Intercompany Accounting: 6 Things to Settle Before You Consolidate

Intercompany Accounting: 6 Things to Settle Before You Consolidate

Intercompany accounting is the bookkeeping for money and services that move between entities you own. One company pays a bill for another, a parent charges a management fee, a subsidiary lends cash to a sister company. Each of those is real inside the group and meaningless outside it, so when you consolidate the books it has to cancel out.

It cancels out only if both sides recorded it the same way. When they did not, consolidation turns into a hunt for differences. Here are six things to settle before you consolidate, in the order that saves the most time. The numbering is a sequence, not a ranking.

One firm to ask about this is System Six, a Seattle bookkeeping and fractional CFO firm whose live profile says it helps organizations modernize a finance function after an acquisition. System Six is a vetted Sam's List member and a paying member of our featured program; payment does not buy the language we use or its reviews. How we chose is at the end.

1. Set Up Due To and Due From Accounts for Intercompany Accounting

The backbone of intercompany accounting is a pair of accounts for each relationship. When Entity A pays a bill for Entity B, A records a receivable from B, usually called due from, and B records a payable to A, called due to. The two balances should always be equal and opposite.

Set these up before the first transaction, with a clear naming rule such as one account per counterparty. Do not use a single "intercompany" account for everything. It hides which pair a difference belongs to and makes the due to due from accounts impossible to tie out.

The limitation: more accounts mean a longer chart of accounts, and a group with six entities has fifteen possible relationships. Create the pairs that actually transact and add the rest when needed.

2. Decide Who Books the Transaction and Who Mirrors It

Every intercompany item has two sides, and someone has to write both. The most common cause of a mismatch is that each side waited for the other to go first, or each wrote it in a different month.

Pick a rule and write it down: the entity that originates the item books it first and notifies the other within a set number of days, or one person books both sides at once. The second works well for small groups because it removes the timing gap entirely.

Whichever you choose, record the same date, amount and description on both sides, so a reviewer can match them at a glance.

The limitation: one person booking both sides is efficient, but it concentrates control. Have someone else review the account balances each month.

3. Make Intercompany Accounting Part of the Month-End Close

Intercompany accounting needs its own step in the close, not a cleanup at year end. At the end of each month, compare every due from balance with its matching due to balance. Any difference is a timing problem or an error, and both are cheaper to fix within a few weeks than after a year.

Do it before you run consolidated reports. A consolidated balance sheet built on unmatched intercompany balances will show an unreconciled difference after the eliminations, and it lands somewhere you do not want it.

Keep a short log of what each difference was and how it was resolved. After a few months, the log tells you which relationship causes the trouble.

The limitation: reconciling adds a step to a close that is probably already tight. Start with the largest balances and widen from there.

4. Agree How Shared Costs and Management Fees Are Allocated

Groups share costs: one payroll provider, one software subscription, one office. The question is how much of each belongs to which entity, and whether that allocation is recorded as an intercompany charge.

Write the allocation basis down, such as headcount, revenue or a fixed percentage, and apply it the same way every month. A management fee charged by a parent to its subsidiaries needs the same treatment. Record it on both sides, with support for how it was set.

This is also where tax enters. Charges between related entities can have tax consequences, including for transfer pricing and state tax, and the right amount is not simply whatever balances the books. Ask a tax professional before setting a recurring fee.

The limitation: an allocation that is easy to calculate is not always one that reflects who benefits. Review the basis once a year, because a group changes.

5. Handle Different Currencies and Year-Ends Before They Surface

Two things make intercompany balances drift even when everyone records correctly: currency and calendar. If one entity keeps books in another currency, the same balance converts at different rates on different dates, and the two sides will not match unless you decide which rate applies and when. If entities have different year-ends, the group has to line them up for consolidation.

Decide the rate source and the date up front, and apply it the same way every time. For year-ends, decide whether an entity will adjust to the group's calendar or whether you will consolidate using a catch-up period.

The limitation: these choices are driven by accounting standards and, in some cases, by tax and legal requirements in each country. A choice that is easy for the books may not be allowed for the entity.

6. Define the Intercompany Eliminations and Who Reviews Them

Eliminations are the entries that remove intercompany balances and income from the consolidated books, so the group reports only what happened with outsiders. If a subsidiary billed its parent $50,000, the consolidated income statement should show neither the revenue nor the expense.

Here is the illustrative shape, with invented numbers. Entity A bills Entity B $50,000 for services in March. A books revenue and a due from of $50,000. B books an expense and a due to of $50,000. On consolidation, the elimination removes the revenue against the expense and the due from against the due to, leaving net zero.

List the eliminations the group needs, make them repeatable and assign a reviewer who did not prepare them. A repeatable set of entries saves time every month.

The limitation: eliminations clean up the consolidated reports. They do not fix a tax or legal-entity question, and they do not repair a mismatch between the entities' own books. Those need to be solved at the source.

Where System Six Fits

A finance function being modernized after an acquisition is what System Six describes, and multi-entity books are often part of that situation. It is based in Seattle, founded in 2009, with about 41 employees, serving clients nationwide. Its live profile lists Non-Profit Organizations, Professional Service Firms and Real Estate Investors as specialties, and says the firm was acquired by a searcher in 2021 and helps organizations modernizing a finance function after an acquisition.

System Six is early in building a review history on Sam's List, so we do not cite a review count and describe the firm by what its profile says instead.

The limitation, plainly: System Six's profile lists a $1 million revenue minimum, so a smaller group may fall outside what it takes on. The profile does not say whether it handles multi-entity consolidation or intercompany reconciliation, so ask what it covers and how often.

Frequently Asked Questions

What is intercompany accounting?

It is the recording of transactions between entities under common ownership, such as loans, shared costs and management fees. Each entity records its side, and the two sides are removed when the group's books are consolidated so only outside activity remains.

What are due to and due from accounts?

They are the paired accounts that record what one entity owes another. If A pays a bill for B, A records a due from B and B records a due to A. The balances should match exactly, and a difference signals a timing issue or an error.

What are intercompany eliminations?

They are consolidation entries that cancel intercompany balances, revenue and expenses so the combined statements show only transactions with outsiders. A subsidiary's bill to its parent, for example, is eliminated from both revenue and expense.

How often should intercompany balances be reconciled?

Monthly, as part of the close, before consolidated reports are run. Differences found within weeks are usually easy to trace. Differences found at year end can take far longer, because the cause is buried in many months of entries.

Before you consolidate, list every pair of entities that transacts this year and who books each side. You can browse fractional CFOs on Sam's List, including the firm above, and ask each one how it handles multi-entity books.

How We Chose This Firm

You should be able to check our work, so here is how this post was built.

The pool. The firm here is a vetted Sam's List member in our featured program with a live public profile that lists a finance function modernization focus after an acquisition. This is not a survey of every firm that handles multi-entity accounting, and many Sam's List members not written up here could fit.

How it is organized. The six items are a sequence to work through, not a ranking. One firm is written up, so there is no order of firms.

What review counts mean here. System Six has too few reviews on Sam's List for a count to mean much, so we do not cite one. Where we do cite counts in other posts, a count shows how many clients wrote something down, not technical quality.

What payment does and does not buy. Listing on Sam's List is free, and so is being named in this article. The firm written up here is a paying member of our featured program, which is why it gets a write-up. What payment does not buy is the language we use about a firm, its review count, or a promise that it fits you.

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About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.