Intercompany: inter-company billing
If you are currently considering how intercompany accounting works, this section explains 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 intercompany accounting process, financial data is transferred between the general ledgers of companies that share expenses or labor costs for a project.
During the intercompany reconciliation process, each company’s revenues and expenses are reconciled, allowing for an assessment of profitability. This process also involves creating entries in the general ledger for receivables and payables of the related companies to balance each company’s main balance sheet.
Intercompany billing allows companies to share personnel while the joint work performance continues. Example:
- workloadAn employee of one company may devote part of their working time to a project, phase, or task of another company.
- Expenditure burdenAn employee of one company can include travel, food, and other expenses under the project of another company in their expense report.
Intercompany transactions in accounting
The various departments, subsidiaries, and other legal entities within your company may exchange products and services to tackle projects.
Example: Imagine that resources for a project intended for an end customer are shared between two companies.
Logically, both companies need to have a defined workflow for processing transactions, which in many cases depends on the accounting application or platform used. You can find the requirements a management application should meet at this link.
What means “Intercompany“?
Advantages of inter-company cost coordination
The use of a dedicated application or platform for cost reconciliation between affiliated companies has many advantages, but the benefits for the different departments are particularly noteworthy.
Accounting department at the subsidiary level
When payments need to be processed (which should ideally happen as quickly as possible), delays and disputes are avoided.
This requires ensuring that the correct documents are available and that they correspond to those of the internal trading partner down to the smallest detail.
What is inter-company or inter-company communication? Intercompany billing?
General ledger
As far as general ledger accounting is concerned, applications for intercompany accounting allow an overview to be created in which the data of all participating companies can be continuously and centrally updated.
Furthermore, all business workflows are clearly presented and bottlenecks are identified that could cause the processes involved in financial statements to stall.
Approaches to inter-company billing
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 workers come.
In this case, don’t forget:
- A company’s income statement shows labor revenues and expenses for all employees of that company.
- The work is assigned to the company from which the employee comes.
- The income is allocated to the company from which the employee comes. In intercompany accounting, 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. No overhead costs are recorded in intercompany accounting.
Approach 2: Focusing 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.
This approach should take the following into account:
- A company’s income statement shows the labor revenues and expenses of all projects owned by that company, regardless of the origin of the employees.
- The workload is allocated to the company that owns the project. No entries are made for the workload itself.
- The income is allocated to the company that owns the project. No income entries are made.
- Overhead costs are allocated to the company that owns the project. In this system, a certain amount of the overhead costs of the company from which the employee comes is transferred to the company that owns the project.
Approach 3: Costs only
This method does not involve any additional transfer of overhead costs or income to the company that owns the project and to which the employee has billed hours and expenses.
This approach takes the following into account:
- A company’s income statement shows the labor revenues and expenses of all projects owned by that company, regardless of the origin of the employees.
- The workload is allocated to the company that owns the project. No entries are made for the workload itself.
- The income is allocated to the company that owns the project. No income entries are made.
- The actual overhead costs remain with the company from which the employee comes.
Using flexible business management software such as SAP Business One You can configure different project approaches so that the intercompany accounting is reported accordingly.