Automate these types of intercompany transactions

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Intercompany accounting is a fact of doing business in today’s world. The bigger companies grow, the harder it can be to scale processes that produce consolidated financial statements that cover all subsidiaries. Automation is critical when handling the complexity involved. In this short blog, get a primer on the key intercompany accounting transactions and eliminations you should consider automating to save your team time and money.

If you’ve other questions about intercompany accounting, check out our comprehensive FAQs here.

The three types of intercompany transactions you need to automate

Downstream transaction

Downstream transactions involve the parent company selling to one of its subsidiary companies. Profit and loss should be recorded by the parent company, as they are the only ones with full visibility of the transaction.

Upstream transaction

Upstream transactions involve a subsidiary selling to its parent company. Profit and loss should be recorded by the subsidiary. The transaction should be visible to all parties. Profit and loss can also be shared in this instance.

Lateral transaction

Lateral transactions involve two subsidiaries of the same parent company selling to each other. Both parties may record the profit and loss.

 

The three types of intercompany elimination you need to automate

Elimination of intercompany revenues and expenses

These eliminations are sales or interest payments between related companies. The accounting team should eliminate the revenues and expenses so it’s not recording a sale to itself as a profit in the consolidated financial statements.

Elimination of intercompany stock ownership

Assets and stakeholder equity accounts for the parent company’s ownership should be eliminated in the consolidated financial statement.

Elimination of intercompany debt

If a parent firm lends money to a subsidiary, this debt should be eliminated. Each party should have a note payable and a note receivable. It’s accounted for as a simple cash exchange when consolidating financial statements, allowing teams to eliminate the payment and receivable.

To find out more about intercompany transactions, check out our FAQ.

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