Intercompany accounting refers to transactions that occur between related legal entities within the same corporate group. These transactions need to be accurately recorded to ensure that the consolidated financial statements are correct. Intercompany transactions can include loans, sales of goods or services, allocation of expenses, and more. Below are examples of intercompany accounting journal entries.
1. Intercompany Loan
Example Scenario: Company A loans $50,000 to its subsidiary, Company B, on July 1, 2024.
Company A’s (Lender) Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 07-01-2024 | Intercompany Receivable A/c Debit | 50,000 | |
| 07-01-2024 | To Bank A/c | 50,000 |
Company B’s (Borrower) Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 07-01-2024 | Bank A/c Debit | 50,000 | |
| 07-01-2024 | To Intercompany Payable A/c | 50,000 |
Explanation:
- Company A records the loan as an intercompany receivable and reduces its cash balance.
- Company B records the receipt of cash and a corresponding intercompany payable.
2. Intercompany Sale of Goods
Example Scenario: Company A sells $20,000 worth of inventory to its subsidiary, Company B, on August 15, 2024.
Company A’s (Seller) Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-15-2024 | Intercompany Receivable A/c Debit | 20,000 | |
| 08-15-2024 | To Sales Revenue A/c | 20,000 | |
| 08-15-2024 | Cost of Goods Sold A/c Debit | 15,000 | |
| 08-15-2024 | To Inventory A/c | 15,000 |
Company B’s (Buyer) Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-15-2024 | Inventory A/c Debit | 20,000 | |
| 08-15-2024 | To Intercompany Payable A/c | 20,000 |
Explanation:
- Company A records the sale of goods, including revenue and cost of goods sold.
- Company B records the purchase of inventory and the corresponding payable.
3. Intercompany Allocation of Expenses
Example Scenario: Company A allocates $10,000 of administrative expenses to its subsidiary, Company B, on September 1, 2024.
Company A’s (Allocating Company) Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-01-2024 | Intercompany Receivable A/c Debit | 10,000 | |
| 09-01-2024 | To Administrative Expenses A/c | 10,000 |
Company B’s (Receiving Company) Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-01-2024 | Administrative Expenses A/c Debit | 10,000 | |
| 09-01-2024 | To Intercompany Payable A/c | 10,000 |
Explanation:
- Company A reduces its administrative expenses by allocating them to Company B.
- Company B records the expenses incurred due to the allocation.
4. Intercompany Dividends
Example Scenario: Company A declares and pays a $5,000 dividend to its parent company, Company B, on October 1, 2024.
Company A’s (Subsidiary) Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 10-01-2024 | Retained Earnings A/c Debit | 5,000 | |
| 10-01-2024 | To Bank A/c | 5,000 |
Company B’s (Parent) Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 10-01-2024 | Bank A/c Debit | 5,000 | |
| 10-01-2024 | To Dividend Income A/c | 5,000 |
Explanation:
- Company A reduces retained earnings and pays out cash as dividends.
- Company B records the cash received as dividend income.
5. Intercompany Sale of Fixed Assets
Example Scenario: Company A sells a piece of equipment to Company B for $15,000 on November 1, 2024. The original cost of the equipment was $25,000 and is depreciated by $12,000.
Company A’s (Seller) Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 11-01-2024 | Bank A/c Debit | 15,000 | |
| 11-01-2024 | Accumulated Depreciation A/c Debit | 12,000 | |
| 11-01-2024 | To Equipment A/c | 25,000 | |
| 11-01-2024 | To Gain on Sale of Asset A/c | 2,000 |
Company B’s (Buyer) Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 11-01-2024 | Equipment A/c Debit | 15,000 | |
| 11-01-2024 | To Bank A/c | 15,000 |
Explanation:
- Company A records the sale, removes the equipment and accumulated depreciation from the books, and recognizes a gain on the sale.
- Company B records the purchase of the equipment at the purchase price.
These examples illustrate common intercompany transactions and how they should be recorded to ensure accurate financial reporting within a corporate group. Inter-company transactions should be eliminated during the consolidation process to prevent double counting and misrepresentation of financial results.