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Help understanding intercompany charges

Hi All,

My understanding of intercompany cross charges is very little and would appreciate if you could help me with the following issue:

I am an acccountant and I manage several european countries for the US headquarter.
Every country has got two accounts ( one expressed in Local currency and another one in USD)

I recently paid some AP invoice using the wrong account ( I used the USD account instead of the local one) and I have been asked to do the cross charge from the USD account to the Local one and then book a journal for the Usd account.

Could someone explain to me why would I do that? Why would I need to book a journal for USD account?

Please let me know if you need more info.

Thanks

Answers

Richard Archer
Title: Principal
Company: CG Management Solutions
(Principal, CG Management Solutions) |

By "accounts", do you mean bank accounts or general ledger accounts? If ledger accounts, this seems to be an unnecessarily complex way to structure accounting considering all the accounting systems that exist that allow accounting in local currency with the system automatically doing the currency exchange calculations.

However, as to your actual question, it depends on how the general ledger is actually structured and how you set up the entry to do the cross charge from the USD account to the local one. It may not be anywhere near as simple as a single entry crediting the USD account and debiting the local currency account, even if your ledger system automatically creates the intercompany clearing parts of the journal entry. On problem you will have is that the exchange rates for the original transaction and the journal entry may not be the same, so you end up with currency valuation errors on both sides resulting in mismatched currency gains/losses, unless you make the proper journal entries to clear both sides of the transaction. It could also be that the way your system is set up, the USD side won't automatically clear, so that you would end up with the debit being reported in both the USD and local currency accounts.

Get someone in authority to review and approve your journal entries BEFORE they are posted. If you don't and something else goes wrong, you will be blamed.

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