An intercompany loan journal entry records the same transaction on two sets of books at once: the lender books a receivable, the borrower books a payable, and the two must match to the penny. Every entry that follows, whether for interest, repayment, or forgiveness, keeps that mirror intact so the loan cleanly eliminates when the group consolidates.
Set Up the Due From and Due To Accounts First
Before any cash moves, both entities need dedicated balance sheet accounts. The lender opens an asset account, usually called “Due From [Entity Name]” or “Intercompany Receivable.” The borrower opens a matching liability account, typically “Due To [Entity Name]” or “Intercompany Payable.” Each lending relationship gets its own pair. A parent lending to three subsidiaries needs three separate receivables so balances never tangle together.
Classification depends on the repayment timeline. A loan due within twelve months of the reporting date is a current asset for the lender and a current liability for the borrower. Anything longer is non-current on both sides.1KPMG. Current/Noncurrent Debt Classification: IFRS Accounting Standards vs US GAAP
Demand loans get special treatment. If the lender can call the loan at any time, the borrower must classify it as current because there is no contractual right to defer payment for at least twelve months. The lender’s side is assessed independently, and the two classifications are not necessarily symmetric.
Record the Disbursement on Both Sides
The first entries capture the moment cash actually changes hands. Say Parent A lends $500,000 to Subsidiary B.
Parent A records the loss of cash and the creation of a receivable:
- Debit Due From Subsidiary B $500,000
- Credit Cash $500,000
Subsidiary B records the exact opposite:
- Debit Cash $500,000
- Credit Due To Parent A $500,000
The $500,000 asset on the lender’s balance sheet perfectly offsets the $500,000 liability on the borrower’s. That symmetry is the entire point. When the group later combines these balance sheets, the loan nets to zero, as if it never happened. If the entries do not match exactly, the consolidation breaks.
Charge Interest at an Arm’s-Length Rate
The IRS does not let related entities pick whatever rate they want. Under the Treasury regulations implementing Section 482, the interest rate must fall within an arm’s-length range, and any rate between 100% and 130% of the Applicable Federal Rate sits inside a safe harbor the IRS will not second-guess.2eCFR. 26 CFR 1.482-2 – Determination of Taxable Income in Specific Situations
Which AFR applies depends on the loan’s term:3Office of the Law Revision Counsel. 26 USC 1274 – Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property
- Short-term for loans of 3 years or less
- Mid-term for loans over 3 years but not over 9
- Long-term for loans over 9 years
For February 2026, the annual AFRs are 3.56% short-term, 3.86% mid-term, and 4.70% long-term.4IRS. Revenue Ruling 2026-3 The rates update monthly. For term loans, the rate in effect when the loan is first made governs; for demand loans, the rate that applies during each period governs.
Charging too little triggers Section 7872. The IRS treats the shortfall as if the lender gave the borrower a payment equal to the forgone interest, and the borrower then paid that same amount back to the lender. Both a deemed transfer and a deemed interest payment get imputed, creating taxable income for the lender and a possible deduction for the borrower whether or not any cash actually moved. There is a narrow exception for compensation-related and corporation-shareholder loans when the total outstanding balance stays at or below $10,000, unless a principal purpose is tax avoidance. Most corporate intercompany balances blow past that number, so the exception rarely helps.5GovInfo. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
Book Interest Accrual and Payment
Interest hits the income statement on both sides. When interest is paid in cash, say $2,000, the borrower records:
- Debit Interest Expense $2,000
- Credit Cash $2,000
The lender records:
- Debit Cash $2,000
- Credit Interest Income $2,000
When interest accrues but has not been paid, the cash accounts are replaced with the intercompany accounts. The borrower credits Due To Intercompany instead of Cash, increasing the liability. The lender debits Due From Intercompany instead of Cash, increasing the receivable. The expense and income still appear on the income statements, and both amounts will need to be eliminated at consolidation.
Book Principal Repayment
Principal repayment is purely a balance sheet event. No revenue or expense is recognized. If Subsidiary B repays $100,000 of principal:
- Debit Due To Parent A $100,000
- Credit Cash $100,000
Parent A records the receipt:
- Debit Cash $100,000
- Credit Due From Subsidiary B $100,000
The receivable and payable both drop by $100,000; the income statement is untouched. Confusing interest with principal is one of the most common bookkeeping errors in intercompany accounting, and the fix is to remember that only interest touches the P&L.
Forgiving the Loan
When a parent decides to forgive a subsidiary’s debt, the entries themselves are simple. On the borrower’s books:
- Debit Due To Parent A $500,000
- Credit Additional Paid-In Capital (or Gain on Debt Forgiveness) $500,000
On the lender’s books:
- Debit Loss on Intercompany Loan $500,000
- Credit Due From Subsidiary B $500,000
The tax treatment is where forgiveness gets uncomfortable. If a shareholder-creditor contributes the debt to the debtor corporation’s capital, the debtor is treated as satisfying the indebtedness for an amount equal to the shareholder’s adjusted basis in the debt, not the face value.6Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness If the shareholder’s basis is below the outstanding balance, the difference can generate cancellation-of-debt income for the borrower. What looks like a simple internal write-off can produce real taxable income.
Eliminate the Balances on Consolidation
When the group prepares consolidated statements, every intercompany balance and transaction has to disappear. A group cannot owe money to itself or earn revenue from itself in the eyes of external stakeholders. Elimination entries are made only on the consolidation worksheet and never touch the individual entities’ general ledgers.
To remove the reciprocal asset and liability, assuming $400,000 of outstanding principal:
- Debit Due To Intercompany $400,000
- Credit Due From Intercompany $400,000
To remove intercompany interest that would otherwise inflate both revenue and expense, assuming $12,000 on each side:
- Debit Interest Income $12,000
- Credit Interest Expense $12,000
After these eliminations, consolidated results reflect only third-party obligations and third-party income. If the balances do not agree before you start eliminating, the consolidated trial balance will not balance. That single problem is the most common reason consolidation takes longer than it should.
Reconcile Every Month
Waiting until year-end to see whether the two sides agree invites painful surprises. Reconcile monthly. Pull the Due From balance from the lender’s books and the Due To balance from the borrower’s books and compare them. Identify every discrepancy, whether from timing (one entity recorded a payment the other has not), interest calculations that do not match, or posting errors. Correct the differences before the month-end close.
Most mismatches are ordinary: a payment recorded on the last day of the month by one entity and the first day of the next month by the other, or slightly different interest calculations from rounding or day-count conventions. Automated intercompany systems can flag discrepancies in real time, but even manual processes should enforce a zero-tolerance policy for unexplained differences carrying over. Small gaps compound, and by year-end they get genuinely hard to untangle.