How do I Create Inter-Company Transactions?

Creating and Posting Inter-Company Charges between two sister Companies in a Group.

Written By Gerry Mckeown ()

Updated at October 4th, 2018

1.     Introduction:

Intercompany Charging facilitates the transmission of charges from one company to another related or sister company in respect of non-trading type charges such as temporary transfer of staff or “Shared Services” like centrally maintained IT services or HR services. Intercompany Trading, on the other hand, is a different matter, involving many legislative matters such as Transfer Pricing, Cross Border Duties and VAT and other Taxes.  Intercompany Trading involving transfer of Goods and Product is achieved through the normal establishment of Customer/Supplier (Vendor) arrangements between the two Companies.

The system facilitates the raising of Intercompany transactions by enabling reciprocal “Purchase Invoices” to be automatically generated into a related Company when “Sales Invoices are input against a nominated and specific “Intercompany Account” in the originating Company.  This feature can be used for Intercompany charges between Group Subsidiary Companies, between Group Companies and Subsidiaries or other Group Companies, between Franchisor and Franchisees (and vice-versa) or even between independent non-related Companies that agree to process Invoices using this feature to reduce re-keying of data between them.

In this way all relevant Intercompany transactions can be catered for, i.e. via Sales Invoices raised by the originating Charging Company with corresponding Purchase Invoices generated in the target Receiving Company.   To achieve this, the system requires the setup of four basic Accounts; One each in the Sales and Purchase Ledgers (i.e. a special Customer Account and a special Supplier (Vendor) Account) of the related Companies and two corresponding special General Ledger Control Accounts (i.e. a special Debtors/AR General Ledger Control Account in the originating Company and a special Creditors/AP in the receiving Company).  The system also allows for situations where Companies have different VAT or Tax Registrations etc. - with VAT being charged where relevant.  The default tax code set up in the originating Intercompany Trading (Customer) Account determines this (unless overridden at Data Entry stage).  

The Intercompany Sales Customer and Purchase Supplier (Vendor) Accounts in each related Company should point (default) to the two special Intercompany Control Accounts in the General Ledger to separate them from normal trade Debtor/AR and Creditor/AP Control Accounts and to allow eventual elimination at the Consolidation level.  This also allows the Intercompany Accounts to be reported separately.

The reciprocal Invoicing function also requires the specific nominated Sales Customer Account to be identified as an “Intercompany Account” in order to automatically generate the reciprocal Purchase Invoice in the receiving Company.  The specific Purchase Supplier (Vendor) Account Code in the receiving Company also needs to be so nominated. 

The reciprocal Invoice posting will take account of the relevant Currency of the Sales Invoice (usually the Base Currency of the charging or originating Company) and convert it to the relevant Base Currency of the receiving Company.  The relevant Sales Trading Account and Purchase Trading Account should be in the same Currency – i.e. the charging Currency.  In this way the month-end Currency Revaluation routines can ensure that the Intercompany Accounts cancel each other on Consolidation.    

Clearly, where there are several inter-related Companies all raising charges on each other, then each Company must be “aware” of all of the other Companies in the context of having set up all of the relevant special Intercompany Sales and Purchase Accounts with each other in the various Currencies involved.  There is no need, however, to set up separate special General Ledger Control Accounts for each of the relationships – just ensure that each and all of the special Trading Accounts (both Sales and Purchase) nominate the default special Debtors/AR or Creditors/AP Control Account.

The following steps outline how to set up and use this function.  There is a certain amount of initial set up required, so please follow the steps carefully.  After the setup is completed, the processing of the Intercompany transactions is quick and easy.

2.    Example 1: Generating Intercompany transactions between two Companies with a Single Currency:

In this example we are going to create an Intercompany charge between RenuMe Spa Products - Bristol and RenuMe Spa Products (Leeds).  This will be by way of a Sale from Bristol to Leeds.

3.    Set up the Intercompany Debtor/AR and Creditor/AP Control Accounts:

As a first step you must ensure that your GL Chart of Accounts is set up to handle Intercompany transactions.  This is done in two stages:

a)    Create Intercompany GL Control Accounts:  In both the sending and receiving companies two new special Balance Sheet Control type GL Accounts for both “Intercompany Debtor/AR” and “Intercompany Creditor/AP” need to be created: (Go to > General > Add/Edit GL Accounts).  These accounts should be set up in a similar fashion to the existing standard Debtor/AR and Creditor/AP Control Accounts.

