What is Intercompany Transactions?
Trades between entities you own - recorded in each set of books, then eliminated when you consolidate.
Intercompany Transactions: definition
Within a group, entities routinely transact - one sells to another, lends cash, allocates shared costs, or charges management fees. Each entity records its side, but at the group level these are internal moves, not real activity with the outside world. Consolidation eliminates them so group revenue, expenses, receivables, and payables are not inflated. Unreconciled intercompany balances are a common source of close delays.
- Common types: intercompany sales, loans, interest, cost allocations, management fees
- Each entity books its own side; balances should mirror across the pair
- Consolidation eliminates intercompany revenue, expense, and balances
- Unrealized profit in inventory sold intercompany is also eliminated
How Fintra handles it
Fintra runs multiple entities on one shared model, so an intercompany transaction can be tagged and matched to its counterpart rather than reconciled from separate systems. At consolidation, matched intercompany balances and margins are eliminated automatically, and any mismatch is flagged for a human to resolve before close.
- Intercompany transactions tagged and matched across entity pairs
- Automatic elimination of intercompany balances and unrealized profit at consolidation
- Mismatched intercompany balances flagged before close
Worked example
Frequently asked questions
Why are intercompany transactions eliminated?
Because consolidated statements present the group as a single economic entity. A sale from one group company to another is not revenue for the group as a whole, so leaving it in would double-count activity and overstate revenue, costs, and balances. Elimination removes the internal double-count.
What is intercompany reconciliation?
Matching the two sides of each intercompany transaction - the receivable in one entity against the payable in the other - to confirm they agree before consolidation. Mismatches (timing, currency, missed entries) must be resolved or they distort the consolidated result.
What is unrealized intercompany profit?
Profit recorded on a sale between group entities where the goods have not yet been sold onward to an outside party. Because the group has not actually earned it, that profit sitting in inventory is eliminated on consolidation until the item is sold externally.
How do intercompany transactions relate to transfer pricing?
Transfer pricing sets the prices for intercompany transactions across tax jurisdictions and must follow the arm-length principle. Intercompany accounting records and eliminates those transactions in the books. One is the pricing policy, the other the bookkeeping and consolidation treatment.
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