When a company grows to encompass a variety of product lines and brand extensions. When this happens, the company sets up different divisions and subsidiaries for accounting purposes and tracking profits. When a company has a vertical integration done, there is a lot of transactions which take place between two companies, records of which need to be maintained. This results in intercompany transactions and while it has many benefits to have an intercompany accounting, there is also a pressure on the accounts team to maintain and synchronize the intercompany transaction data.
The problem with Intercompany transaction is that, they are not maintained on a single platform and hence, there is a lot of effort and time spent to maintain data accuracy from data coming in from different systems. It is the process in which intercompany transactions are reconciled to avoid counting transactions twice, first on the parent company’s books and again on the books of the subsidiary.
For an example, if a manufacturing company has done a vertical and a horizontal integration and managing all the processes from raw material, manufacturing and distribution from three different subsidiaries. In such scenario, there are 3 different log books which need to be maintained and when the accounting happens, all the subsidiaries need to be on the same page for handling intercompany transaction.
So intercompany accounting means reconciling the intercompany receivables and payables, and intercompany sales and purchases between the parent company and its subsidiaries. Intercompany accounts are typically electronic and equivalent so records between companies are easily accessed and balanced.
An ERP system eliminates the complexity while making multiple entries in Intercompany accounting scenario and provides a number of benefits.
Benefits of Sage ERP Solutions for Intercompany Accounting:
- Accounts Accuracy: Implementing gross and accurate electronic intercompany accounting and reconciliation system is highly recommended for commonly controlled businesses. The centralized system will promote intercompany synergies and help smooth the closing process at the end of an accounting cycle. When a company needs to create a report or file a tax return, the information will be accurate and easily at hand.
- Cost Saving for Benefit Analysis: Intercompany accounting functionality excludes the need of hiring an outside firm to control intercompany accounting which save an additional cost to the company. Performing a cost-to-benefit analysis can help you decide what your firm needs and what it is budget can accommodate.
- Transactions Control: Intercompany transactions in ERP signifies policies and procedures to drive the intercompany activities which leverages the common processes across multiple entities into one service center.
- High Visibility: Intercompany accounting provides the ability to analyse gross profit on a consolidated cost basis which gains high data quality and consistency for product costing.
Managing Cost Centers: Cost Centers can be used in intercompany accounting as an indirect assignment of the location (Entity) of the equipment in order to derive invoice and tax charges (e.g., additional charges to different entities). It helps to manage the potential aperture for different entity taxes/ combination of vendor and other billing characteristics to derive correct tax calculation.
Hence, Intercompany accounting in an ERP consolidates and control the increasing complexity of your supply chain and administrative services is a result of increased business growth and expansion to multiple operating locations. To know more about the same, You can also write to Sage Software Solutions Pvt Ltd at sales@sagesoftware.co.in
