We have two independent companies, owned by the same person, operating in the same building. Currently, the property management company issues monthly rent invoices to the airline company. For this type of related-party transaction, how should I handle it? Should I continue with the invoicing approach and, at month-end, prepare entries to transfer the rent expense directly to the related-party receivable/payable account? Or should I skip the rent expense account and directly record the related-party receivable/payable on the invoice? Please advise.

Two Common Approaches to Handling Related-Party Transactions

Regarding the above question, there are generally two approaches in practice, each with its own applicable scenarios and accounting logic.

Approach One: Continue Invoicing and Make a Month-End Closing Entry

If both companies operate as independent legal entities with independent accounting, and need to maintain a complete chain of revenue and expense recognition, it is recommended to continue issuing monthly invoices. When invoicing, the property management company recognizes rental revenue, and the airline company recognizes rent expense; at month-end, an adjusting entry is prepared to transfer the rent expense from the expense account to the "related-party receivable/payable" current account, reflecting the net settlement relationship within the group.

The advantages of this approach are:Each company's financial statements can truly reflect its operating results, with rental revenue and expenses clearly presented in their respective income statements, facilitating external audits and tax filings. The disadvantage is the need to prepare additional month-end entries, increasing the workload of accounting processing, and ensuring that the balance of the current account matches the invoice amount.

Approach Two: Directly Record to the Current Account When Invoicing

If the two companies are only managed as internal cost centers or a fund pool within the group, without emphasizing independent profit accounting, the rent amount can be directly recorded in the "related-party receivable/payable" account when invoicing, without passing through the rent revenue or expense accounts.

The advantages of this approach are:This simplifies the accounting process and reduces month-end adjustments, and directly reflects internal fund flows within the group. However, the disadvantage is that the income statements of each company cannot reflect rental income and expenses, which may affect internal performance evaluation or the comparability of external reports, especially potentially raising questions about transfer pricing or expense attribution in tax matters.

Key Considerations

  • Independence of accounting entities: If the two companies need to report independently to external parties, Approach One is recommended to ensure revenue and expense matching.
  • Tax compliance requirements: Related-party transactions must comply with the arm's length principle; invoicing and recognizing revenue and expenses generally makes it easier to meet the tax authority's evidentiary requirements.
  • Internal management needs: If the group adopts centralized fund management, Approach Two can reduce internal settlement steps, but a clear reconciliation mechanism for current accounts needs to be established.
  • Audit and internal control: Regardless of the approach adopted, complete contracts, invoices, and bank statements should be retained for inspection.

Recommendation and Conclusion

Overall, if both companies are independent legal entities and need to prepare individual financial statements,it is recommended to continue using the invoicing approach and prepare a month-end closing entry, transferring the rent expense to the current account. This not only satisfies accounting recognition principles but also clearly reflects the related-party fund relationship. If there are special internal management arrangements, it is advisable to consult a professional accountant to choose a more appropriate treatment based on the specific business substance.

Please note that this answer is provided for reference only based on general accounting principles and does not constitute professional legal or tax advice. Specific operations should be determined in accordance with local accounting standards and the actual circumstances of the company.