Intercompany accounting manages financial transactions between entities within the same corporate group. Every sale, cost allocation, management fee, loan and cash transfer between related entities must be recorded by both parties, reconciled to ensure agreement and eliminated during consolidation so that group financial statements reflect only external activity.
This guide covers what intercompany accounting is, why it is difficult, the types of intercompany transactions, the reconciliation and elimination process, transfer pricing considerations, common challenges and when to invest in automation.
Why Intercompany Matters
As organizations add entities — through acquisitions, international expansion or legal restructuring — the volume and complexity of internal transactions grows exponentially. A group with 10 entities can have up to 90 unique intercompany relationships. With 50 entities, that number approaches 2,500.
If intercompany balances do not agree, consolidation breaks. If eliminations are incomplete, the group reports revenue, expense or assets that do not exist from an external perspective. Intercompany accounting is the plumbing that makes consolidation work.
Types of Intercompany Transactions
Goods and services
One entity sells products or services to another. The selling entity records revenue; the buying entity records cost. Both must agree on amount, timing and accounts.
Management fees and allocations
Shared service costs allocated across entities. Common for IT, HR, legal and corporate overhead. Allocation methodology must be consistent and documented.
Intercompany loans
One entity lends cash to another. Both must record the loan, accrued interest and repayments. Cross-currency loans add exchange rate complexity.
Cash transfers and settlements
Movement of cash between entities for funding, dividends or netting of balances. Timing differences between cash movement and accounting recognition create reconciliation challenges.
The Intercompany Process
Transaction recording
Both entities record their side of the transaction — one records the receivable, the other records the payable. Consistency in timing, amount and account mapping is critical.
Matching and reconciliation
Compare balances between counterparties. Identify mismatches caused by timing differences, currency conversion, missing entries or account mapping errors.
Dispute resolution
Investigate and resolve differences. This often requires communication between entity controllers — the most time-consuming part of the process.
Elimination
During consolidation, matched intercompany balances and transactions are eliminated so that group financials reflect only external activity.
Common Challenges
• Timing differences — one entity records in January, the counterparty records in February.
• Currency mismatches — entities in different currencies use different exchange rates.
• Account mapping inconsistency — entities use different chart of accounts or account descriptions.
• Volume — large groups with hundreds of intercompany relationships generate thousands of transactions per period.
• Manual reconciliation — spreadsheet-based matching is slow, error-prone and does not scale.