Intercompany transactions happen when companies within the same group buy or sell goods or services to each other. These transactions are common in groups that have a parent company and several subsidiaries. Proper accounting for these transactions is important because they can affect the group’s total profit and financial position. The goal is to make sure the group financial statements show only transactions with outside parties, not internal ones. If you need help, please contact an accounting firm in Singapore for professional support.
One example of an intercompany transaction is when one subsidiary sells inventory (Also see What Should You Include in Your Inventory Cost?) to another subsidiary. Another example is when a parent company provides management services to its subsidiary. These transactions may look like normal business activities, but for the group as a whole, they are internal movements of money and goods.
When preparing consolidated financial statements, intercompany transactions must be eliminated. This means removing sales, expenses (Also see What Are Non-cash Expenses?), and balances that happen only within the group. For example, if one company records revenue from selling to another company in the same group, that revenue should not appear in the group’s total revenue.
Unrealized profit is another important issue. If goods are sold within the group and not yet sold to outside customers, any profit included in those goods must be removed. This helps make sure the group does not report profit that has not truly been earned from external sales.
Accounting for intercompany transactions helps ensure that financial statements are accurate and fair. It prevents double counting and shows the true performance of the business group. By following proper rules, companies can provide clear and reliable information to investors (Also see Investor Ratios in Financial Statement) and other users of financial statements.