Intercompany accounting represents the relationship among companies that are within the same group, normally enterprises having a holding company, and subsidiaries. The intercompany transactions are captured in the financial records of the subsidiaries that are involved in the intercompany.
There are several formats of intercompany transactions among the subsidiaries, and the following diagram illustrates these intercompany transactions formats:
As shown in the preceding diagram, there are three types, which can be explained as follows:
- Upstream: An intercompany transaction flowing from the subsidiary to the parent
- Downstream: An intercompany transaction flowing from the parent to the subsidiary
- Lateral: An intercompany transaction flowing from one subsidiary to another subsidiary
In Microsoft Dynamics 365 for Finance and Operations, transactions posted in one legal entity lead to a related transaction to be posted automatically in the other company. Let's say that we have two subsidiaries, UMSF and USRT. The two companies have finalized an advertising campaign, and need to pay for the expenses. USMF will execute the payment transaction, but need to identify in the records that USRT should hold 30% of this expense. If the advertising expense is equal to $1,000 USD, then $700 USD will be posted as USMF's expenses, and $300 USD as USRT's expenses.
The financial entry will be as the following:
- Posted entry on USMF
- Dr. Advertising expense $700 USD
- Dr. Due from USRT $300 USD
- Cr. Bank $1,000 USD
- Posted entry on USRT
- Dr. Advertising expense $300 USD
- Cr. Due to USMF $300 USD