Accounting for Pass-through Expense

Pass-through expenses are the expense that third party charge to the company and the company charge it directly to the clients. The company pass-through this cost to the client without any markup. The company does not provide any value on this service and it is not facing any risk. Third-party has obligation to complete the service directly to customers, who have liabilities to settle the payment base on contract.

Pass-through expenses are not the main part of the company’s business activities. They just act as the agent to collect revenue on behalf of the third parties. The company does not have obligation to complete the service or face the risk of uncollectible debt.

Pass-through Expense Example

Company ABC rent a condo to Mr. B, the rental fee is $ 500 per month, however, Mr. B has obligation to pay for utilities around $ 100 per month which depend on the consumption. Every month, Mr. B needs to pay a rental fee of $ 500 plus the utility expense to Company ABC.

Company ABC needs to record rental revenue of $ 500. For the utility expense, Company will not record it as revenue, it just the pass-through expense which third party bill to them and pass to the lessee.

Pass-through Expense Journal Entry

Based on the example above, utility expense is the pass-through expense, Company A need to record as the following:

• When Mr. B pays the utilities $100, Company needs to record debit cash $100 and credit payable to third party $ 100.

Account	Debit	Credit
Cash	100
Payable to Utilities Provider		100

• When company ABC settle with the utility provider, they need to debit payable and credit cash.

Account	Debit	Credit
Payable to Utilities Provider	100
Cash		100

Cash collect from pass-through expenses does not impact the revenue as we do not provide any service or add value to the customers. Third-party take full responsibility if something goes wrong. Cash paid to the third party is not considered as expenses as well.