What is an intercompany account?

Definition

An intercompany account is a general ledger account that records activity between companies under common ownership. It is an asset when the other entity owes this company, and a liability when this company owes the other.

Each legal entity still keeps its own books. The account exists so a payment, bill, or transfer that belongs to a sister company does not get buried in this company's own income or expense.

Where it shows up

Balance Sheet: Located as a receivable or payable with a related entity.

P&L: Related to income or expense between related entities before those amounts are eliminated.

Cash flow: Related to cash only if cash actually moved between the entities.

See also: Due To Due From · Elimination Entry · Consolidation

When you look at a company's Balance Sheet, the account usually sits with other receivables or payables and is named for the related entity. A debit balance means the related company owes this one.

A credit balance means this company owes the related one. The name on the account should match the counterparty so a reader can tell which sister company the balance belongs to.

The Income Statement can still show rent, fees, or interest billed between the entities. Those lines are the income or expense of each separate company.

The unpaid piece of that activity sits in the intercompany account. It is the open amount, not the income or expense itself.

Cash flow is involved only when cash actually moved. Recording a receivable without a transfer does not change cash.

Paying a sister company's vendor does move cash. That is why cash flow follows the transfer, not the open balance sitting on the books.

How it works

Each entity has its own chart of accounts. The intercompany account is one of those accounts, often labeled with the counterparty's name.

A journal entry puts a balance in. Common triggers are one entity paying a vendor for the other, one entity billing the other for shared costs, or one entity moving cash to the other.

The debit and credit must balance on that entity's books, the same as any other entry. Posting the entry updates the general ledger.

The related entity should record the mirror. If Roaster books a due-from Cart balance, Cart should book a due-to Roaster balance for the same amount and the same date.

The balance stays until it is settled with cash or offset against a reverse amount. At month-end close, the two sides should still match.

An unmatched balance usually means one entity posted and the other did not. Keep a source document for every movement: the vendor bill, the transfer confirmation, or a short note of who paid what and why.

That paper trail is what makes the account easy to prove later. It also helps anyone reading the books see that the cash movement was not this company's own cost.

Example

Roaster LLC and Cart LLC are both owned by the same person. The cart's landlord will only take a check from the roaster, so Roaster pays $5,000 of Cart's rent from Roaster's bank account.

On Roaster's books, the payment is not Roaster's rent. It is cash leaving Roaster that Cart now owes.

Debit: Due from Cart LLC $5,000

Credit: Cash $5,000

Roaster's cash is down $5,000, and Roaster holds a $5,000 receivable from Cart. Cart's own books would record rent expense and a payable to Roaster so Cart still shows the $5,000 cost.

The tracking account is doing its job. Anyone reading Roaster's Balance Sheet can see that the cash did not buy Roaster's own occupancy.

Common mix-ups

An intercompany account is not the same as ordinary accounts receivable from customers. A customer receivable is money a third party owes for goods or services.

An intercompany balance is money a related entity owes. That can be true even when no sale to an outside customer happened.

It is also not the same as ordinary accounts payable to vendors. A vendor payable is what this company owes an outside supplier.

A due-to related-entity balance is what this company owes a sister company. The outside vendor never appears on that line.

People also mix the tracking account with the later combined-statement cleanup. The account stays on each entity's books so each company remains complete.

Removing the internal amounts is a different step. That cleanup happens when statements are combined, not when the payment is first recorded.

Related terms

• Due To Due From: The paired receivable and payable accounts recording what one entity owes another.
• Elimination Entry: The consolidation entry that removes transactions between related entities.
• Consolidation: Combining multiple entities into one set of financial statements.
• Account Reconciliation: Proving that a ledger balance agrees to independent support.
• General Ledger: The master record of every account and every posted transaction.
• Journal Entry: A dated record of debits and credits posted to the ledger.
• Chart Of Accounts: The organized list of every account used to record transactions.
• Balance Sheet: A statement showing what a business owns, what it owes, and what is left for owners at a single point in time.