An intercompany cash transfer journal entry has two halves booked on the same date: the sending entity debits an intercompany receivable and credits cash, and the receiving entity debits cash and credits an intercompany payable, both for the identical amount. If Company A advances $100,000 to Company B, Company A books Due From Company B $100,000 / Cash $100,000, and Company B books Cash $100,000 / Due To Company A $100,000. The mechanics are easy. What trips companies up is everything that has to be true for those entries to hold up: matching balances, arm’s-length interest, proper documentation, and clean elimination at consolidation.
The Sender’s Entry
Company A’s cash goes down, and a new internal asset appears in its place:
- Debit: Due From Company B — $100,000
- Credit: Cash — $100,000
Total assets don’t change. Company A traded cash for the right to collect $100,000 from an affiliate. The Due From account (some companies label it “Intercompany Receivable”) sits on Company A’s balance sheet until Company B repays or the balance is otherwise settled.
The Receiver’s Entry
Company B’s cash goes up, and a matching liability appears:
- Debit: Cash — $100,000
- Credit: Due To Company A — $100,000
The Due To account is Company B’s formal acknowledgment that it owes the money back. Its balance must exactly match Company A’s Due From balance at all times.
Why the Two Sides Have to Match
The Due From on Company A’s books and the Due To on Company B’s books are two sides of the same transaction. If they don’t tie to the penny, something has gone wrong. Accountants call the mismatch an out-of-balance, and it has to be resolved before the group can prepare consolidated financial statements. Common causes: one side recording the transfer a day later than the other, a payment applied to the wrong intercompany account, or one entity accruing interest that the other hasn’t booked yet.
Most corporate groups reconcile intercompany accounts monthly. The process is simple in concept: both sides compare account detail line by line and investigate every discrepancy until the balances agree. Waiting until year-end is how audit findings happen.
Interest Entries on the Advance
A cash transfer between affiliates almost always needs to carry interest. Treating the advance as interest-free is one of the most common mistakes, and two provisions of the Internal Revenue Code create problems when a group ignores them.
IRC Section 7872 treats a loan between related parties as a “below-market loan” if it charges less than the applicable federal rate. The IRS then imputes the missing interest. For a demand loan with no fixed term, the forgone interest is treated as though the lender transferred it to the borrower and the borrower paid it back as interest, all on the last day of the calendar year. That produces phantom interest income for the lender even though no cash moved. For a term loan with a fixed repayment date, the IRS treats the difference between the loan amount and the present value of the payments as a transfer made on the day the loan closed, which can create an immediate income event.1Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
Section 482 goes further. It gives the IRS broad authority to reallocate income, deductions, and credits between commonly controlled organizations when the existing allocation doesn’t clearly reflect income.2Office of the Law Revision Counsel. 26 USC 482 – Allocation of Income and Deductions Among Taxpayers The Treasury regulations apply this to intercompany loans specifically: charge no interest or a below-market rate, and the IRS can impute an appropriate one.3eCFR. 26 CFR 1.482-2
The minimum rate that satisfies both provisions is the applicable federal rate, published monthly by the IRS.4Internal Revenue Service. Applicable Federal Rates The rate depends on the term of the loan:
- Short-term (3 years or less): 3.59% annual compounding as of April 2026
- Mid-term (over 3 years, up to 9 years): 3.82% annual compounding
- Long-term (over 9 years): 4.62% annual compounding
Term loans lock in the rate on the closing date. Demand loans use the short-term rate, recalculated each period.1Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
How to Book the Interest Each Period
Once you’ve set the rate, both sides record matching entries each period. The lender (Company A) records:
- Debit: Due From Company B (increases the receivable)
- Credit: Interest Income
The borrower (Company B) records:
- Debit: Interest Expense
- Credit: Due To Company A (increases the payable)
If the interest isn’t settled in cash, the intercompany balance grows each period. Both the interest income and the interest expense get eliminated at consolidation, so they don’t affect the group’s bottom line. They absolutely affect each entity’s separate tax return.
Keeping the Loan from Being Recharacterized as Equity
An advance booked as a loan can be reclassified by the IRS as an equity contribution or a constructive dividend if it doesn’t look like real debt. That reclassification blows up the tax treatment: interest deductions disappear, and the transfer may trigger dividend income to the common shareholder.
IRC Section 385 authorizes Treasury to issue regulations distinguishing debt from equity, and it lists the factors that may be considered:5Office of the Law Revision Counsel. 26 USC 385 – Treatment of Certain Interests in Corporations as Stock or Indebtedness
- Whether there is a written, unconditional promise to pay with a fixed rate and maturity
- Whether the debt is subordinated to outside creditors
- The debt-to-equity ratio of the borrower
- Whether the debt is convertible into stock
- Whether the debt is held in the same proportion as stock ownership
Courts weigh these together. A transfer booked as a loan but lacking a written agreement, a maturity date, a repayment schedule, or an actual repayment history looks a lot like a capital infusion. Practically: document every intercompany loan with a formal note showing principal, a stated interest rate at or above the AFR, a maturity date, and a realistic repayment schedule. Then follow it.
