Intercompany Clearing

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Note. Image is from DATA UNIT AG. (https://www.dataunit.ch/was-ist-zwischenbetriebliche-verrechnung-intercompany/)

If you are just thinking about how intercompany accounting works, here is an explanation of which groups of companies benefit most from this type of solution and how it improves the accounting of the companies involved.

What are Intercompany Relationships?

During the process of intercompany accounting there is a transfer of financial data between the general ledgers of companies that share expenses or workload of a project.

During the process of intercompany clearing, revenues and expenses of each company can be reconciled to evaluate profitability. During this process, entries of receivables and payables of the related companies are also created in the general ledger to balance the general ledgers of each company.

Using intercompany accounting, companies can share personnel while the joint work effort is ongoing. Example:

  • Workload: an employee of one company may spend a portion of his or her work time on the other company’s project, phase, or task.
  • Expense charge: An employee of one company may record travel, meals, and other expenses under the other company’s project in his expense report.

Intercompany transactions in accounting

Between the different departments, subsidiaries and other legal entities of your company, there may be an exchange of products and services to shoulder projects.

Example: Imagine that resources of a project destined for an end customer are shared between two companies.

Logically, in these two companies, the workflow to be followed must be clarified in order to process the transactions, which in many cases depends on the accounting application or platform used. You can check out this link to see the requirements that a management application should meet.

What does “intercompany” mean?

Advantages of inter-company cost reconciliation

Using a dedicated application or platform for cost reconciliation between related companies has many advantages, but the benefits for the different departments are particularly worth mentioning.

Accounting department at subsidiary level

If payments have to be processed (which should preferably be done as soon as possible), this will avoid delays and disputes.

For this purpose, it must be ensured that the correct documents are available and that these correspond to those of the internal trading partner down to the smallest detail.

What is intercompany or intercompany settlement?

General Ledger Accounting

As far as general ledger accounting is concerned, intercompany accounting applications can create an overview in which the data of all participating companies can be updated continuously and centrally.

It also clearly displays all business workflows and identifies bottlenecks that can cause processes involved in financial closings to stall.

Approaches to intercompany accounting

There are three basic approaches to intercompany accounting that have a major impact on how transactions are reported.

The approach used depends on your company or group.

Approach 1: Focus on employees

In this first approach, the workload and income of the project are transferred to the company from which the workforce comes.

Remember in this case:

  • A company’s income statement reports labor income and expenses for all employees of that company.
  • Labor is allocated to the company from which the employee comes.
  • Income is allocated to the company from which the employee comes. In intercompany allocation, all (or part of) the income from the company that owns the project is transferred to the company from which the employee comes.
  • Overhead costs are allocated to the company from which the employee comes. In the case of intercompany allocation, no posting of overhead costs is made.

Approach 2: Focus on projects

In this system, the overhead costs of the company from which the employee comes are transferred to the company that owns the project.

To consider in this approach:

  • A company’s income statement reports the labor income and expenses of all projects owned by that company, without regard to where the employee comes from.
  • The work effort is allocated to the company that owns the project. No entries are made for work effort.
  • Income is assigned to the company that owns the project. Income entries are not made.
  • Overhead costs are assigned to the company that owns the project. In this system, a certain amount of overhead from the company the employee comes from is transferred to the company that owns the project.

Approach 3: Costs only

Under this method, no additional transfer of overhead or income is made to the company that owns the project and to which the employee has charged hours and expenses.

In this approach, it is necessary to take into account:

  • A company’s income statement reports the labor income and expenses of all projects owned by that company, without regard to the source of the employees.
  • The work effort is allocated to the company that owns the project. Entries for work effort are not made.
  • Income is allocated to the company that owns the project. Income entries are not made.
  • The real overhead costs remain with the company from which the employee comes.

Using flexible enterprise management software such as SAP Business One, you can configure different project approaches so that intercompany accounting is reported accordingly.

Original Article:
https://blogs.sap.com/2023/03/01/intercompany-clearing/

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