Intercompany receivables arise when one entity within a group of companies provides goods, services, or loans to another entity within the same group. This creates a receivable for the entity providing the goods/services and a payable for the entity receiving them. To ensure accurate consolidated financial statements, these intercompany balances must be eliminated.
Example 1: Intercompany Sale of Goods
Scenario:
Company A sells goods worth $20,000 to its subsidiary, Company B.
Company A’s Journal Entry (Seller):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-01-2024 | Intercompany Receivables A/c Debit | 20,000 | |
| 09-01-2024 | To Sales Revenue A/c | 20,000 |
Company B’s Journal Entry (Buyer):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-01-2024 | Inventory/Purchase A/c Debit | 20,000 | |
| 09-01-2024 | To Intercompany Payables A/c | 20,000 |
Example 2: Intercompany Loan
Scenario:
Company A lends $50,000 to Company B.
Company A’s Journal Entry (Lender):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-01-2024 | Intercompany Receivables A/c Debit | 50,000 | |
| 09-01-2024 | To Bank A/c | 50,000 |
Company B’s Journal Entry (Borrower):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-01-2024 | Bank A/c Debit | 50,000 | |
| 09-01-2024 | To Intercompany Payables A/c | 50,000 |
Example 3: Intercompany Service Charges
Scenario:
Company A provides IT services to Company B for $10,000.
Company A’s Journal Entry (Service Provider):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-01-2024 | Intercompany Receivables A/c Debit | 10,000 | |
| 09-01-2024 | To Service Revenue A/c | 10,000 |
Company B’s Journal Entry (Service Recipient):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-01-2024 | Service Expense A/c Debit | 10,000 | |
| 09-01-2024 | To Intercompany Payables A/c | 10,000 |
Example 4: Intercompany Management Fees
Scenario:
Company A charges a $5,000 management fee to Company B.
Company A’s Journal Entry (Charging Entity):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-01-2024 | Intercompany Receivables A/c Debit | 5,000 | |
| 09-01-2024 | To Management Fee Revenue | 5,000 |
Company B’s Journal Entry (Charged Entity):
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-01-2024 | Management Fee Expense A/c Debit | 5,000 | |
| 09-01-2024 | To Intercompany Payables A/c | 5,000 |
Elimination Entry (Consolidation):
When preparing consolidated financial statements, the intercompany receivables and payables need to be eliminated to avoid double-counting.
Consolidation Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-01-2024 | Intercompany Payables A/c Debit | 85,000 | |
| 09-01-2024 | To Intercompany Receivables A/c | 85,000 |
Explanation:
- Intercompany Payables are debited to remove the liability from the consolidated balance sheet.
- Intercompany Receivables are credited to remove the asset from the consolidated balance sheet.
This entry ensures the financial statements accurately reflect only the external transactions, providing a clear view of the financial position and performance of the group as a whole.