Accounting technology / Glossary / Intercompany accounting

What is intercompany accounting?

Definition

Intercompany accounting is recording, matching, settling and eliminating transactions between legal entities in the same group, such as recharges of shared costs, sales of goods between subsidiaries and intercompany loans. Each side must be booked by both entities for the same amount, and in consolidated accounts the balances and transactions are removed in full.

Also calledintercompany transactionsintragroup accountingintercompany reconciliation

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Must agree: Both sides, same period and amount
Group accounts: Eliminated in full
Category: Financial close

How intercompany accounting works

Each intercompany transaction creates a receivable in one entity and a payable in the other, plus matching income and expense. Problems come from timing, when one side books in a different period; currency, when the entities use different currencies and rates; and missing entries, when one entity never books its side. At each close the balances are matched pair by pair, differences are resolved, and the group settles balances by payment or netting. For the group accounts, IFRS 10 requires intragroup assets, liabilities, income, expenses and cash flows to be eliminated in full, along with unrealised profit on goods still held in the group; US GAAP has the same rule in ASC 810. Prices charged between entities in different countries are also subject to transfer pricing rules for tax. Translucent and Nominal handle intercompany and consolidation on top of existing ledgers; NetSuite and Sage Intacct automate it inside multi-entity ERPs.

Common questions

What is an intercompany elimination?+

Removing transactions and balances between group entities when the accounts are consolidated, so the group shows only its dealings with outside parties. Without it, revenue, costs, receivables and payables would be counted twice.

Why do intercompany balances not agree?+

Usually because one entity booked the transaction in a different period, used a different exchange rate, coded it to a different account, or did not book it at all. Agreeing balances before the close avoids last-minute differences.

What is intercompany netting?+

Offsetting what group entities owe each other so that only the net amount is paid between them, often through a central treasury once a month. It reduces the number of payments and foreign exchange costs.