Intercompany transactions occur between two or more divisions, subsidiaries, or units within the same parent company. These transactions need to be properly recorded for accurate financial reporting and to eliminate any intercompany balances during consolidation.
1. Intercompany Sales of Goods
Example 1: Selling Goods to a Subsidiary
Company A sells goods worth $15,000 to its subsidiary, Company B, on August 1, 2024, on credit.
Journal Entry in Company A (Seller) on August 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-01-2024 | Intercompany Receivables A/c Debit | 15,000 | |
| 08-01-2024 | To Sales Revenue A/c | 15,000 |
Journal Entry in Company B (Buyer) on August 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-01-2024 | Inventory/purchase A/c Debit | 15,000 | |
| 08-01-2024 | To Intercompany Payables A/c | 15,000 |
Explanation:
- Intercompany Receivables will debited in Company A to reflect the amount due from Company B.
- Sales Revenue will credited in Company A to record the sale.
- Inventory will debited in Company B to record the purchase of goods.
- Intercompany Payables will credited in Company B to recognize the liability to Company A.
2. Intercompany Loan
Example 2: Granting a Loan to a Subsidiary
On September 1, 2024, Company A provides a loan of $50,000 to its subsidiary, Company B.
Journal Entry in Company A (Lender) on September 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-01-2024 | Intercompany Loan Receivable A/c Debit | 50,000 | |
| 09-01-2024 | To Bank A/c | 50,000 |
Journal Entry in Company B (Borrower) on September 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-01-2024 | Bank A/c Debit | 50,000 | |
| 09-01-2024 | To Intercompany Loan Payable A/c | 50,000 |
Explanation:
- Intercompany Loan Receivable will debited in Company A to record the loan to Company B.
- Cash will credited in Company A to reflect the outflow of funds.
- Cash will debited in Company B to recognize the receipt of funds.
- Intercompany Loan Payable will credited in Company B to record the liability.
3. Intercompany Dividend Payment
Example 3: Payment of Dividends to the Parent Company
On October 15, 2024, Company B declares and pays a dividend of $20,000 to its parent Company A.
Journal Entry in Company B (Subsidiary) on October 15, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 10-15-2024 | Retained Earnings A/c Debit | 20,000 | |
| 10-15-2024 | To Bank A/c | 20,000 |
Journal Entry in Company A (Parent) on October 15, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 10-15-2024 | Bank A/c Debit | 20,000 | |
| 10-15-2024 | To Dividend Income A/c | 20,000 |
Explanation:
- Retained Earnings will debited in Company B to reduce the equity as dividends are paid out.
- Cash will credited in Company B to reflect the payment.
- Cash will debited in Company A to recognize the receipt of dividends.
- Dividend Income will credited in Company A to record the income from the subsidiary.
4. Intercompany Services Provided
Example 4: Charging a Subsidiary for Management Services
Company A provides management services to its subsidiary, Company B, and charges $5,000 for these services on November 1, 2024.
Journal Entry in Company A (Service Provider) on November 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 11-01-2024 | Intercompany Receivables A/c Debit | 5,000 | |
| 11-01-2024 | To Service Revenue A/c | 5,000 |
Journal Entry in Company B (Service Recipient) on November 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 11-01-2024 | Management Expense | 5,000 | |
| 11-01-2024 | To Intercompany Payables A/c | 5,000 |
Explanation:
- Intercompany Receivables will debited in Company A to reflect the amount due from Company B.
- Service Revenue will credited in Company A to record the income from services provided.
- Management Expense will debited in Company B to recognize the expense for services received.
- Intercompany Payables will credited to Company B to record the liability to Company A.
5. Intercompany Inventory Transfer
Example 5: Transferring Inventory to a Subsidiary
Company A transfers inventory with a cost of $8,000 to Company B on December 1, 2024.
Journal Entry in Company A (Transferring Entity) on December 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-01-2024 | Intercompany Receivables A/c Debit | 8,000 | |
| 12-01-2024 | To Inventory A/c | 8,000 |
Journal Entry in Company B (Receiving Entity) on December 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-01-2024 | Inventory A/c Debit | 8,000 | |
| 12-01-2024 | To Intercompany Payables A/c | 8,000 |
Explanation:
- Intercompany Receivables will debited in Company A to record the amount owed by Company B.
- Inventory will credited to Company A to reflect the inventory reduction.
- Inventory will debited in Company B to recognize the received goods.
- Intercompany payables will be credited to Company B to record the liability.
In these intercompany transaction examples, all related entities in a corporate structure have accurate records of their transactions with each other, helping to maintain proper consolidation and financial reporting.