Approaches to Intercompany Billing

There are three basic approaches to Intercompany Billing that significantly affect the way your company Income Statement reflects your operations. The approach you use depends upon the focus of your companies.

Approach 1: Emphasis on Employees

In Approach 1, you transfer labor and revenue from the charged project's company to the employee's home company.

When you select Approach 1:

A company’s Income Statement reflects the revenue and labor expenses for all the employees in that company. This is valuable if the companies in your enterprise want to focus on employees' efforts, no matter which projects they charge.
Labor belongs in the employee's company. Intercompany Billing moves labor from the project's company to the employee's home company.
Revenue belongs in the employee's home company. Intercompany Billing moves all (or a portion of) revenue from the project's company to the employee's home company.
Overhead belongs in the employee's home company. Intercompany Billing does not make any overhead entries.

Approach 2: Emphasis on Projects

In Approach 2, you transfer overhead from the employee's home company to the company that owns the project to which the employee charged time or expenses.

When you select Approach 2:

A company’s Income Statement reflects the revenue and labor expenses for all the projects owned by that company, no matter which company each employee belongs to.
Labor belongs in the project's company. Intercompany Billing does not make any labor entries.
Revenue belongs in the project's company. Intercompany Billing does not make any revenue entries.
Overhead belongs in the project's company. Intercompany Billing moves a specified amount of overhead from the employee's home company to the company that owns the project.

Approach 3: Cost Only

In Approach 3, you do not make any additional transfer of overhead or revenue to the company that owns the project to which the employee charged time or expenses.

When you select Approach 3:

A company’s Income Statement reflects the revenue and labor expenses for all the projects owned by that company, no matter which company each employee belongs to.
Labor belongs in the project's company. Intercompany Billing does not make any labor entries.
Revenue belongs in the project's company. Intercompany Billing does not make any revenue entries.
Actual overhead cost stays in the employee's company. Intercompany Billing does not make any entries to either company’s Income Statement.
Intercompany Billing reclassifies any amounts in the Intercompany Suspense account to be an intercompany accounts receivable amount or intercompany accounts payable amount.

Different Approaches for Different Project Charge Types

You can use one approach for regular (revenue-producing) projects, and a different approach for overhead and promotional projects. Sometimes firms select Approach 1 for regular projects, but select Approach 2 for overhead and promotional projects. This combination results in the company’s Income Statement reflecting all of the operations of revenue-producing projects they own.

Overhead projects are typically set up so that employees only charge projects that belong to their own company, so there is no intercompany billing. But when promotional work is done for another company, the costs of labor and associated overhead is passed to the company that benefits from the promotional effort.

In Intercompany Billing Configuration, the options on the following tabs support this flexibility:

Regular Labor
Overhead Labor
Promotional Labor
Regular Expenses
Overhead Expenses
Promotional Expenses