Content authored by practitioners with experience at Amazon India, Intuit QuickBooks, and the Tata Group. Meet the team →
A finance executive in a group company is asked to agree intercompany balances but is not sure which dealings count as intercompany and why both sides must match.
Intercompany transactions are dealings between two legal entities of one group. Each entity records its own half, and the two halves must be equal and opposite so they cancel on consolidation.
A list of group entities and their intercompany control accounts, one control account per counterparty, and a monthly confirmation of balances between each pair.
Each pair of group companies shows equal and opposite balances at month end, and consolidation eliminations go through without unexplained differences.
Intercompany transactions are dealings between two separate companies that belong to the same group: goods sold by a parent to a subsidiary, a management fee, a loan with interest, or a cost recharged from one company to another. Each company records its own half of the deal. When the group prepares consolidated accounts, the two halves cancel out, so they must match.
What kinds of intercompany transactions are common in Indian groups?
A group here means a holding company and its subsidiaries, or companies under common control that prepare group accounts.
| Transaction type | Indian example | Seller or lender’s books | Buyer or borrower’s books |
|---|---|---|---|
| Sale of goods | A Pune manufacturing parent sells components to its Chennai assembly subsidiary | Intercompany receivable, sales, output GST | Purchases, input GST, intercompany payable |
| Services | A shared IT company in the group supports all other entities | Receivable, service income, output GST | Expense, input GST, payable |
| Management fee | The parent charges subsidiaries for finance, HR and legal support | Receivable, fee income | Fee expense, payable |
| Loan and interest | The parent lends ₹50,00,000 to a new subsidiary | Loan given, interest income | Loan taken, interest expense |
| Cost recharge | The parent pays a group insurance premium and recharges each company its share | Receivable, reduction in expense | Expense, payable |
The rule is simple: whatever one company records as an asset or income, the other must record as an equal liability or expense.
A worked example: a ₹10,00,000 sale with GST
The parent sells goods to its subsidiary for ₹10,00,000 plus 18 percent GST of ₹1,80,000. The invoice total is ₹11,80,000.
| Parent (seller) | Subsidiary (buyer) | |
|---|---|---|
| Sale or purchase | Sales ₹10,00,000 | Purchases ₹10,00,000 |
| GST | Output GST ₹1,80,000 | Input GST ₹1,80,000 |
| Balance | Receivable from subsidiary ₹11,80,000 | Payable to parent ₹11,80,000 |
At consolidation, the ₹11,80,000 receivable and the ₹11,80,000 payable are removed together, and so are the ₹10,00,000 sale and the ₹10,00,000 purchase. If the subsidiary has booked only ₹10,00,000 because its accountant has not yet recorded the GST, the two sides are ₹1,80,000 apart and the elimination does not balance.
Is a transfer between two branches or units of the same company intercompany?
This is where the accounting view and the GST view part ways.
- Accounting view. A branch or plant is part of the same legal entity. A transfer between two branches is an inter-branch or inter-unit transaction, not intercompany. It is cancelled when the company prepares its own accounts, using branch or head-office accounts.
- GST view. Under the CGST Act, each GST registration of a business is treated as a distinct person. If the Mumbai branch and the Bengaluru branch have separate GSTINs, a stock transfer from one to the other is generally treated as a supply, even with no payment, and needs a tax invoice.
- Same GSTIN. Two units under the same GSTIN, such as two warehouses in one state on one registration, move goods on a delivery challan rather than a tax invoice.
So a stock transfer can need a GST invoice and still not be an intercompany transaction for accounting. Keep the two ideas separate.
Why do the two sides disagree at month end?
Intercompany balances rarely match by accident. The common reasons:
- Timing. The parent invoices on 30 October, and the subsidiary books it on 2 November. For October, the parent shows a receivable the subsidiary has not yet recorded.
- GST on one side only. As in the example above.
- Returns and credit notes. The subsidiary returns goods worth ₹50,000 and books a debit note, but the parent has not issued its credit note.
- Payments in transit. The subsidiary pays on 31 October by NEFT, but the parent receives and books the credit on 1 November.
- Foreign currency. When a group company abroad is involved, each side may use a different exchange rate.
Each of these clears once both sides record the same event in the same period. The work of finding and fixing them is intercompany reconciliation.
What to read next
- Next in this series: How is an intercompany sale recorded in the books of both companies?
- How do I reconcile between two subsidiaries of the same group?
- Intercompany reconciliation in India: the full overview
- For the wider set of reconciliations a finance team runs, 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 →