Intercompany accounting is the process by which firms reconcile a company's transactions to eliminate duplication among different departments that may result in overstating assets, according to Oracle. Companies must adjust accounting practices for intercompany transactions or face legal consequences.
Intercompany accounting must be used among separate legal entities of a parent company that are the same corporate enterprise, or among departments of one company that have access to the same transactions. Departments may include a warehouse, retail outlet and manufacturing plant. Most companies use specific accounts to consolidate intercompany transactions, notes Oracle. Each account should be identified as one used by more than one segment of the firm, and each account should be one that balances the company's books properly.
The point of intercompany accounting is to avoid counting the same transaction twice, once with a subsidiary and once with the parent company. An accounting system must be able to identify and segregate individual transactions from overall balance sheets that are made during period reporting, according to Acumatica. The key is to have an integrated accounting system that recognizes duplicate transactions through computer programs. Transactions such as inventory, cash, and receivable and payable balances should be updated automatically to see an accurate portrayal of a company's status. Supply chains, new products, expanding manufacturing and growing customer bases can complicate intercompany accounting as a firm grows.