What Is an 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.
How Is an Intercompany Invoice Prepared?
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.
How Is an Intercompany Invoice Recorded?
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.
Intercompany Cost of Goods Sold (COGS)
Why Are Intercompany Invoices Important?
Intercompany invoices are important because all transactions must be properly recorded.
Intercompany accounting is a vital process that enables a business to maintain the same detailed journal entries for intercompany transactions as it would for all other financial activity. It allows the business to track, record, and reconcile all transactions, to avoid double entries in more than one of its subsidiaries or divisions, and to avoid artificially inflating profits or losses from intercompany transactions.
The recorded information allows the company to evaluate the full monetary value of all of its transactions, and to provide accurate financial statements. Intercompany accounting allows the business to assess all liabilities that it may incur on behalf of any of its subsidiaries, to comply with tax regulations within different jurisdictions where its subsidiaries are located, and lastly, to avoid disputes over transactions between any of its subsidiaries.
Accurate and detailed intercompany invoices support all of these objectives.
What Is an Example of an Intercompany Invoice?
If an executive of one subsidiary spent time working on the affairs of another, the executive’s time spent should be invoiced. The invoice would document all details related to the service provided:
Name of executive
Name of subsidiary that lent out the executive
Name of subsidiary that received the executive
Dates of service
Purpose of the time spent
Hourly rate of compensation
Total hours spent