N.B.   If it is the case that Leeds might also raise charges on Bristol, then obviously an Intercompany Creditors Control Account also needs to be set up in the Bristol Company and an Intercompany Debtors Control Account set up in Leeds.

You might also consider setting up a couple of new Accounts in the Revenue/Expense side of the Chart of Accounts for “Intercompany Sales” and “Intercompany Purchases” to differentiate these sales and purchases from the normal sales and purchases Accounts (although this is not a necessary pre-requisite).  In addition, for Reporting purposes, you might want to set up and allocate Sub-GL Categories of “Intercompany Sales” and “Intercompany Purchases” to these additional Revenue/Expense accounts also.

b)    Nominate these special Control Accounts as Intercompany “System” Accounts:  The system also needs to identify these two Intercompany Debtor/AR and Creditor/AP Control Accounts as special “System” Accounts.  To do this you must set them up correctly within the System Accounts screen (Go to > Setup > Company Setup > CodesMaintenance > System Accounts) in each Company.

In the charging Company (Renu MediSpa Bristol), edit the entry for the Intercompany Debtors Control/AR (or both) and enter the GL Code you have previously set up.  In the receiving Company (Renu MediSpa Leeds) do the same for the Intercompany Creditors/APR Control.

4.    Create the Intercompany Sales and Purchase Accounts:

The next step is to create an Intercompany Customer Account in the Sending Company (Renu MediSpa Bristol) and an Intercompany Supplier (Vendor) Account in the Receiving Company (Renu MediSpa Leeds).  These accounts will be used for the purposes of raising and receiving the Invoice charges from the one company to the other.   Log into the Bristol Company and Go To > Sales > Customer Accounts > New Customer;         

Log into the Leeds Company and Go To > Purchases > Supplier Accounts  > New Supplier (Vendor);

Both these accounts must be set to point at the relevant Intercompany Debtors/AR or Creditors/AP Control Accounts that you previously set up in 2. above (and also to the Intercompany Sales and Purchases Accounts that you may also have set up – which, in our example, we have set up as – 1140 and 2140 respectively).

N.B.  If you do not wish to charge VAT on the intercompany transactions then please ensure that the “Default VAT Code” on the “Finance Settings” Tab is set to “NT” on both the Supplier (Vendor) Account and the Customer Account.

5.    Create a Connection between the two Companies:

The next stepbefore you can raise Intercompany transactions, is to “Connect” the two companies.  This is a very important Security constraint. 

However, once this connection has been established, Sales Invoices created in the Bristol Company will automatically be sent to the connected Leeds Company for automatic Posting as Purchase Invoices in that company (providing that they are raised on the appropriate Intercompany Customer Account). Note, however, that this is only a one-way connection.  If you also wish the Leeds (Receiving Company) to also send Invoices back to the Bristol Company (Originating Company), as touched on earlier, then you need to carry out the same process in reverse.  And, if you require connections to a number of other sister Companies (see Example 2. below) then these also require their own exclusive connections keys to be established (both forward and reverse).

These connections are established using the system’s API which uses an encrypted string of characters (called the “Client Key”’) to facilitate connections between the two companies.  However, once a connection has been established, it remains so.  To establish a connection you must firstly generate a Client Key in the Receiving Company (in this example, Renu MediSpa Leeds).  This key will contain the necessary permission information to allow the Sending Company (Renu MediSpa Bristol) to send Invoice data to the Receiving Company.

Log into RenuMe Spa Products (Leeds) (the Receiving Company) and Go to > Setup > Company Setup >Company Details & Settings > Integration Tab;

Enter the User Password you use to log into the Leeds Company and press “Request User Key”;

Swipe the entire Key with your mouse and then press (CTRL+C) to copy all the text in the user key box.  Make sure that you copy all of the text in the generated key.

Next, log out of Leeds and Log into Bristol.  In this company choose the following menu option:

(If this Menu option is not shown on your Screen, contact your System Administrator or your Support Team to set it up for you).

First, Click on “Add New Intercompany Connection” and Paste (CTRL + V) the contents of the clipboard (i.e. The Client Key from the Leeds Company) into the box provided.  Then click “Save”. 

In this, the Bristol Company, a connection has now been established with the Leeds Company.

You next need to supply the nominated Sales Customer Account from the Drop Down List and the opposing Company’s Purchase Supplier Account from its Drop Down List – as you have set up in 3. above – and finish by “Closing” this screen.

6.     Create an Intercompany Sales Transaction:

Intercompany Transactions Set Up is now complete for the purpose of allowing Bristol to send Intercompany Sales Invoices to Leeds.  As mentioned previously, if you also wish to have the Leeds Company send Sales Invoices to Bristol you should repeat the set up process starting at 2. above.

