Intercompany Invoice

An intercompany invoice is a document that details a transaction between two units, divisions, or subsidiaries within the same parent company.

An invoice is a document generated by a business that provides a product or service to a customer. It provides the details of the transaction so the customer can have a record to support payment for the services or goods received.

Many businesses have units, subsidiaries, divisions, and/or franchises that conduct transactions with each other or with the parent company. These transactions need to be documented just like any transaction conducted with an outside customer.

Intercompany accounting is the process of documenting and recording these transactions. It is an important process for businesses that have subsidiary units that conduct business with each other. A transaction can only be considered profitable if it is conducted with an outside customer, so intercompany accounting ensures that all intercompany transactions are properly recorded. An intercompany invoice is the first step in that process.

An intercompany invoice will contain all of the vital information related to the transaction, including:

• The name of the entity or unit providing the good or service

• The recipient of the good or service

• The good or service provided

• The date on which it was provided

• The quantity or amount that was provided

• The value of the resource that was exchanged

Intercompany transactions can include a number of different kinds of financial activity. Related units can buy and sell goods or services, just like they do with outside customers. They can also exchange other resources, such as fees, inventory, cash, capital, dividends, raw materials, parts, staff, and loans. Any of these types of transactions require documentation.

In the process of intercompany accounting, it is vital that both parties accurately record the transaction and that they do so in a similar manner, using the same descriptive terms and values. This ensures that the transaction can be correctly recorded and processed.

Because intercompany transactions cannot be reported as a profit, they must be eliminated—they must cancel out or equal zero, in the final accounting process. The parent business cannot have an intercompany transaction with a value greater than zero in the closing period statements.

Preparing an intercompany invoice allows all parties to the transaction to fulfill this accounting requirement. Both entities should use a standardized language to refer to the entities, divisions, or units involved, as well as the type of transaction itself. This language will be reflected in the invoice, to ensure that the transaction is properly recorded on both sides.