Let’s say that one company has two businesses. There are two shareholders and each runs one of those businesses. The reason they chose this structure is that although different, each business generates leads for the other, so there is good synergy.

Is there any benefit in keeping two sets of books, one for each company?

Not in my view. The reason is that there are bound to be shared costs and if you have separate books, then you have to split those costs. This is a trap that is quite common. The difficulty is that you have to decide on a formula for splitting the shared expenses (or overheads) and whichever way you cut it, some of the splits will be inappropriate.

Take telephone and internet costs for example. One of the businesses does a lot of telephone sales and few internet sales, whilst the other does few telephone sales and a lot of internet sales. Do you split in proportion of gross turnover? But that changes every month, and anyway, is turnover proportional to the cost? Unlikely. That’s just one example. There’s rental sharing, water and electricity, insurance, depreciation, receptionist’s and driver’s salaries and many more possible overheads.

What you end up with is a totally artificial view of the profitability of each business.

Here’s my preferred approach.

Two bank accounts, one set of books.

The chart of accounts has sub-accounts “O” for overhead, “A” for business A and “B” for business B.

All overhead expenses, shared assets and shared liabilities are posted to the “O” sub-accounts. It doesn’t matter from which bank account overheads are paid at any time, because of the method of accounting. So, whichever bank account has the cash at the time can pay the overhead. Having two bank accounts does, however, make the bookkeeper’s job a fair bit easier when it comes to allocating each business’s income and direct expenses.

All income and direct expenditure of the two businesses is posted to their respective sub-accounts.

The “profit” of each business is called the “Overhead contribution” and is its income minus its direct expenses.

The profit of the company as a whole is the sum of the two Overhead contributions minus the Overhead expenses.

The profitability of each business can be compared by comparing their overhead contributions.

There’s another reaon why two separate sets of books is not a good idea. SARS requires at least a balance sheet and income statement with the annual tax return. So, two sets of books would have to be consolidated at tax year end and that adds unnecessary work for the bookkeeper.