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Intercompany Transactions

Intercompany transactions are business transactions between companies within the same consolidation group. These transactions must be tracked, reconciled, and eliminated during consolidation to prevent overstating the group’s financial position.

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What Are Intercompany Transactions?

Intercompany transactions occur when related companies do business with each other:
  • Sales and purchases - One company sells goods/services to another
  • Loans - One company lends money to another
  • Management fees - Charges for shared services or management
  • Dividends - Subsidiary pays dividends to parent
  • Capital contributions - Parent invests capital in subsidiary
  • Cost allocations - Shared costs allocated across entities
  • Royalties - Payments for intellectual property use
Each transaction appears on both companies’ books, which means it must be eliminated during consolidation.

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Transaction Lifecycle

1
Transaction occurs
2
Two group companies engage in a business transaction.
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Example: Company A sells $10,000 of goods to Company B.
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Both sides record entries
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Company A (Seller):
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DR  Accounts Receivable - IC    $10,000
  CR  Sales Revenue - IC                $10,000
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Company B (Buyer):
8
DR  Inventory / COGS           $10,000
  CR  Accounts Payable - IC             $10,000
9
Transaction is tracked
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The system creates an IntercompanyTransaction record linking both journal entries.
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Matching and reconciliation
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The system identifies whether both sides agree on the amount and details.
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Elimination during consolidation
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When consolidating, elimination rules remove both sides of the transaction.

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Transaction Types

The system tracks seven types of intercompany transactions:

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Sale/Purchase

Description: Sale or purchase of goods or services between group companies. Typical Accounts:
  • Seller: Intercompany Revenue, Intercompany Receivable
  • Buyer: Inventory/COGS, Intercompany Payable
Elimination: Remove revenue and corresponding expense/asset.

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Loan

Description: Intercompany loans including principal and interest. Typical Accounts:
  • Lender: Intercompany Loan Receivable, Interest Income
  • Borrower: Intercompany Loan Payable, Interest Expense
Elimination: Remove loan receivable/payable and interest income/expense.

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Management Fee

Description: Charges for management services, shared services, or administrative support. Typical Accounts:
  • Service Provider: Management Fee Revenue
  • Service Recipient: Management Fee Expense
Elimination: Remove management fee income and expense.

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Dividend

Description: Dividend distributions from subsidiary to parent. Typical Accounts:
  • Subsidiary: Dividends Paid (equity)
  • Parent: Dividend Income
Elimination: Remove dividend income and reduce equity.
Dividend eliminations affect the equity section of the consolidated balance sheet and may impact retained earnings calculations.

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Capital Contribution

Description: Capital invested by parent in subsidiary. Typical Accounts:
  • Parent: Investment in Subsidiary
  • Subsidiary: Paid-in Capital
Elimination: Part of investment elimination in consolidation.

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Cost Allocation

Description: Allocation of shared costs (rent, IT, HR) across entities. Typical Accounts:
  • Allocating Company: Cost Allocation Expense (recovery)
  • Receiving Company: Allocated Cost Expense
Elimination: Remove allocated expense and corresponding recovery.

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Royalty

Description: Payments for use of intellectual property (trademarks, patents, technology). Typical Accounts:
  • IP Owner: Royalty Income
  • IP User: Royalty Expense
Elimination: Remove royalty income and expense.

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Matching Statuses

The system tracks the reconciliation status of each intercompany transaction:

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Matched

Status: Both sides agree - entries on both companies match exactly. Indicators:
  • ✓ Both journal entry IDs are present
  • ✓ Amounts match exactly
  • ✓ Transaction dates align
Action: Ready for automatic elimination.

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Unmatched

Status: Missing entry on one side - only one company has recorded the transaction. Indicators:
  • ✗ Only one journal entry ID present
  • ⚠️ Other side hasn’t recorded transaction yet
Action: Follow up with the other company to record their side.

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Partially Matched

Status: Amounts differ - both sides have entries but amounts don’t match. Indicators:
  • ✓ Both journal entry IDs present
  • ✗ Amounts don’t match
  • ⚠️ Variance amount calculated
Action: Investigate and resolve the discrepancy.

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Variance Approved

Status: Difference accepted - variance has been reviewed and approved. Indicators:
  • ✓ Both journal entry IDs present
  • ⚠️ Known variance with explanation
  • ✓ Approved for elimination
Action: Eliminate using the agreed-upon amount.
Variances may be legitimate (timing differences, FX translation, rounding) or may indicate errors requiring correction. Always document the reason for approving a variance.

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Creating Intercompany Transactions

There are two ways to create intercompany transaction records: When recording journal entries, flag intercompany transactions:
  1. Create journal entry as usual
  2. Enable Intercompany transaction flag
  3. Select Partner company (the related party)
  4. Choose Transaction type (Sale/Purchase, Loan, etc.)
  5. System automatically creates intercompany transaction record

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Manual Creation

For historical or imported transactions:
  1. Navigate to Consolidation > Intercompany Transactions
  2. Click Create Transaction
  3. Fill in:
    • From company (seller/lender)
    • To company (buyer/borrower)
    • Transaction type
    • Date and amount
    • Link to journal entries (if available)

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Reconciling Intercompany Transactions

