Cash /goods in transit.

For transactions between 2 companies in a group, in the consolidated accounts you treat the cash or goods as received by the receiving party. This means the intercompany balances will then agree and can be contra’d out.

So for example, we have a group of 2 companies – Company A & B. The reporting date of the accounts is 30th June. On 29th June, Company A had an intercompany balance payable to Company B of $10,000. They sent a cheque for $6,000 to Company B.

Company A records this in their individual company ledgers as

Dr Intercompany payable $6,000
Cr Cash $6,000

They now show a balance of $4,000 Cr payable to Company B. However, Company B didn’t receive the cheque yet, so they still show a balance of $10,000 Dr receivable in their individual accounts.

In order to consolidate the two companies, we must eliminate the intercompany balance as not doing this will gross up the balance sheet and be misleading. However, because of the cash in transit, the 2 balances do not match. One company has $4,000 and the other $10,000.

So what we do is treat it as it Company B already received the cheque and cashed it – even though in reality they might not do this until 2nd July. If we don’t do this, it’s as if the $6,000 has disappeared into thin air which is obviously not the case when you look at the group as a whole. The journal we need to post is:

Dr Cash $6,000
Cr Intercompany receivable $6,000

Company B now shows a balance of $4,000 Dr in the intercompany balance. Now the two numbers are the same and we can eliminate them:

Dr intercompany payable $4,000
Cr Intercompany receivable $4,000

Does that help?

@drishti1234 said:
Ok sir I understand this concept. But how will we treat this example :
Suppose on 31 march 2010, A has current ac with B as 3.4m(dr). Which did not agree with equivalent bal with B due to CIT of 1.8m which was sent by A on 28th march 2010?

A has a balance of $3.4m Dr – so they have 3.4m receivable from B. However, they just sent $1.8m that B did not receive yet. Previous to this their balance must have been 3.4 – 1.8 = $1.6m receivable. So B’s balance will show as $1.6m payable as they didn’t receive the cash in transit yet.

Therefore the correcting journal will be Dr Cash $1.8m, Cr Intercompany $1.8m.

A and B will then show intercompany balances of $3.4m and these can be contra’d.

Hello sir,,,in accordance to the two examples you explained above there is one contradiction that u may have made.Please let me know if im right or wrong.

………You said “A has a balance of $3.4m Dr – so they have 3.4m receivable from B. However, they just sent $1.8m that B did not receive yet. Previous to this their balance must have been 3.4 – 1.8 = $1.6m receivable. So B’s balance will show as $1.6m payable as they didn’t receive the cash in transit yet.

Therefore the correcting journal will be Dr Cash $1.8m, Cr Intercompany $1.8m.

A and B will then show intercompany balances of $3.4m and these can be contra’d.”…….

the last line u made is that the balances remaining which should be contra’d is 3.4m,, however, i personally think the balance which remains is 1.6M.

The other example u made agrees with me,since you also commented earlier above and i quote………..
“So what we do is treat it as it Company B already received the cheque and cashed it – even though in reality they might not do this until 2nd July. If we don’t do this, it’s as if the $6,000 has disappeared into thin air which is obviously not the case when you look at the group as a whole. The journal we need to post is:

Dr Cash $6,000
Cr Intercompany receivable $6,000

Company B now shows a balance of $4,000 Dr in the intercompany balance. Now the two numbers are the same and we can eliminate them:

Dr intercompany payable $4,000
Cr Intercompany receivable $4,000″……….

The balance remaining here is 4000 and not 10000 (In which would have been the case had you used the same style as the first example) .
So which is the correct remaining balance?

Thank you in advance Sir.