Intercompany accounts are accounts in an organizations’ General Ledger that represent a balance of payments due from, or to, entities related by common ownership or control. For instance, If company “A” makes widgets and sells them for $100 to a sister-company, company “B,” an intercompany relationship exists, or should exist, in the General Ledger where Company “B” has an Intercompany Payable to Company “A” and, conversely, Company “A” has an Intercompany Receivable from Company “B.”
At the end of each month, the consolidated Intercompany Accounts Receivable and Intercompany Accounts Payable must have the same balances, a debit for the Intercompany A/R and a credit for Intercompany A/P.
Many companies have reconciliation issues related to intercompany accounts. For many, this problem can cause the books to be kept open for days or weeks longer than necessary. I know of a company where it was not unusual to have the intercompany accounts out of balance by several million dollars every month. Unless a company institutes the appropriate controls to keep the balances in check, the problem will continue to grow and as it multiplies, it will become utterly unmanageable.
The reasons for these out-of-balance situations usually start out very small – If Company “A” from the previous section sells a widget to Company “B” for $100 and charges $10 freight, but the Purchasing Dept for Company “B” tells their Accounts Payable Dept that it’s not on the Purchase Order, so we aren’t paying it, the company will have an out-of-balance situation if the issue is not resolved by the end of the month. Many companies also pass an intercompany charge to their subsidiaries based upon their Working Capital as an inducement to keep Working Capital as low as possible to avoid excessive intercompany charges. If there is a disagreement in the calculation, this could also cause an imbalance in the Intercompany Accounts. Any lack of clarity on the part of the entity passing the charge, or a lack of acceptance on the part of the entity receiving the charge, has the potential to cause an out-of-balance situation.
Our experience ranges from entities with only a few entities and huge problems with balancing the accounts, to huge companies with thousands of entities which have very few issues in getting the accounts to balance.
There are seven primary causes for out-of-balance situations with Intercompany Accounts:
- Lack of clarity in what the receiving entity is being charged for
- Lack of clarity in the calculation of an intercompany charge
- Lack of communication by the entity passing on an intercompany charge
- Lack of communication by the entity receiving the intercompany charge
- Lack of consideration by the entity passing the intercompany charge
- Ineffective policies and/or procedures for addressing intercompany charges
- Lack of effective course for resolution of disputes
We could, of course, break this down into four categories:
- Lack of clarity
- Lack of communication
- Lack of consideration
- Lack of support from Corporate
but I wanted to illustrate that the responsibility for both communication and clarity …