Intercompany Transactions: What Business Owners Need to Record

John owns GoodFood Sdn Bhd, an established F&B business right at the heart of KL. Successful, he later opened another kopitiam restaurant concept under a separate company, Kopi & Cham Sdn Bhd.

The two businesses have the same owner, operate in the same industry and even share suppliers and administrative staff. 

One day, Kopi & Cham needs RM20,000 for kitchen equipment but does not have enough cash in its bank account. Luckily GoodFood does, so John pays the supplier from GoodFood’s account.

At first glance, this feels harmless. After all, John owns both businesses.

From an accounting perspective, however, GoodFood did not buy its own kitchen equipment. It paid RM20,000 on behalf of another legal entity.

That RM20,000 therefore cannot simply disappear into GoodFood’s expenses and this is where intercompany transactions come in along with its messy, messy steps.

What Are Intercompany Transactions?

Intercompany transactions are transactions between separate companies that are related through common ownership, control or a wider corporate group.

They can involve much more than bank transfers.

Examples include:

• One company paying another company’s supplier.
• Loans or advances between related companies.
• Shared employees or administrative costs.
• Rent, utilities or software paid centrally.
• Management or service fees.
• Goods sold between related businesses.
• Assets transferred between companies.
• Expenses recharged from one company to another.

The point is that common ownership does not merge the accounts of separate companies.

If two Sdn Bhd entities transact with each other, each company normally needs its side of the transaction reflected in its own records.

Why Do Intercompany Transactions Become Messy?

The problem usually starts when related-company payments are treated like internal transfers rather than entity transactions.

A business owner may move RM30,000 from one company to another because one entity happens to have more cash that week.

The bookkeeping then says: Due from related company: RM30,000

Three months later, another RM15,000 is added. Then one company pays a supplier for the other. Then payroll costs are shared informally.

By year-end, the balance may have reached RM100,000, but nobody can clearly explain what makes up that number.

That creates problems for:

• Bookkeeping.
• Year-end accounts.
• Audit work.
• Tax reporting.
• e-Invoice records.
• Transfer pricing.
• Cash-flow planning.

A related-company account should not become a dumping ground for unexplained transactions even if shared.

What Should You Identify Before Recording an Intercompany Payment?

Start with the reason for the transaction, not the bank transfer itself.

A payment of RM50,000 between two related companies could mean several different things.

It might be:

• A loan.
• A repayment.
• A reimbursement.
• Payment for services.
• Payment for goods.
• A management fee.
• An asset purchase.
• A capital contribution.
• A payment made on behalf of another company.

Those are not interchangeable, assets might need to take account of appreciation and depreciation, and so on.

Before an accountant records the transaction, a useful five-question test is:

1. Who received the benefit?
2. Why did money, goods or services move?
3. What type of transaction is it?
4. What documents support it?
5. Does the other company record the corresponding side?

If those five questions can be answered clearly, accounting usually becomes much easier.

How Should One Company Paying Another Company’s Expense Be Recorded?

The company receiving the benefit should generally recognise the relevant expense or asset, even if another related company made the payment.

Let’s go back to John, the owner of GoodFood and Kopi & Cham. The kitchen equipment he bought  is being used by Kopi & Cham, while GoodFood simply provided the cash.

Conceptually:

• Kopi & Cham records the kitchen equipment and an amount owed to GoodFood.
• GoodFood records an amount recoverable from Kopi & Cham.

This creates what accountants commonly call an intercompany receivable and payable.

GoodFood has an amount due from Kopi & Cham.

Kopi & Cham has an amount due to GoodFood.

If Company A records an amount involving Company B, what should Company B see?

For example:

If the two companies show different balances without a clear timing reason, the accounts need to be reconciled.

How Do Intercompany Loans Work?

Money transferred between related companies should not automatically be treated as an informal cash movement.

Suppose one company needs RM100,000 to cover working capital and another group company provides it. If the transaction is genuinely a loan, the records should make that clear.

Useful documentation may include:

• Amount borrowed.
• Date advanced.
• Borrower and lender.
• Purpose.
• Repayment terms.
• Interest arrangement, if applicable.
• Loan agreement.
• Outstanding balance.

