Plain definition
An intercompany reconciliation compares balances and transactions recorded by entities in the same group, such as one company's receivable against another's payable or one company's sale against another's purchase. The aim is to identify timing, currency, pricing, or posting differences before consolidation. It does not merely seek matching totals: each side needs evidence of the counterparty, transaction date, amount, currency, and settlement status.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
Company A invoices Company B for shared services in June. A records an intercompany receivable and service income; B records a payable and expense. At close, B has booked only because it excluded a supported June usage charge. The reconciliation identifies the mismatch, B investigates the schedule, and the group records or documents the required correction before eliminating the matched intra-group amounts in consolidation.
Intercompany balances can differ temporarily because of cut-off or foreign-exchange timing, but an unexplained difference is not a valid elimination.
Why it matters
Unreconciled group balances can double count income, liabilities, or cash needs in consolidated reporting. They also hide disputes between business units, which can make a group manager believe a charge has been accepted when the receiving entity contests it.
Practical consequence
Agree a common confirmation timetable and template. Require both entities to confirm counterparty, invoice or agreement number, currency, tax treatment, amount, date, and dispute status. Age differences by cause and owner; resolve them before consolidation or show a specific escalation. Do not net unrelated balances merely to reduce the reported difference.