Reimbursable expenses


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Entity A expects to make payment of certain expenses on behalf of Entity B.

Entity B will reimburse these costs incurred by Entity A once Entity A provides Entity B with an invoice for reimbursement of these costs together with copies of all relevant invoices from the original expense transactions.

From the perspective of Entity A's accounts, should these transactions be quarantined from Entity A's other operating expenses (eg recorded under Expenses > Other expenses > Reimbursable expenses > Entity B), or allocated under the various operating expense accounts?

From the perspective of Entity B's accounts, should these transactions be allocated to separate operating expense accounts based on the underlying goods/services purchased or should all underlying expenses be aggregated in recognition of the summary reimbursement payment to Entity A (eg Expenses > Other expenses > Reimbursed expenses > Entity A)?

While the answers to some of these questions will no doubt come down to personal preference and reporting requirements, I am interested in any opinions as to how others treat these transactions and why.
 
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Triest123

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Entity A expects to make payment of certain expenses on behalf of Entity B.

Entity B will reimburse these costs incurred by Entity A once Entity A provides Entity B with an invoice for reimbursement of these costs together with copies of all relevant invoices from the original expense transactions.





While the answers to some of these questions will no doubt come down to personal preference and reporting requirements, I am interested in any opinions as to how others treat these transactions and why.
 

Triest123

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There is no expense incurred in Entity A as it only make the payment on behalf of Entity B. Entity B should book the expense immediately upon making the payment
to Entity A.

The accounting entries are :

Entity A : 1. Dr Other receivable (or Temp payment)
Cr Bank
To record the payment on behalf of Entity B

2. Dr Bank
Cr Other receivable (or Temp payment)
Being cash received for the payment on behalf


In Entity B : Dr Expenses
Cr Bank
To record the cash payment for the expenses

 
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There is no expense incurred in Entity A as it only make the payment on behalf of Entity B. Entity B should book the expense immediately upon making the payment
to Entity A.
For Entity A, I was thinking of entries along the following lines:

1. On receipt of invoice for goods/services
Dr Expense
Cr Payable
Purchase of goods/services by Entity A on behalf of Entity B

2. On payment of invoice for goods/services
Dr Payable
Cr Bank
Payment by Entity A on behalf of Entity B

3. On Entity A providing an invoice to Entity B for purchases previously made
Dr Receivable
Cr Expense
Request for payment by Entity B to Entity A

4. On receipt of payment of invoice by Entity B
Dr Cash
Cr Receivable
Receipt of payment by Entity B to Entity A

This seems to more accurately reflect the transactions as they occur.

As there is always the risk carried by Entity A that Entity B does not make a reimbursement as agreed/expected, such that an non-reimbursed purchase becomes (or remains) an expense, I was thinking that each purchase is initially expensed until such time as a reimbursement is made. The main question I had was whether to expense each item with other operating expenses or separately.
 
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In Entity B : Dr Expenses
Cr Bank
To record the cash payment for the expenses
From the perspective of Entity B's accounts, should these transactions be allocated to separate operating expense accounts based on the underlying goods/services purchased or should all underlying expenses be aggregated in recognition of the summary reimbursement payment to Entity A (eg Expenses > Other expenses > Reimbursed expenses > Entity A)?
 
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...I was thinking that each purchase is initially expensed until such time as a reimbursement is made. The main question I had was whether to expense each item with other operating expenses or separately.
Alternatively, could each purchase by Entity A (on receipt of an invoice for goods/services purchased) be initially recorded as a current other asset (effectively a non-interest-bearing loan to Entity B) which then becomes receivable on the issue of an invoice to Entity B?

For example:

1. On receipt of invoice for goods/services
Dr Other assets > Reimbursable purchases for Entity B
Cr Payable
Purchase of goods/services by Entity A on behalf of Entity B

2. On payment of invoice for goods/services
Dr Payable
Cr Bank
Payment by Entity A on behalf of Entity B

3. On Entity A providing an invoice to Entity B for purchases previously made
Dr Receivable
Dr Other assets > Reimbursable purchases for Entity B
Request for payment by Entity B to Entity A

4. On receipt of payment of invoice by Entity B
Dr Cash
Cr Receivable
Receipt of payment by Entity B to Entity A
 
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Fidget

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It all comes down to the substance of the transaction. There isn't a simple "this is how you do it" answer just based on Entity A paying expenses on behalf of Entity B.

