A category of intercompany transaction that represents flow of business or activities between two subsidiaries, or similar structures, owned by the same parent company. Lateral transactions occur when the assets or financial activity is exchanged/ transferred between two subsidiaries controlled by the same parent. Neither subsidiary has hierarchical power over the other (in terms of control and decision making) but can carry out transaction involving both entities, such as swapping, purchasing, or selling assets in one way or the other (laterally). An example of a lateral transaction is when subsidiary A provides IT services to subsidiary B for a fee.

Intercompany transactions are an important element in the accounting process. By identifying such transactions, an entity can record and evaluate all financial activity thoroughly and accurately, and without duplication. By nature, not all transactions are carried out with external counterparties . Transactions that occur within or between entities within the parent company can impact its overall financial performance just as much as those that involve external stakeholders. Applying intercompany accounting allows a business to maintain the same detailed journal entries for these types of transactions in the same manner its does so with its general financial reporting. Intercompany accounting examines all lateral, upstream and downstream processes, tracking, recording, and reconciling relevant transactions to avoid duplication of entries in more than one of its subsidiaries or divisions.

Lateral transactions fall within transaction lines that require elimination (also including: downstream transactions and upstream transactions). For example, intercompany sales and billing transaction lines are set apart based on the intercompany account with which the line is associated. An intercompany sales order doesn’t impact general ledger (hence, it is a nonposting transaction), but when the sales order is invoiced, the system sets for elimination such transaction lines. Similarly, intercompany purchase orders are a nonposting transaction. However, when the purchase order is billed, the system carries out the same elimination process before posting to the general accounts.