Regular reconciliation ensures accurate consolidation:
1
Generate intercompany reconciliation report
2
Navigate to Consolidation > Intercompany Reconciliation. Filter by:
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  • Date range
  • Company pair
  • Transaction type
  • Matching status
    • 4
    Review unmatched transactions
    5
    Identify transactions where only one side has recorded an entry:
    6
    Common causes:
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  • Timing difference (one side recorded in different period)
  • Missing entry (transaction not yet recorded)
  • Incorrect classification (not flagged as intercompany)
    • 8
    Investigate variances
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    For partially matched transactions, identify the source of discrepancies:
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    Common causes:
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  • Currency translation differences
  • Rounding differences
  • Incorrect amounts entered
  • Different transaction dates
    • 12
    Resolve discrepancies
    13
    Take corrective action:
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  • Missing entries: Record the missing side
  • Incorrect amounts: Post correcting journal entries
  • Timing differences: Wait for next period or reclassify
  • Legitimate variances: Document and approve
    • 15
    Approve variances if legitimate
    16
    For approved variances:
    17
  • Select the transaction
  • Click Approve Variance
  • Enter explanation
  • Save

    • ​
    Intercompany Transaction Properties

    Each intercompany transaction contains: 
    interface IntercompanyTransaction {
  id: string
  
  // Companies involved
  fromCompanyId: string  // Seller/lender
  toCompanyId: string    // Buyer/borrower
  
  // Transaction details
  transactionType: "SalePurchase" | "Loan" | "ManagementFee" | "Dividend" | "CapitalContribution" | "CostAllocation" | "Royalty"
  transactionDate: string
  amount: MonetaryAmount
  
  // Journal entry links
  fromJournalEntryId?: string  // Entry on seller/lender side
  toJournalEntryId?: string    // Entry on buyer/borrower side
  
  // Matching status
  matchingStatus: "Matched" | "Unmatched" | "PartiallyMatched" | "VarianceApproved"
  
  // Variance tracking
  varianceAmount?: MonetaryAmount
  varianceExplanation?: string
  
  // Optional description
  description?: string
}

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    Intercompany Accounts Setup

    For effective intercompany tracking, set up dedicated accounts: Designate account range 9000-9999 for all intercompany accounts: Balance Sheet Accounts:
    • 9010-9099: Intercompany Receivables
    • 9100-9199: Intercompany Payables
    • 9200-9299: Intercompany Loans (Receivable)
    • 9300-9399: Intercompany Loans (Payable)
    Income Statement Accounts:
    • 9400-9499: Intercompany Revenue
    • 9500-9599: Intercompany COGS/Expenses
    • 9600-9699: Intercompany Interest Income
    • 9700-9799: Intercompany Interest Expense
    Equity Accounts:
    • 9800-9899: Intercompany Dividends
    • 9900-9999: Investment in Subsidiaries
    Consistent account numbering across all group companies simplifies reconciliation and makes it easier to configure elimination rules.

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    Viewing Intercompany Transaction Reports

    The system provides several reports for managing intercompany transactions:

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    Intercompany Transaction Listing

    View all transactions with filtering options:
    • By company pair
    • By transaction type
    • By matching status
    • By date range

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    Intercompany Reconciliation Report

    Side-by-side comparison of both sides of each transaction:
    • From company amount
    • To company amount
    • Variance
    • Matching status

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    Unresolved Variances Report

    Highlights transactions requiring attention:
    • Unmatched transactions
    • Partially matched with variances
    • Aging of unresolved items

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    Consolidation Impact

    During consolidation runs, the system:
    1. Matches intercompany transactions - Identifies corresponding entries on both sides
    2. Calculates variances - Determines if amounts match
    3. Applies elimination rules - Removes matched or approved transactions
    4. Reports exceptions - Flags unmatched or unapproved variances
    Unmatched or unapproved intercompany transactions may prevent successful consolidation or result in warnings. Resolve all discrepancies before finalizing consolidated reports.

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    Best Practices

    All group companies should use the same account numbers for intercompany transactions. This simplifies reconciliation and elimination rule configuration.
    Don’t wait until consolidation time to reconcile intercompany transactions. Monthly reconciliation identifies discrepancies when they’re easier to resolve.
    Every approved variance should have a clear explanation. This creates an audit trail and helps others understand the reasoning.
    Define clear cut-off dates for recording intercompany transactions to minimize timing differences between companies.
    Train all users to consistently flag intercompany transactions when creating journal entries. This ensures complete tracking.
    Establish regular communication between accounting teams at different entities to quickly resolve discrepancies.

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    Common Scenarios

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    Scenario 1: Intercompany Sale

    Transaction: Company A sells $25,000 of inventory to Company B. Company A books: 
    DR  IC Receivable - Co B       $25,000
  CR  IC Sales Revenue                  $25,000
    Company B books: 
    DR  Inventory                  $25,000
  CR  IC Payable - Co A                 $25,000
    System action: Creates intercompany transaction, matches both entries, status = Matched. Consolidation: Elimination rule removes IC Revenue and adjusts Inventory.

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    Scenario 2: Intercompany Loan

    Transaction: Parent lends $100,000 to Subsidiary at 5% interest. Parent books: 
    DR  IC Loan Receivable         $100,000
  CR  Cash                              $100,000
    Subsidiary books: 
    DR  Cash                       $100,000
  CR  IC Loan Payable                   $100,000
    Monthly interest:
    • Parent: DR Interest Receivable / CR Interest Income
    • Subsidiary: DR Interest Expense / CR Interest Payable
    Consolidation: Eliminates loan receivable/payable and interest income/expense.

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    Scenario 3: Dividend Payment

    Transaction: Subsidiary declares $50,000 dividend to 100% owner Parent. Subsidiary books: 
    DR  Retained Earnings          $50,000
  CR  Dividends Payable - Parent        $50,000

DR  Dividends Payable - Parent $50,000
  CR  Cash                              $50,000
    Parent books: 
    DR  Cash                       $50,000
  CR  Dividend Income                   $50,000
    Consolidation: Eliminates dividend income; retained earnings reduction remains.

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    Next Steps

    Elimination Rules

    Configure automatic elimination rules

    Consolidation

    Run the full consolidation process

    Journal Entries

    Create and manage journal entries

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