For one entity to initially be paying anything on behalf of another there going to be a relationship between them in some shape or form.

Could be that they share the same building and A picks up the tab for utility bills and recharges to B its share of them.

Could be that A & B are part of a group and it's cost effective for A to pick up the tab for certain expenses and recharge B with its share of them.

Could be that A is helping B get itself established and covering certain costs, which brings in the possibility that A is basically lending money to B.

Could be that A covers the costs of providing back-office services: Finance, HR, Marketing etc and B is invoiced on the basis of a pre-defined agreement, or flat rate, rather than recharged individual invoices.

That's not an exhaustive list, just examples of factors that need to be considered to be able to judge how to account for these things.
 
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Thanks Fidget. You raise some interesting/useful points based on the substance of these different scenarios.

It all comes down to the substance of the transaction. ... For one entity to initially be paying anything on behalf of another there going to be a relationship between them in some shape or form.
The original question suggested that the costs met initially by Entity A would generally be considered in the nature of operating expenses. In this specific case, the 2 entities share the same building and are part of a related group - that is, there is a pre-existing relationship/association.

The types of costs met by Entity A on Entity B's behalf include items such as rent, utilities/communications, certain transport costs, etc. These costs would generally be classified as operating expenses for both Entity A and Entity B. It is simply convenient for Entity A to make payment of its and Entity B's expenses and to collect Entity B's share at a later time.

The essence of the original question related to whether the (portion of) payments reimbursable by Entity B ought to be separated from Entity A's operating expenses in some way, before Triest123 suggested above that these payment may instead be classified as an asset rather than an expense where no expense is incurred by Entity A.

Could be that they share the same building and A picks up the tab for utility bills and recharges to B its share of them.

Could be that A & B are part of a group and it's cost effective for A to pick up the tab for certain expenses and recharge B with its share of them.
How does A & B being part of a group change the substance of the transaction as opposed to the 2 parties being unrelated other than share the same building and sharing costs? Isn't the substance of these 2 scenarios the same with the only different being the nature of the parties' relationship?

Could be that A is helping B get itself established and covering certain costs, which brings in the possibility that A is basically lending money to B.

Could be that A covers the costs of providing back-office services: Finance, HR, Marketing etc and B is invoiced on the basis of a pre-defined agreement, or flat rate, rather than recharged individual invoices.
There are no pre-defined loan or back-office services arrangements between the entities.
 
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Fidget

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The original question suggested that the costs met initially by Entity A would generally be considered in the nature of operating expenses. In this specific case, the 2 entities share the same building and are part of a related group - that is, there is a pre-existing relationship/association.

The types of costs met by Entity A on Entity B's behalf include items such as rent, utilities/communications, certain transport costs, etc. These costs would generally be classified as operating expenses for both Entity A and Entity B. It is simply convenient for Entity A to make payment of its and Entity B's expenses and to collect Entity B's share at a later time.

The essence of the original question related to whether the (portion of) payments reimbursable by Entity B ought to be separated from Entity A's operating expenses in some way, before Triest123 suggested above that these payment may instead be classified as an asset rather than an expense where no expense is incurred by Entity A.
My preferred way of doing it, since the account with whichever supplier(s) is in A's name, is put the whole expense through A's accounts, then credit the relevant expense account with the portion being recharged to B, thereby leaving only the actual amount of the expense belonging to A in its operating expenses, whilst creating the debtor for B in the balance sheet.

How does A & B being part of a group change the substance of the transaction as opposed to the 2 parties being unrelated other than share the same building and sharing costs? Isn't the substance of these 2 scenarios the same with the only different being the nature of the parties' relationship?
Yes, but substance of the transaction was in reference to where you mention expenses paid being treated as an interest free loan, rather than just a recharge.
 

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