Intercompany transactions

An intercompany transaction is a transaction that takes place when two entities belonging to the same legal parent engage in certain activities with each other, as part of each entity’s direct area and towards fulfillment of the overarching objectives of the parent entity. These include transactions arising and implemented between the parent company and the subsidiary, or transactions between two subsidiaries owned by the same parent company. Category-wise, intercompany transactions are categorized into three types: downstream (parent to subsidiary), upstream (subsidiary to parent) or lateral (between subsidiaries).

In terms of purpose, intercompany transactions can take a variety of different forms, and certain common examples of these transactions include loans (intercompany loans), finances, cost allocations, royalties, and the exchange of goods and services.

Intercompany transactions can entail both monetary and non-monetary transfers. These transactions might involve the transfer of debt or the exchange of human resources and other economic resources such as fixed assets (e.g., equipment). In this sense, these transactions provide a viable means of utilizing and optimizing the shared resources at the level of a corporate group (parent entity).

To qualify as an intercompany transaction, both the parent company and its subsidiaries must act in the capacity of separate legal entities.

Intracompany transactions

On the other hand, an intracompany transaction is a transaction that takes place within the same legal structure of the company. In other words, it refers to any sale, transfer or trade between a division, subsidiary, parent or affiliated or related company under the common ownership and control of a corporate entity.

If multiple subsidiaries belong to the same legal entity, transactions and activities (e.g., transfers) between them are recorded as intracompany transactions.

Key differences

In the context of accounting, the difference arises since intercompany transactions involve entities within the same group, while intracompany transactions occur within a single entity. As such, a transaction takes place between companies that are under common control or ownership. As these transactions do not represent actual external revenue or expenses, intercompany transactions are typically eliminated during the consolidation process.

An intercompany transaction is a transaction that occurs between two different entities within the same group of companies. On the other hand, an intracompany transaction refers to a transaction that occurs within the same company or entity. These transactions are recorded in the company’s books and affect its financial statements.

The main difference between intercompany and intracompany transactions is the relationships between the entities involved. Intercompany transactions involve multiple entities within the same group, while intracompany transactions occur within a single entity. In other words, an intercompany transaction

occurs between legal entities forming a larger entity (a parent), while an intracompany transaction occurs within the same legal entity. Hence, financial reporting for the transactions differs in scope and intended effect and output.