The objective of intercompany accounting is to strip away the financial impact of internal transactions
(financial interactions between related entities within the same parent company) to yield financial
statements that only reflect activity with independent third parties. Intercompany accounting eliminates
financial activity that takes place between two subsidiaries or between the parent and a subsidiary.
Examples of events covered by intercompany accounting include sales of products, services or inventory,
cost allocations, royalties, and debt financing between related companies.
Intercompany transactions are common and come in many forms. Their primary characteristic is that the
participating entities are part of the same parent company, unlike “intracompany transactions” that occur
between two units within the same legal entity. Because of the relationship between the two
parties, intercompany transactions are not considered independent transactions.
Why is it important?
• Eliminates double counting of intercompany activity.
• Highlights activity among the entities within a group.
• Supports accurate tax filings across different jurisdictions.
• Aids cash movement and settlement, including of foreign currencies.
• Is necessary for compliance with Generally Accepted Accounting Principles (GAAP), Securities
and Exchange Commission (SEC) rules and IRS codes