Intercompany Accounting & Eliminations: How to Keep Multi-Entity Financials Audit-Ready
Every scaling company reaches a point where its structure becomes more complicated than its books.
You start with one legal entity. Then another is added for a new line of business. Then a holding company. Then maybe a real estate affiliate. What once fit neatly into QuickBooks turns into a web of intercompany transfers, shared costs, and due to/from balances.
This is the moment when many companies lose financial clarity — and it’s exactly where intercompany accounting and eliminations either create confidence or chaos.
Whether you’re preparing for an external audit, an ABL field exam, or an investor due diligence, clean intercompany accounting isn’t optional — it’s foundational.
🏢 Why Intercompany Accounting Matters More Than Most Think
Intercompany activity often happens quietly: a wire to cover payroll here, an intercompany invoice there. It seems minor at the time — “we’ll reconcile it later.” But those small transfers snowball into:
Unclear loan balances
Unbalanced eliminations during consolidation
Incorrect borrowing base calculations for ABL lenders
Red flags for auditors and investors
Auditors, lenders, and due diligence teams know this is where errors and risks hide. A well-structured intercompany framework signals maturity. A messy one slows everything down and raises eyebrows.
👉 This is why intercompany accounting is not just a controller’s task — it’s a strategic lever for every CEO, CFO, and owner with multiple entities.
🧭 Step 1: Map the Entity Relationships Before Touching the Books
Before reconciling anything, start with clarity: understand how your entities interact.
A clean intercompany structure map answers:
Who owns what (and how ownership is structured)
Which entities share cash, contracts, or expenses
How funds move between subsidiaries and affiliates
What’s consolidated and what remains standalone
A simple entity map can turn a tangled mess into a narrative auditors can follow.
Pro tip: Keep this map inside your CFO Drive, updating it with each structural change or acquisition.
📊 Step 2: Standardize the Chart of Accounts Across All Entities
A GAAP-aligned chart of accounts is the backbone of accurate intercompany accounting.
If each entity uses different account numbers or naming conventions, reconciliation becomes a nightmare. Consolidation falls apart.
Your COA should include:
Numbered, standardized accounts across entities
Dedicated intercompany receivable and payable accounts
Clear naming conventions (e.g., “Due To Parent Co.”, not vague “Due To”)
Mapping that supports eliminations cleanly in consolidation
Standardization saves you time at month-end, quarter-end, and especially during audits.
💸 Step 3: Document Intercompany Loans & Affiliate Balances Clearly
Intercompany loans are one of the most common audit pain points.
What starts as a quick cash transfer can linger for years without formal documentation — creating audit findings and lender concerns later.
Your Intercompany Loan Schedule should include:
Lender & borrower entity names
Principal amount and origination date
Interest terms (or note if none)
Outstanding balance and repayment activity
Clear distinction between subsidiaries and affiliates
This transparency builds trust with lenders and auditors and avoids borrowing base adjustments during ABL exams.
📑 Step 3.1: Keep Intercompany Loan Agreements Handy
Even if your journal entries are perfect, lenders and auditors will always ask for backup. One of their first questions during an audit or field exam is:
“Can you provide the intercompany loan agreements?”
Many companies don’t have formal agreements — just internal notes or wires. That’s a red flag.
A proper Intercompany Loan Agreement packet should include:
✍️ Signed agreement — even if between related entities
📆 Date of origination and maturity
💰 Principal amount and interest rate (if applicable)
📝 Repayment terms or note of no fixed schedule
🔐 Entity names that match your GL and schedules
📎 Any supporting board approvals or internal memos
Pro tip: Store these agreements in your Audit Drive, clearly labeled by entity and date. This allows auditors or lenders to verify balances in seconds — not hours.
✅ Benefits:
Speeds up audit testing
Strengthens lender confidence
Supports GAAP compliance
Reduces field exam friction
Step 4: Record Intercompany Transactions Properly
Intercompany activity should never be treated as an afterthought.
Book each transaction — cash transfers, shared expenses, allocations — as they happen or on a consistent cadence.
Common examples:
✅ Loan funding between entities
✅ Cost allocations (payroll, rent, insurance)
✅ Centralized payments for group expenses
✅ Dividends or capital distributions
Each entry should be mirrored:
If Entity A books a receivable, Entity B books a payable.
If Entity A books income, Entity B books expense.
Miss one side, and you create unreconciled balances that compound over time.
Step 5: Reconcile & Eliminate Regularly — Not Just at Year-End
Waiting until year-end to fix intercompany balances is a costly mistake.
Monthly or quarterly reconciliations:
Keep balances accurate
Prevent big “plug” adjustments later
Build auditor confidence
Protect your ABL borrowing base
Eliminations should be structured, not ad hoc.
Use standardized elimination templates tied to your COA so they’re repeatable and easy to audit.
Pro tip: Store elimination workpapers inside your Audit Drive for direct auditor access.
🏦 Step 6: Handle Affiliate Entities with Extra Care
Affiliate entities outside of consolidation — such as real estate or investment entities — are often where the mess hides.
Best practices:
Track affiliate loans and activity separately
Maintain signed agreements
Exclude these amounts from borrowing base calculations properly
Present clean reconciliations to auditors
This not only prevents audit findings but also preserves borrowing capacity with lenders.
✍️ Step 7: Memos Are Your Best Friend
If a decision was made — how to treat an affiliate loan, when to eliminate a transaction, how to allocate shared costs — document it.
Each memo should include:
Background and rationale
Accounting treatment (with GAAP reference if needed)
Date and approval signature
When audit season comes, memos tell the story for you. They prevent last-minute panic and protect CFOs and Controllers.
🚀 Step 8: Start Preparing Long Before the Audit
Intercompany accounting is one of the top three areas auditors flag — but also one of the easiest to fix proactively.
Start early:
Build your COA right
Keep loan schedules current
Reconcile monthly
Write memos
Organize loan agreements
Use your Audit Drive and CFO Drive intentionally
When the auditors walk in, you won’t explain balances — you’ll hand them a clean, consistent financial story.
📌 Services & Disclaimer
This content is for informational purposes only and should not be considered legal, tax, or accounting advice. Please consult with a qualified professional regarding your specific situation. Acrux Advisory is not a CPA firm and does not provide services requiring a public accountancy license.