Round Tripping

Business / By / August 7, 2023

In accounting, round tripping takes place when a company sells assets to another party to generate sales and later buys them back.

Understanding round tripping

Round tripping is named after the concept of a round trip – or a journey where someone travels from A to B and then back to A.

When two companies practice round tripping, the idea is essentially the same. Both parties start in a certain financial position and conduct a series of transactions. When those transactions are settled, the companies are in the same financial position as when the process started. 

Consider a real estate firm that sells an apartment complex to a related party for $15 million and then buys it back twelve months later for the same price. This process generates sales for both the buyer and the seller but has minimal impact on each firm’s bottom line.

An example that extends beyond the sale of reciprocal assets includes a scenario where mutual payments are made for non-existent services. One company may also “invest” in a second company that then uses the capital to buy products from the first. 

Why does round tripping occur?

Round tripping is primarily used to inflate reported sales, but the reasons for this are varied. 

For example, management may believe the practice is necessary to meet analyst expectations. Others may employ the practice to boost revenue if they know the company’s sale price will be predicated on a multiple of its sales.

In some cases, round tripping is a way to fool shareholders into believing that a company is more robust than it is. This may cause them to invest more and increase the company’s share price and market capitalization.

Is round tripping legal?

Round tripping is legal in some instances and illegal in others.

Consider the example of a delivery company that operates a fleet of vans from a distribution center. One of the vans needs new tires, so the company spends $500 at a tire fitter across the street. Several weeks later, the tire fitter needs a set of tires delivered to another branch for a customer. They utilize the delivery company’s services and pay them $500 to transport the tires.

In this example, both parties had a legitimate business purpose for the transactions despite the situation’s reciprocal nature. Each company walked away with $500 in revenue and $500 in expenses for a net profit of zero.

However, when companies use round tripping to mislead shareholders or lenders, they can be prosecuted for fraud. In limited circumstances, some may also engage in round tripping to evade taxes or launder money. 

The practice itself also violates a fundamental accounting principle that relates to substance over form. In other words, round tripping considers the economic implication of a given transaction to be more important than its lawfulness. 

Key takeaways:

  • In accounting, round tripping takes place when a company sells assets to another party to generate sales and later buys them back.
  • Round tripping is primarily used to inflate reported sales, but the reasons for this are varied. Management may believe it is necessary to meet analyst expectations, while others employ the practice to boost revenue if they know the company’s sale price will be predicated on a multiple of its sales
  • Round tripping is legal if both parties have a legitimate business purpose for reciprocal transactions. The practice is clearly illegal when it is used to evade taxes, launder money, or mislead shareholders and analysts.

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About The Author

Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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