers $50,000 to help B cover payroll, and accidentally pays B’s $4,000 insurance bill. Company A shows $66,000 due from B. Company B shows only $54,000 due to A because its bookkeeper never received the software invoice. The $12,000 difference should be resolved from the underlying transaction, not cleared to miscellaneous expense simply to make the balances agree.

The $50,000 transfer needs a documented funding arrangement. The software and insurance payments need evidence of the benefited entity and reviewed expense treatment. Some items may be settled promptly; others may remain outstanding under an agreement. Treating all three as one undifferentiated loan can obscure how expenses, interest, and repayments should be recorded.

If B sends $20,000 back to A, identify what it settles. A payment memo and allocation schedule can specify whether it repays loan principal or reimburses particular invoices. Without that explanation, the two bookkeepers may apply it differently and create another mismatch. The bank movement should close identified items rather than merely reduce a total whose composition nobody understands.

Use a shared reconciliation at each close

Have both bookkeepers work from the same schedule and agree the balance as of a common date. Identify transactions in transit, disputed allocations, missing documents, and amounts requiring professional review. Sign off the reconciliation with the person responsible for each entity. A management report that eliminates intercompany balances for presentation does not correct the underlying legal-entity books.

For recurring shared services, document the service, allocation approach, billing cadence, and approval process. Save the evidence supporting the allocation. An equal split may be reasonable in some commercial contexts and inappropriate in others; the advisor needs the actual use and relevant rules. Reassess the approach when staffing, locations, or customer activity changes rather than carrying forward a percentage forever.

Settle old balances deliberately

An aging report should show how long each amount has been outstanding and why. If repayment is unlikely, obtain advice on the consequences and appropriate action. Do not write off, forgive, or convert an obligation informally because the owner controls both companies. Those actions can have accounting, legal, and tax consequences that depend on the facts.

At year-end, reconcile the final schedules with both general ledgers, bank activity, agreements, and related tax reporting. Keep financing terms and shared-cost records accessible to the preparer. This article does not determine transfer pricing, deductibility, or debt treatment for a particular group. It gives the owner a workable control: every intercompany amount has an originating transaction, a reviewed purpose, a matching entry, and an understood settlement plan.

For a company group with different bookkeepers, choose one secure shared location for the intercompany schedule and supporting invoices. Assign a version owner and lock the reconciled period through the normal accounting process. Later changes should be communicated to both sides with the original transaction reference. Otherwise one company can correct its books while the other continues using an older balance. The owner should receive a short summary of aged items, new financing, and unresolved differences, with a named person responsible for each. That summary turns a large unexplained account into specific actions.