You can now process intercompany transactions from the Sales Batch Invoice screen.  Log in to the Bristol Company and “Go To > Sales Invoicing > Batch Invoices” and enter a transaction against the Intercompany Sales Customer Account;

When you’ve finished with the details of the Invoice, Click “Post Batch and the Invoice will “Post” in the originating Company (Bristol) as a Sales Invoice and an equivalent Purchase Invoice will be created within the receiving Company (Leeds) at the same time and stored as an “Unposted transaction waiting subsequent approval and consequent Posting.

7.     Reviewing and Posting Intercompany Charges:

The next step in the process will be to review and post received Intercompany charges in the receiving company.  When you (or another user) are ready to do this, log into the Leeds Company, and “Go To > Purchases >  Purchase Invoicing > Intercompany Transactions. (If this Menu option - not to be confused with Intercompany Transactions Setup - is not shown on your Screen, contact your System Administrator or your Support Team to set it up for you).    Alternatively, click on the “Globe” symbol here;

Both options will bring up this screen;

This screen lists all of the received intercompany charges that are currently “Unposted” in this company.  The General Ledger Account shown (“IC-Bristol”) is the Intercompany Purchasing Account that you previously set up in 3. above.  You now have the opportunity to override the default General Ledger Posting Account, add or override the default BI Code (both defaults from the Intercompany Purchasing Account master record) and the Tax Code.  When you have made the amendments, activate the “Process” button to post the transactions.   N.B.  If there is more than one Intercompany Transaction shown, then you must amend all of them before Processing starts, as once processing commences - all displayed Transactions will be Posted.   After processing, the grid will clear and you can open up the Intercompany Purchasing Supplier (Vendor) Account verify that the transactions have been posted correctly;

Note:  If, for any reason, the receiving Company decides to reject the Invoice from the originating Company, it (the receiving Company) should still accept and post the transaction, but then send an exact replica back to the originating Company.

8.     Producing the Intercompany Profitability Report:

You should now run a Consolidation – but please note that all Intercompany transactions must be accepted beforehand;

After the Group Company is Consolidated, the Intercompany Transactions will remain in the subsidiary companies for their own reporting purposes but will be eliminated at group level as they will effectively cancel each other out by using appropriate General Ledger Categorisation.  At group level (i.e. Log into the Group Company) there is a report called “Intercompany Profits” that details the Intercompany charges in each subsidiary.  This can also be extracted to Excel to determine any profit elements. This report shows all the SIs and PIs posted to the Inter-company Accounts during the selected period.

And here is the Intercompany Balance Sheet;

9.     Example 2 - Multiple Companies with Multiple Currencies:

In this example, we are going to raise an Intercompany charge between Australia and France.

As heretofore we need to set up the Intercompany Sales Account and the Intercompany Debtors/AR Control Account in the Australia Company and the Intercompany Purchases Account and Intercompany Creditors/AP in France and nominate the two Control Accounts as “System Accounts”.  And also as heretofore the Sales and Purchase Accounts need to default to these Control Accounts.

Clearly, the Base Currency of the Australian Company is “AUD$” and the Base Currency of the French Company is “€”.  In this case, however, the Currency of the receiving Company’s Intercompany Supplier (Vendor) Account (Renu MediSpa France) must match that of the sending Company’s Intercompany Sales Account - i.e. AUD$.  Similarly, if France is also expecting Intercompany Charges from the USA, then it must also set up a separate Intercompany Purchase Supplier (Vendor) Company for that purpose with the nominated currency, in this instance, being “US$”.  Likewise, if USA is expecting charges from the other related companies in the Group, it must set up Intercompany Purchase Supplier (Vendor) Accounts for each of the Currencies and Companies involved.  (In the former example of a single currency Group, it is only necessary, if desired, to set up one Intercompany Purchase Supplier (Vendor) Account to receive charges from all multiple sister Companies).

After “Connecting” the two Companies, you can then go on to raise an Intercompany Sales Invoice from Australia.  In this example AUD$1,000.00 (AUD$1,100 after GST Tax).   After accepting the charge, the Intercompany Supplier (Vendor) Account in France will look like this;

And, after Group Consolidation this is what the Intercompany Profitability Report looks like;

(In this latter example, we neglected to set up additional separate General Ledger Codes for Intercompany Sales and Purchases (as we did in Example 1) and, as a consequence, the Invoices have been posted to the default “Direct Sales” and “Direct Purchases” Accounts in Australia and France).