Intercompany accounting is a set of procedures used by a parent company to eliminate transactions occurring between its subsidiaries. For example, if one subsidiary has sold goods to another subsidiary, this is not a valid sale transaction from the perspective of the parent company, since the transaction occurred internally. Consequently, the sale must be removed from the books at the point when the consolidated financial statements of the parent company are being prepared.
Intercompany transactions can be flagged in an organization's accounting system at the point of origination, so that they can be automatically backed out when the consolidated financial statements are prepared. If there is no flagging feature in the software, then the transactions must be manually identified, which is subject to a high degree of error. The latter case is most common in smaller organizations that have used a less feature-rich accounting system, and now find that it does not have the necessary transaction flagging features needed to account for its subsidiaries.
Intercompany accounting can be one of the key bottlenecks in the process of closing the books for a parent company, and so should be a focus of management attention to find ways to streamline the process.