What Are Intercompany Transactions?
Intercompany transactions are any type of business transactions that occur between two or more companies. Those companies may have some type of affiliation, such as being owned by the same parent company while maintaining their own identities, or there may be a buyer/supplier relationship between the two. Activities of this type should not be confused with intracompany transactions that involve the completion of tasks between two or more units that are part of the same operation.
One of the more common examples of intercompany transactions is the sale of goods or services by a supplier to a buyer. For example, a company that manufactures lawn furniture may enter into a deal with a retailer to supply tables, lawn chairs, and outdoor chaise lounges to the retailer’s outlets for sale to the general public. Since the deal is structured so that the retailer buys the lawn furniture from the supplier, the transaction involves the need to complete the transaction with the creation of an invoice that is presented after delivery, and with terms of payment that both parties have agreed is reasonable.
Two subsidiaries of a parent company may also engage in activities that are rightly referred to as intercompany transactions. When this is the case, one of the firms places an order with the other, is invoiced directly, and pays for the purchase out of funds allocated by the purchasing entity. The parent, while being a connecting factor between the two firms, is not directly involved in the ordering process and also does not get involved in the payment for the order. In the event that the transaction is conducted through the parent rather than independently by the two firms involved, then the transaction would be considered intracompany rather than intercompany.
Affiliated group transactions are also often classed as intercompany transactions. This approach is sometimes helpful for business consortiums that negotiate special discounted rates on behalf of their membership. When this is the case, the consortium or group seeks to secure goods and services from vendors based on the collective buying power of the members. Typically, those members will establish accounts directly with the supplier and be billed directly by that supplier. The benefit of intercompany transactions in this scenario is that the member firms have access to pricing that could not be secured individually, while still remaining responsible for interacting directly with the vendor or supplier without relying on the consortium to process payments or place orders.
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