What exactly is a recharge in the world of accounting? It essentially involves providing a good or service to an entity and recovering the cost from the entity served on a fee basis. Therefore, intercompany recharging happens when one entity incurs a cost and then bills, invoices, or moves that cost to another entity in the larger organization. The goal is to accurately charge the entity that ultimately received the value of the good or service provided.
Notable examples of intercompany recharging occur when shared services, IT and telecom, or any costs that are centralized must be billed to their ultimate beneficiaries across the corporation. Charges for phone, computer, and networking usually come from vendors in one comprehensive invoice. That invoice might be paid by corporate, but corporate would have to split the invoice and “recharge” portions of the bill to the entities in the organization that used the service.
Two different approaches to intercompany recharging
Broadly speaking, intercompany recharging can be handled in one of two ways:
- The very detailed allocation model - This method involves getting down to a per head cost with each line in an invoice allocated to the specific person or project it served. Then, that cost, such as a mobile phone expense, is charged to whatever entity that person rolls-up to in the organization. Challenges with this model occur when an individual doesn’t align easily to a single entity or when personnel changes happen within the organization. For example, people change roles, the billing or accounting information changes, or the organizational structure itself adjusts.
- The more generic allocation model - This method involves setting a cost per person and allocating that figure to intercompany entities based on the number of people allocated to that entity. For example, a percentage of costs would be allocated based on headcount regardless of whether or not the people actually used the billed product or service. The challenge with this method is that it results in many disputes. Arguments arise because people disagree with how costs were allocated to their group. For example, a French entity might argue that their telecom costs are cheaper than the US or that only a portion of their team were given l Then charges must be debated.
The benefits of doing it right include less intercompany disconnects, which results in a more accurate and timelier close. Ensuring transaction allocations are right before they are booked also eliminates last-minute conversations with people trying to work out where disconnects happened and why. There is less chaos and churn. And if issues do arise, they can be resolved faster because teams can quickly see where disconnects exist.