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What are intercompany journal entries?

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Quick Answer

Intercompany journal entries are financial recordings prepared by related entities. During each specific period, whether it is a quarter or year, intercompany transactions must net to zero to prevent double counting of items.

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Full Answer

The purpose of an intercompany entry is to eliminate any balances between related entities. For instance, a parent company may conduct business with multiple subsidiaries. Each transaction, whether it involves a purchase, sale or transfer, involves an intercompany journal entry. Examples of items that are prepared include intercompany reconciliations of receivables and payables. Given that these entries are reciprocal, it is usually easy for both entities involved to capture the transaction.

By having an efficient, centralized accounting system, an entity can effectively record intercompany entries at the end of the accounting period. In some businesses, intercompany entries are automatically prepared after the transaction takes place. However, reconcilitiations should still be performed to prevent any miscalculations. Other businesses may hire exterior accountants to perform all of the associated entries and analytics. This approach requires a cost-benefit analysis to determine if the exterior accounting team is providing enough value to offset the cost of performing the intercompany entries internally. Ultimately, businesses need to ensure all internal transactions are recorded properly or else they can be scrutinized by professional auditors.

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