Intercompany Sales Journal Entry refer to transactions between different entities within the same corporate group. Recording these transactions accurately is crucial to ensure the financial statements of each entity and the consolidated financial statements of the group are correct.
Example Scenario
Let’s assume Company A sells goods worth ₹1,00,000 to Company B on 10-07-2024. Company A is the seller, and Company B is the buyer.
Journal Entry in Company A’s Books (Seller)
Company A needs to record the sale and the receivable.
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 10-07-2024 | Intercompany Receivable | 1,00,000 | Amount due from Company B for sales | |
| 10-07-2024 | To Sales Revenue | 1,00,000 | Recording intercompany sales |
Explanation:
- Intercompany Receivable (Debit): This increases the asset account, reflecting the amount owed by Company B.
- To Sales Revenue (Credit): This increases the revenue account, recording the sales revenue.
Journal Entry in Company B’s Books (Buyer)
Company B needs to record the purchase and the payable.
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 10-07-2024 | Purchases | 1,00,000 | Purchase of goods from Company A | |
| 10-07-2024 | To Intercompany Payable | 1,00,000 | Amount owed to Company A |
Explanation:
- Purchases (Debit): This increases the expense account, reflecting the cost of goods purchased.
- To Intercompany Payable (Credit): This increases the liability account, indicating the amount owed to Company A.
Settlement of Intercompany Payable and Receivable
When Company B pays Company A, the following entries are made to clear the intercompany receivable and payable.
Journal Entry in Company A’s Books (Receiving Payment)
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 20-07-2024 | Cash | 1,00,000 | Payment received from Company B | |
| 20-07-2024 | To Intercompany Receivable | 1,00,000 | Clearing intercompany receivable |
Explanation:
- Cash (Debit): This increases the cash account, reflecting the receipt of payment.
- To Intercompany Receivable (Credit): This decreases the receivable account, clearing the amount owed by Company B.
Journal Entry in Company B’s Books (Making Payment)
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 20-07-2024 | Intercompany Payable | 1,00,000 | Clearing intercompany payable | |
| 20-07-2024 | To Cash | 1,00,000 | Payment made to Company A |
Explanation:
- Intercompany Payable (Debit): This decreases the liability account, clearing the amount owed to Company A.
- To Cash (Credit): This decreases the cash account, reflecting the outflow of funds for payment.
Conclusion
Recording intercompany sales accurately ensures that each entity’s financial statements are correct and that intercompany transactions are eliminated during consolidation. Proper management of these entries helps in maintaining transparency and compliance with accounting standards.