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A finance executive in a group company books an intercompany sale or purchase but is unsure of the entries on the other side, and the two control accounts end up disagreeing.
The seller debits an intercompany receivable and credits sales and output GST; the buyer debits purchases and input GST and credits an intercompany payable. Settlements and returns are booked as mirror entries in the same period so the two control accounts stay equal and opposite.
One intercompany control account per counterparty in each company, a shared invoice and credit note reference, and an agreed cut-off rule for invoices and payments near month end.
At each month end the seller's receivable equals the buyer's payable, consolidation eliminations balance, and any difference is a listed timing item.
In an intercompany sale, the seller debits an intercompany receivable and credits sales and output GST. The buyer debits purchases and input GST and credits an intercompany payable. Done correctly in the same period, the seller’s receivable and the buyer’s payable show the same amount in opposite directions, and they cancel when the group accounts are consolidated.
What are the entries for the sale, the payment and a return?
A parent company sells goods to its subsidiary for ₹10,00,000 plus 18 percent GST of ₹1,80,000. The invoice total is ₹11,80,000. Later the subsidiary pays in full and returns goods worth ₹50,000 plus GST.
| Event | Seller (parent) | Buyer (subsidiary) |
|---|---|---|
| Sale on 10 October | Dr Intercompany receivable ₹11,80,000; Cr Sales ₹10,00,000; Cr Output GST ₹1,80,000 | Dr Purchases ₹10,00,000; Dr Input GST ₹1,80,000; Cr Intercompany payable ₹11,80,000 |
| Bank settlement on 30 October | Dr Bank ₹11,80,000; Cr Intercompany receivable ₹11,80,000 | Dr Intercompany payable ₹11,80,000; Cr Bank ₹11,80,000 |
| Return of goods worth ₹50,000 plus ₹9,000 GST | Dr Sales returns ₹50,000; Dr Output GST ₹9,000; Cr Intercompany receivable ₹59,000 | Dr Intercompany payable ₹59,000; Cr Purchases (or purchase returns) ₹50,000; Cr Input GST ₹9,000 |
“Dr” means debit and “Cr” means credit. The intercompany receivable and payable are control accounts: one account in each company for each group counterparty, so that the balance with every group company is visible at a glance.
After all three events, the parent’s receivable from the subsidiary is a credit of ₹59,000 (it owes the subsidiary a refund), and the subsidiary’s payable to the parent is a debit of ₹59,000 (it is owed a refund). Equal and opposite, as they should be.
A worked example: when settlement crosses month end
Change one fact. The subsidiary transfers ₹11,80,000 on 30 October, but its accountant books the payment on 1 November because the bank statement was downloaded that morning.
| At 31 October | Parent | Subsidiary |
|---|---|---|
| Intercompany balance | Receivable ₹0 (payment received and booked) | Payable ₹11,80,000 (payment not yet booked) |
For October, the two control accounts are ₹11,80,000 apart. Neither company has made a wrong entry in the long run; the subsidiary has simply recorded it a day late. On 1 November both show zero again.
For a single month this is a timing difference. But at a quarter end or year end, it means consolidation will not balance unless someone spots it. The fix is a simple cut-off rule: both companies book intercompany payments on the value date shown on the bank statement.
What happens to these balances at consolidation?
When a group prepares consolidated accounts, it adds together the accounts of the parent and its subsidiaries. If the ₹10,00,000 sale and the ₹10,00,000 purchase were left in, the group would appear to have earned revenue by selling to itself. The same applies to the receivable and payable.
So the group eliminates:
- The intercompany sale against the intercompany purchase.
- The intercompany receivable against the intercompany payable.
- Any unrealised profit on goods still held by the buyer at the year end, which is a further adjustment.
Elimination only works if both sides carry the same number. A difference of even ₹9,000 has to be explained before the group accounts can be finalised.
Which small mistakes make the two control accounts differ?
- GST booked by one side only. The buyer records ₹10,00,000 and forgets the ₹1,80,000 of input GST, so its payable is ₹1,80,000 lower.
- Different invoice dates. The seller dates the invoice 31 October; the buyer receives it on 3 November and books it then.
- Return booked by one side. The buyer posts a debit note for the ₹59,000 return; the seller has not yet issued its credit note.
- Wrong counterparty. The buyer books the invoice to a general creditor account instead of the intercompany control account.
- Bank charges. One side records the payment net of a small bank charge, the other gross.
Each of these is easy to fix once found. Finding them is the job of intercompany reconciliation, covered next.
What to read next
- Next in this series: Intercompany reconciliation in India: the full overview
- How do I reconcile between two subsidiaries of the same group?
- Start of this series: What are intercompany transactions?
- For the wider set of reconciliations, see reconciliation software for Indian finance teams
Content authored by practitioners with experience at Amazon India, Intuit QuickBooks, and the Tata Group. Meet the team →