Intercompany Reconciliation: How to Agree Balances Across a Group

When companies in a group trade with or lend to one another, each records its own side. Company A's receivable from Company B should equal Company B's payable to Company A. Intercompany reconciliation checks that they do, and explains where they do not.

This matters because intercompany balances and transactions are generally removed on consolidation. If the two sides disagree, the difference has nowhere to go, and it often delays group reporting.

Why the two sides disagree

• Timing. One company has booked an invoice or payment and the other has not.
• Goods or cash in transit at the period end.
• Exchange rates. The companies use different currencies or rates.
• Tax. One side records an amount with VAT or GST and the other without it.
• Coding errors. A transaction is posted to the wrong partner company or account.
• Disputes. One company does not accept a charge.

A step-by-step process

1. Set the rules. Agree a group calendar, a cut-off date, the exchange rates to use, and a tolerance for small differences.
2. Confirm balances before the close. Reconcile during the month, not only at the end.
3. Extract each company's ledger for its intercompany accounts, identifying the partner on every line.
4. Reconcile each pair of companies. A group of 5 has 10 pairs, and a group of 10 has 45, which is why spreadsheets get difficult quickly.
5. Explain and resolve each difference, with a reason and an owner. Book the missing entries.
6. Settle. Use netting where it is allowed (see below).
7. Prepare elimination entries for consolidation.

What netting does

Instead of each company paying every other company, netting calculates one net position for each company, then the fewest payments that settle the group.

For example, if A owes B 100, B owes C 100 and C owes A 40, then without netting, three payments totalling 240 are needed. With netting, A pays 60 and B pays nothing net, leaving C to receive 60: one payment.

Before netting across borders, check local rules with your tax and legal advisers, since some countries restrict it.

What elimination does

Elimination entries remove intercompany balances, and intercompany revenue and costs, so that the group's accounts show only dealings with outside parties. Any unrealised profit on goods still held within the group is usually removed as well. Your accounting framework and auditors set the exact requirements.

What Closentry does, and does not do

The Enterprise plan of Closentry reconciles every pair of companies, proposes netting from the agreed balances, and prepares elimination entries as a journal file.

It is not a full consolidation system. It does not combine trial balances, translate whole sets of accounts, handle non-controlling interests or produce consolidated statements. You post its elimination entries in your own consolidation process.