Eliminating the Balances at Consolidation
Everything above lives on each entity’s own books. When the parent prepares consolidated financial statements, the intercompany balances and transactions come out. Consolidated statements treat the entire group as one economic entity, and an internal debt from one subsidiary to another is the equivalent of owing money to yourself.
Leave the Due From and Due To on the consolidated balance sheet and you overstate both assets and liabilities by the full intercompany amount. The elimination entry reverses the internal balances on a consolidation worksheet, never on the individual ledgers:
- Debit: Intercompany Payable (Due To) — $100,000
- Credit: Intercompany Receivable (Due From) — $100,000
Any intercompany interest is eliminated the same way, so the group doesn’t show both income and expense for the same internal transaction:
- Debit: Intercompany Interest Income
- Credit: Intercompany Interest Expense
ASC 810-10-45-1 is explicit: in consolidated statements, all intra-entity balances, transactions, sales, purchases, interest, and dividends must be eliminated, and no gain or loss on transactions between entities in the group can remain. A clean elimination only works when the Due From and Due To match perfectly, which is the reason monthly reconciliation matters so much.
A note on separate tax returns: an affiliated group where a common parent owns at least 80% of both the voting power and value of each subsidiary’s stock can elect to file a consolidated federal return.6Office of the Law Revision Counsel. 26 USC 1501 – Privilege to File Consolidated Returns7Office of the Law Revision Counsel. 26 USC 1504 – Definitions Groups below the 80% threshold, or that choose not to consolidate for tax, file separately. Either way, each entity must keep its own books with accurate intercompany balances.
Entries for Related Situations
The Due From / Due To structure handles more than pure cash advances. Any time one affiliated entity incurs a cost or provides a service for another, the same framework applies.
Parent Pays a Subsidiary’s Bill
Suppose the parent pays a $5,000 property tax bill that belongs to Subsidiary S. Two rounds of entries are needed. First the parent records the cash outflow:
- Debit: Property Tax Expense — $5,000
- Credit: Cash — $5,000
Then the parent bills the subsidiary:
- Debit: Due From Subsidiary S — $5,000
- Credit: Expense Recovery (or Property Tax Expense) — $5,000
The subsidiary records the other half:
- Debit: Property Tax Expense — $5,000
- Credit: Due To Parent — $5,000
The expense lands on the subsidiary’s income statement, where it belongs, and the $5,000 intercompany balance tracks the reimbursement until settlement.
Management Fee or Service Charge
A parent or central service entity often bills subsidiaries for shared administrative, legal, or IT support. If the parent charges Subsidiary B $20,000 for IT services:
Parent:
- Debit: Due From Subsidiary B — $20,000
- Credit: Intercompany Service Revenue — $20,000
Subsidiary B:
- Debit: Management Fee Expense — $20,000
- Credit: Due To Parent — $20,000
The revenue and expense wash out at consolidation, but on each entity’s separate tax return the fee shifts income from the subsidiary to the parent. That shift is exactly what the IRS scrutinizes under Section 482. Fees must reflect what an unrelated party would charge for comparable services, and companies that inflate fees to move income into a lower-tax jurisdiction without supporting documentation invite an adjustment.8Internal Revenue Service. Transfer Pricing
When shared costs benefit multiple subsidiaries, companies generally either trace a specific cost directly to the entity that caused it (direct allocation) or distribute a pooled cost using a formula like headcount, revenue, or square footage (indirect allocation). The IRS expects the allocation basis to have a reasonable connection to the benefit each entity receives.
Settling the Balance
Intercompany balances shouldn’t grow indefinitely. Settling them periodically, either through actual cash payments or through multilateral netting, keeps them manageable and reinforces the argument that the underlying transactions are genuine loans. Netting is especially useful in high-volume groups: instead of dozens of wires between affiliates each month, the group calculates the net position of each entity and settles with a single payment per entity.
The settlement entry is the reverse of the original transfer. When Company B repays the $100,000 advance, Company B debits Due To Company A and credits Cash, while Company A debits Cash and credits Due From Company B. Both intercompany accounts return to zero. For groups that use netting, the same logic applies across many transactions at once, with a treasury function coordinating timing and amounts.
One boundary worth flagging: if the entities are in different countries, or the loan is denominated in a currency other than the borrower’s functional currency, the entries above are only the starting point. Currency remeasurement under ASC 830 and additional IRS reporting on Form 5471 for 10%-or-greater U.S. owners of foreign corporations both come into play, and neither is covered here.9Internal Revenue Service. Instructions for Form 5471