Why intercompany accounting is its own process
Each legal entity in a group keeps its own ledger and files its own statements, so a sale from one group entity to another is a real posting in both sets of books even though nothing left the group.
The process exists because consolidation has to remove what the group did with itself. If an internal receivable and payable stay in the consolidated statements, the group reports an asset and a liability that describe a claim inside the group, while internal revenue and internal cost inflate the totals outside readers see. Pricing that transfer is a separate tax question known as transfer pricing.
Intracompany, intercompany and the direction of a flow
Intracompany describes a transaction inside one legal entity, such as a transfer between two departments or two branches of the same company. It never leaves that entity’s own books, so it does not require elimination during consolidation.
Intercompany describes a transaction between two different legal entities in the group. It touches two sets of books and does require elimination, which is why the two words are not interchangeable. Teams also use intercompany alone as shorthand.
Direction is a second distinction: downstream runs from the parent to a subsidiary, upstream runs from a subsidiary to the parent, and lateral runs between two subsidiaries of the same parent. Direction is not the same as transaction type: sales, loans, dividends and asset transfers belong to intercompany transactions, while intercompany accounting is the process that records both sides and clears them at consolidation.
How intercompany accounting works
- Record both sides in the two sets of books. The entity that provides the good, the service or the funds posts its side, and the receiving entity posts the mirror image for the same event.
- Reconcile the reciprocal accounts. The two entities compare the balance each one carries for the same relationship and agree on the amount and the timing. Reconciliation is a step inside this process rather than a synonym for it, and the matching procedure between entities belongs to intercompany reconciliation.
- Clear the internal positions. At consolidation the internal receivable and the internal payable are removed against each other, and internal revenue is removed against the internal cost. Elimination comes after reconciliation and before the consolidated statements are prepared, and the elimination rules belong to intercompany eliminations.
- Keep the evidence for each reciprocal account. Every reciprocal balance needs a named owner, the documentation that supports it and a record of who reviewed it, because the group has to explain any remaining internal balance to its auditors.
Example: two entities and reciprocal accounts that cancel
This example is illustrative and does not describe a product configuration. Parent Alpha and its subsidiary Beta report in US dollars. Alpha sells goods to Beta for USD 120,000, and those goods cost Alpha USD 80,000. Beta resells them outside the group for USD 150,000.
Alpha records a receivable of USD 120,000 due from Beta and intercompany revenue of USD 120,000, with cost of goods sold of USD 80,000. Beta records intercompany cost of goods sold of USD 120,000 and a payable of USD 120,000 due to Alpha.
The reciprocal pair agrees exactly: Alpha’s receivable from Beta of USD 120,000 equals Beta’s payable to Alpha of USD 120,000, so the difference is USD 120,000 minus USD 120,000 = USD 0. Adding both entities without clearing anything would show revenue of USD 270,000 and cost of goods sold of USD 200,000. Clearing the two internal lines brings consolidated revenue to USD 270,000 minus USD 120,000 = USD 150,000, consolidated cost of goods sold to USD 200,000 minus USD 120,000 = USD 80,000, and consolidated gross profit to USD 150,000 minus USD 80,000 = USD 70,000.
Assigning ownership across two sets of books
An internal transaction needs an owner on each side. A shared account total is not enough when one entity has a missing invoice or a different cut-off. Simetrik organizes ERP balances, supporting evidence and review responsibilities by account and period, so the group can trace an unresolved balance back to the entity that must explain it.
The account reconciliation policy checklist helps define who prepares, who reviews and when an item should be escalated. Once both sides are understood, the group can prepare its consolidation elimination entries using the approved accounting treatment.