Intercompany financing can also fall within Malaysia’s transfer pricing rules.

That means businesses should be careful about leaving large balances sitting indefinitely without being able to explain why they exist or how the arrangement was determined.

How Should Shared Staff and Expenses Be Handled?

Shared costs should reflect which company actually benefited from them. This comes up frequently when several companies operate from the same office or use the same employees.

For example, a software development company may employ an accounts executive who spends:

• 70% of her time on Company A.
• 30% of her time on Company B.

If Company A pays her entire salary, the business may need to consider how Company B’s share should be treated.

The same issue appears with:

• Office rent.
• HR teams.
• Accounting staff.
• Advertising.
• Software.
• Vehicles.
• Insurance.
• Utilities.
• Group administration.

The answer is not always to split everything equally. While a 50:50 allocation may be convenient, the allocation should make commercial sense based on how the cost is actually used.

“If 100 staff members go to company A more often than company B, parking fees, utilities and pantry costs are going to add up over time for company A.

What Records Should Support Intercompany Transactions?

The records should make it clear what happened, why it happened and which company benefited.

Depending on the transaction, supporting documents may include:

• Supplier invoices and receipts.
• Payment records.
• Loan agreements.
• Management or service agreements.
• Cost-allocation workings.
• Staff time records.
• Recharge calculations.
• Internal approvals.
• Relevant e-Invoices.

Even a short internal description can help.

Instead of recording:

RM25,000 transfer to Company B.

A clearer description would be:

Temporary working-capital advance to Company B, repayable to Company A.

That small amount of context can make reconciliation and year-end review much easier.

Do Intercompany Transactions Affect E-Invoicing in Malaysia?

Yes, HASiL specifically states that an e-Invoice is required for intercompany charges. This applies because two related companies remain separate entities, even if they share the same owner or operate as part of the same group.

Note: That is different from moving costs between departments or divisions within the same legal company.

For example, if GoodFood charges Kopi & Cham for accounting support, shared software or management services, that charge may need to be supported by an e-Invoice rather than treated as a simple internal transfer.

HASiL’s current Specific Guideline gives examples where interest on a loan between related Malaysian companies can require either an e-Invoice or a self-billed e-Invoice, depending on the arrangement.

How Can Businesses Keep Intercompany Accounting Under Control?

1. Identify the purpose of the transaction.
2. Classify it correctly as a loan, reimbursement, service charge, asset transfer or other item.
3. Keep supporting documents with the accounting record.
4. Record the matching entry in the other company.
5. Reconcile intercompany balances regularly.
6. Review recurring arrangements such as management fees, shared staff and cost allocations.
7. Check tax, transfer pricing and e-Invoice implications where relevant.

For a business with several entities, the goal is to make sure every intercompany balance can still be explained clearly when the accountant, auditor or tax adviser asks about it later. 

It will save you a lot of trouble.

Keeping Intercompany Transactions Clear From the Start

Owning several companies gives a business more flexibility, but each entity still needs records that clearly show what belongs to it.

A payment between related companies should have a clear purpose, matching records and enough supporting information to make sense months later.

If your intercompany accounts are starting to look a little too creative, we can help at Accounting.my.

• Bookkeeping: We keep transactions properly classified across each company.
• Intercompany Reconciliation: We help match “due to” and “due from” balances and investigate differences.
• Management Accounts: We give you a clearer view of what each business is actually spending, earning and owing.
• Accounting services: We can help untangle old related-company balances that have built up over time.
• e-Invoice Support: We help businesses organise the records behind intercompany charges and related transactions.

The sooner those balances are cleaned up, the easier they are to explain. Because “I own both companies” may work while chatting with your friends, but your accounts will still want a better answer.

Source:

• Lembaga Hasil Dalam Negeri Malaysia (HASiL) — e-Invoice Specific Guideline, Version 4.7
• Lembaga Hasil Dalam Negeri Malaysia (HASiL) — General e-Invoice Guidance / e-Invoice Portal
• Companies Commission of Malaysia (SSM) — Separate Legal Entity Guidance
• Malaysian Accounting Standards Board (MASB) — Related Party Disclosures / FRS 124 materials
• MASB — MFRS 116, Property, Plant and Equipment