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Intercompany Reconciliation Guide With Examples

Apr 03, 2023

Multi-entity organizations have a unique accounting challenge that other companies don’t face; intercompany transactions. So, in addition to traditional account reconciliation, multi-entity accounting teams also have to perform intercompany reconciliation (ICR) to verify all of the transactions among affiliates of the parent company.

In this post, we’ll discuss what intercompany reconciliation is, examples of intercompany reconciliation, the manual intercompany reconciliation process, and how to automate the process.  

What Is Intercompany Reconciliation?

Intercompany reconciliation is the process of verifying the transactions that occur between various legal entities owned by a single parent company.

It is very similar to standard account reconciliation, though instead of matching the company’s general ledger to a bank’s statement, the accountant reconciles transactions between the company’s various entities.  

This is important because it ensures there aren’t any discrepancies in the data and helps avoid double entries across multiple subsidiaries.

While you can manually reconcile the various entities in your company, plenty of automation solutions are also available. We’ll discuss both the manual process and automated solutions below.

Intercompany Reconciliation Process

If there are only one or two small entities within the parent company, you probably won’t have too many intercompany transactions and can perform the reconciliation process either monthly or quarterly. Therefore, you might be able to perform intercompany reconciliation manually. 

The first step to manually reconciling your accounting processes is to ensure that you accurately identify all intercompany transactions in each entity’s balance sheet and income statement.

To make this process easier for yourself, use the same identification and data entry standards for all journal entries involved in intercompany transactions. Ideally, all entities within the parent company use consistent data entry standards, though, at the very least, the journal entries for intercompany transactions should be consistent.

From there, you can choose one of three different processes to execute the intercompany reconciliation process:

  • G/L Open Items Reconciliation (Process 001): For the reconciliation of open items
  • G/L Account Reconciliation (Process 002): For reconciling profit/loss accounts or documents on accounts that don’t have open time management. 
  • Customer/Vendor Open Items Reconciliation (Process 003): Used for most accounts payable and accounts receivables attached to customer or vendor accounts.

As you can see, manually consolidating entries is time-consuming and can slow down your monthly close process. In addition, it’s also risky. As the month-end draws near, your accountants will feel the pressure to finish the reconciliation process which can lead to errors in the data.

For this reason, we recommend that all companies invest in software to automate the process.

An Example of Intercompany Reconciliation (Automated)

Smaller multi-entity companies can theoretically get away with manually performing intercompany reconciliations in spreadsheets. However, larger corporations that deal with thousands or even millions of intercompany transactions execute the reconciliation process daily and therefore have to invest in automation software. 

While various software solutions offer intercompany reconciliation automation, we built SoftLedger because we couldn’t find a solution designed specifically to solve the challenges multi-entity companies face.

We’re particularly proud of it because it automates the entire intercompany accounting and consolidation process. Here’s a brief overview of how SoftLedger handles multi-entity transactions and automates the intercompany reconciliation process:

As you can see, as soon as a transaction for a single subsidiary enters the platform, SoftLedger automatically creates the corresponding journal entries for each intercompany transaction. It also performs any necessary intercompany eliminations and performs the reconciliation process for you.

This way, you always have access to real-time data and never have to worry about manual errors creeping into your consolidated financial statements.

It also makes it easier for you to close the books faster and improves the overall efficiency of your team’s workflow. 

However, there are also a few other key benefits of SoftLedger that make it unique from other traditional ERP systems. 

First, the platform is 100% programmable via API, making it easy to build just about any integration. This also makes it highly flexible, so you can build out your own customizations to fit specific needs. 

It is also the first accounting platform to offer native cryptocurrency capabilities. So rather than purchasing an add-on to integrate your crypto financial data with your fiat financial data, SoftLedger seamlessly combines the two.

As you perform the intercompany reconciliation process, there are probably a few other terms that you’ll hear as well. We’ll discuss these terms below.

Intercompany Payables

An intercompany payable is when a subsidiary in your company owes a payment (like a credit, loan, or advance) to another subsidiary in the parent company. In this case, the company that records the payable consumed the resources provided by the other subsidiary. 

That being said, intercompany payables are ultimately eliminated in the final consolidated balance sheet to avoid inflating the company’s financial data.

Intercompany Receivables

Intercompany receivables occur when one subsidiary provides resources to another subsidiary in the parent company. In this case, the subsidiary providing the resources records the intercompany receivable. 

Like intercompany payables, all intercompany receivables ultimately need to be eliminated in the final consolidated financial statement.

Intercompany Reconciliation Automation Software

While you can theoretically perform the intercompany reconciliation process manually, it’s time-consuming and can slow down the monthly close process.

In addition to creating an operational drag, this delay also means that executives won’t have accurate data for decision-making, leading to poor investment decisions.

To solve this problem, we built SoftLedger, which automates the intercompany reconciliation process.

Designed specifically for multi-entity companies, your team will always have access to real-time data, which makes it easy to close the month faster and improves data accuracy by minimizing the opportunity for human error.

To see for yourself how SoftLedger can streamline your accounting operations and improve efficiency, schedule a demo today!

Intercompany Eliminations Guide (With Examples)

Consolidated Financial Statements: Process and Tools

Accounting For Multiple Entities: An Efficient Step-by-Step Process

Author
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Ben Taylor
CEO & Co-Founder at SoftLedger

A CPA with more than 10 years of varied public and private accounting experience, Ben has led many complex financial projects to successful outcomes.

He began his career at Ernst & Young, followed by in-house management roles at Fannie Mae and other public companies.

Ben holds a B.S. in Accounting from the University of Maryland.

Frequently Asked Questions

Yes, users have the option to use their own chart of accounts or SoftLedger’s standard chart of accounts when getting started with SoftLedger.  SoftLedger’s flexibility allows users to make changes to their charts by easily adding new accounts.

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