what is intercompany

Intercompany refers to financial transactions between two different entities that are related by the same parent company. These transactions occur when two entities within the same legal parent engage in business activities with each other. Intercompany accounting is the process of recording and evaluating all manner of financial activity between related entities within the same parent company. The objective of intercompany accounting is to strip away the financial impact of internal transactions to yield financial statements that only reflect activity with independent third parties. Intercompany transactions are initially shown on each business entity’s separate financial statement as if they were third-party transactions. Intercompany accounting treatment is applied toward the end of the financial close process, when the subsidiaries’ financial statements are combined at the parent level, resulting in consolidated financial statements and tax filings. Intercompany transactions can involve many different scenarios, such as purchases for goods and services, loans, management fees, dividends, cost allocations, and royalties. Intercompany accounting is a complicated and demanding process, especially when dealing with international regulations and tax laws. Accurate intercompany accounting is important for a companys financial health, as it allows the company to evaluate the full monetary value of its transactions, to provide accurate financial statements, and to avoid disputes.