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Introduction:

Intercompany trade is a powerful tool within your D365 Finance and Operations instance that provides out-of-the-box functionality for transactions between legal entities. This process ensures synchronized purchase/sales cycles among multiple legal entity pairs. The intercompany trade functionality creates balanced transactions that remain consistent between the legal entity pairs at the end of the process flow. This article will highlight the postings made during an intercompany trade transaction.

(Note: The attached Excel file above contains all the vouchers discussed throughout this post. Please refer to the file to view those vouchers and the T account postings.) 

Intercompany Trade Process:

Dynamics 365 Finance and Operations has native intercompany trade functionality integrated into the process of creating purchase orders (PO) and sales orders (SO). Setup is necessary to utilize this functionality, involving the creation of customers and vendors in each legal entity for the other legal entities you plan to transact with, along with defining these intercompany records. Additionally, setup involves specifying products and releasing them to other legal entities to ensure both sides of the transaction utilize the same product. When initiating a new PO or SO under one of the intercompany records, the system automatically generates the corresponding transaction in the respective legal entity. The following sections will describe the records and voucher postings created when using intercompany trade functionality.

1. If Company 2 initiates an intercompany purchase order, an intercompany sales order will be automatically generated in Company 1 (the opposite occurs if the process starts with the creation of an intercompany sales order). Purchase orders and sales orders do not have vouchers associated with them as they do not impact any ledger account.

2. When an order is picked, packed, and shipped (SO) or received (PO), a voucher posting is created due to the financial impact within the system. The specific accounts used in the voucher posting vary across businesses based on their chart of accounts and account structures. Generally, a purchase accrual and cost of purchase materials received accounts are used under the Product receipt (PO), while cost of goods sold and cost of units delivered are used under the product shipment (SO).

   a. Product Receipt Voucher - Under the accrual method in D365 Finance and Operations, the product receipt serves as the initial voucher posting to ledger accounts. The system recognizes the product receipt, debiting it to an inventory accrual account and offsetting it with an entry to an accrued receipts liability account. If there's a cost variance between companies, a purchase price variance may occur. To calculate this variance, find the cost difference between companies and multiply it by the transaction quantity. This difference populates under the PO side of the transaction.

   b. Packing Slip Voucher - For the Sales order process, the initial document produced with a voucher is the packing slip voucher. This posting recognizes the product's movement through a sale and sets up postings as accruals. The system posts this transaction by applying a debit balance to a shipping accrual account, typically classified as another asset account, and offsets it with a credit to an accrued inventory account.

(Note: Review the product receipt voucher under the ICPO vouchers tab and the packing slip voucher under the ICSO Vouchers tab.)

3. Once the order is received or packed, the invoice process begins, where most voucher postings occur. The focus of the invoice postings is to reverse the accruals created by the product receipt and packing slip, and then formally recognize the addition or subtraction of inventory value, revenue, and the generation of payable or receivable balances.

   a. Purchase Order Invoice Voucher - This voucher reverses the accrual posting made to the inventory and liability accrual accounts and applies the received inventory's value to the inventory posted account. This is when the value of inventory is recognized in the procurement process and posted to the general inventory balance. The offset to the inventory account's balance is applied to the vendor balance, resulting in a credit to Accounts payable.

   b. Sales Order Invoice Voucher - The sales order invoice recognizes revenue and cost of goods sold, reduces inventory, and generates a receivable balance. This invoice reverses entries made to the shipping accrual and accrued inventory accounts. Then, the system accounts for inventory reduction by crediting the inventory posting account and debiting cost of goods sold, representing the cost of selling the product. Finally, revenue recognition matches the cost in this intercompany trade without a markup, offset by generating a receivable balance.

(Note: Review the purchase order invoice voucher under the ICPO Vouchers tab and the sales order invoice voucher under the ICSO Voucher tab.)

4. Payment journals are used in the system to reduce balances on customers and vendors through cash payment or receipt. As this is an intercompany transaction, no cash changes hands explicitly. Journals are still used to reduce balances in their respective payable and receivable accounts, which consolidate into one main account through financial consolidation.

   a. Vendor Payment Journal Voucher - This journal accounts for the reduction of payable to Company 1 in the intercompany trade scenario. It debits the accounts payable account and offsets it by crediting an intercompany payables account.

   b. Customer Payment Journal Voucher - This journal voucher reduces the receivables balance of Company 2 in the intercompany trade scenario. It credits the accounts receivable account and offsets it with a debit to the intercompany payables account.

(Note: Review the vendor payment journal voucher under the ICPO Vouchers tab and the customer payment journal voucher under the ICSO Vouchers tab.)  

5. With all the vouchers posted, the intercompany trade process concludes, and the correct values should exist in the general ledger postings for each respective company. Since this was a transaction between companies under the same parent, a consolidated balance sheet is generated, ensuring no double entries occur in any accounts. The intercompany trade process in D365 is designed to prevent duplicate entries and balance all transactions during financial consolidation.

(Note: Review the consolidated account posting under the IC T Account breakdown tab in the Excel file.) 

Conclusion:

Intercompany trade presents challenges in ensuring accurate accounting. By relying on the standard functionality of D365 Finance and Operations, visibility into the intercompany trade process improves through detailed and accurate reporting to the general ledger.