Accounting Best Practices, Fifth Edition

4–16. Replace Intercompany Invoicing with Operating Transactions

Those companies with subsidiaries will find some difficulty at the end of the fiscal year, because they must back out all sales between subsidiaries, which are not, according to accounting rules, true sales. The most common way to record product shipments between locations is to issue an invoice to another subsidiary, which pays it as though it is from an independently owned organization. At the end of the year, the accounting staff must then determine the margin on all sales to subsidiaries (which can be a lengthy undertaking) and create a journal entry to reverse out the margin. This is clearly not a value-added activity, and reducing it to the minimum gives the accounting staff more time to deal with other issues.

A best practice that multiple-subsidiary companies can use is to avoid using invoices when shipping between company-owned facilities. Instead, there are two ways to record the transactions. The first and easiest approach is to record any inventory transfers as a simple movement of inventory between warehouse locations in the computer system. This approach is only possible if a company uses a single enterprisewide database of information to control activities in all company locations. If such a system is in place, a shipping clerk can simply record a delivery as being moved from one warehouse to another, or as being in transit to another warehouse, where it will be recorded as having been received as soon ...