An intercompany payable is an accounting transaction occurring between two divisions or subsidiaries owned by the same company. It is a transaction in which one of the agencies owes the other agency money for the a transferred asset or rendered service. For example, a subsidiary that manufactures electronic components might sell some of its products to another subsidiary that builds audio equipment.
Intercompany payables allow related units the opportunity of maintaining separate accounting records that are accurate and complete. During consolidation, intercompany payables are combined and removed from the parent's balance sheet.
When an intercompany payable occurs, reciprocal entries from the agencies take place. For one agency, it is an intercompany payable; for the other, it is an intercompany receivable. When Agency A transfers $1,000 of goods to Agency B, Agency B records this as a debit to Inventory and a credit to Intercompany Payable. When Agency B pays this bill, Intercompany Payable is debited and cash is credited.
Companies do not earn profits or losses when transferring time, material or other expenses. Because of this, when any company dealing with intercompany payables prepares or consolidates financial statements, the intercompany account balances are eliminated.