ASC 850: Intercompany Transactions Journal Entries for Related Party Disclosures
Posted In | ASC Education | Gridlex AcademyAccounting Standards Codification (ASC) Topic 850, Related Party Disclosures, provides guidance on the disclosure of related party transactions in financial statements under Generally Accepted Accounting Principles (GAAP). Related parties are entities or individuals that have control, joint control, or significant influence over an entity or are subject to common control. This article will explore the key aspects of ASC 850, intercompany transactions, and provide examples of journal entries to help you better understand the accounting treatment and disclosure requirements.
ASC 850 Overview
ASC 850 requires entities to disclose the nature of their relationships with related parties and the effects of those relationships on their financial statements. The standard aims to provide financial statement users with relevant information to assess potential conflicts of interest and the impact of related party transactions on an entity's financial position and performance.
Intercompany transactions between related parties are common in business and can include sales, purchases, loans, guarantees, and investments. ASC 850 does not prescribe specific accounting treatment for these transactions but focuses on disclosure requirements to ensure transparency and comparability in financial reporting.
Journal Entries for Intercompany Transactions
To illustrate the accounting treatment for intercompany transactions, let's consider an example. Company A and Company B are related parties due to common control by a parent company. Company A sells goods to Company B for $50,000 on credit.
Here are the journal entries for Company A and Company B to record the intercompany transaction
1. Company A records the sale of goods to Company B:
Debit: Accounts Receivable - Company B $50,000
Credit: Sales Revenue $50,000
2. Company B records the purchase of goods from Company A:
Debit: Inventory $50,000
Credit: Accounts Payable - Company A $50,000
When preparing consolidated financial statements, these intercompany transactions must be eliminated to avoid double-counting of revenue, expenses, assets, and liabilities. In our example, the following elimination entries would be required in the consolidated financial statements:
3. Eliminate intercompany sales and purchases:
Debit: Sales Revenue $50,000
Credit: Inventory $50,000
4. Eliminate intercompany receivables and payables:
Debit: Accounts Payable - Company A $50,000
Credit: Accounts Receivable - Company B $50,000
Related Party Disclosures
In addition to recording the journal entries for intercompany transactions, entities must provide disclosures in their financial statements as required by ASC 850. These disclosures include:
1. The nature of the relationship between the related parties.
2. A description of the transactions, including the amounts involved and any terms and conditions.
3. The effects of the transactions on the financial statements, such as the impact on revenue, expenses, assets, and liabilities.
4. Any amounts due to or from related parties, including the terms and conditions and the nature of any guarantees or commitments.
ASC 850 ensures transparency and comparability in financial reporting by requiring entities to disclose information about their related party transactions. By understanding the accounting treatment and journal entries associated with intercompany transactions, as well as the disclosure requirements of ASC 850, companies can maintain accurate financial records and provide financial statement users with relevant information to assess potential conflicts of interest and the impact of related party transactions on an entity's financial position and performance.