Setting up and reconciling Due To / Due From intercompany accounts in QuickBooks

Setting Up Intercompany Accounts in QuickBooks for Multi-Entity Startups

Your startup is growing. You’ve just established a new legal entity, perhaps a UK subsidiary to support your US parent company, and suddenly the financial picture is more complex. Funds are moving between them, one entity is paying bills for the other, and your simple one-company bookkeeping model is starting to break. The books get messy, fast. Misclassifying these transactions leads directly to a misstated P&L and balance sheet. For SaaS and e-commerce startups, this can mean double-counted revenue and distorted margins, a critical risk when reporting to investors.

This isn't just a minor bookkeeping challenge; it's about maintaining financial integrity as you scale. The good news is that for most early-stage companies, the solution doesn't require expensive enterprise software. You can manage this effectively within QuickBooks Online with a clear process and manual discipline. This guide provides the practical steps for how to track intercompany transactions in QuickBooks, ensuring your financials are clean, accurate, and ready for scrutiny. For a deeper look at group-level reporting rules, see the Intercompany Eliminations topic.

Foundational Understanding: Intercompany Accounting 101

Before diving into QuickBooks, it’s essential to grasp the core concepts. An intercompany transaction is any financial activity between two related legal entities under common control. While founders often think of them as simple fund transfers, they take many forms.

Common examples include:

• A parent company providing a loan to a subsidiary to fund initial operations.
• One entity paying a vendor invoice on behalf of another, common when a vendor only bills in one currency (e.g., USD).
• A parent company charging an intercompany management fee to a subsidiary for shared services like marketing, legal, or executive oversight.
• A US entity paying for software development that benefits a UK entity, creating an intercompany receivable.

When you prepare financial reports for your board or investors, you cannot simply add the two companies' P&L statements together. This would result in 'combined' financials, which incorrectly inflate performance. For instance, if US ParentCo charges UK SubCo a $50,000 management fee, ParentCo records revenue and SubCo records an expense. Combining them would show both, but from the consolidated group's perspective, no new, external revenue was generated. The accounting principle of 'Elimination' solves this. In consolidated reporting, you eliminate these internal transactions to reflect only the group's activities with the outside world.

For clean reporting and separate legal entity accounting, a separate QuickBooks Online subscription is required for each legal entity. This structure is fundamental for tax, legal, and operational clarity. It is a non-negotiable setup for companies operating across the US and UK under distinct accounting standards like US GAAP and FRS 102.

Choosing Your Method for Managing Related Company Accounts in QuickBooks

QuickBooks Online does not have a built-in 'eliminations module' or a one-click 'consolidate' function. This reality means you need a robust method inside QBO to track the underlying data before performing a manual consolidation in a spreadsheet. While there are a few ways to approach this, one is a clear winner for most startups. For vendor guidance on QuickBooks multi-entity options, see QuickBooks support notes on eliminations and intercompany setup.

The Flawed Method: Using Customers and Vendors

One approach is the 'Customer/Vendor' method, where you set up each related entity as both a customer and a vendor in each QuickBooks file. While it can feel intuitive at first, this method creates significant reporting problems. It clutters your Accounts Receivable (A/R) and Accounts Payable (A/P) aging reports with internal balances, which distorts your view of actual third-party customer and vendor activity. This makes it difficult to assess your true cash conversion cycle and manage working capital effectively.

The Recommended Method: 'Due To / Due From' Accounts

The second, and highly recommended, approach is the 'Due To / Due From' method. This method uses dedicated balance sheet accounts that act as a running ledger between your companies. The pattern across pre-seed to Series B startups is consistent: the 'Due To / Due From' method is recommended for approximately 90% of startups with two to four entities. It provides a clean separation between third-party operational activities and internal intercompany balances, keeping your A/R and A/P reports pure. This gives you a truer picture of your company's external financial health.

Implementation Guide: How to Track Intercompany Transactions in QuickBooks

Setting this system up correctly from the start is crucial for accurate intercompany reconciliation in QuickBooks. The goal is to create mirrored accounts in each company's Chart of Accounts that will always have equal and opposite balances. Let’s walk through a common US ParentCo and UK SubCo scenario.

Step 1: Configure Your Chart of Accounts

The first step is creating the dedicated intercompany accounts in each entity's QuickBooks file. These accounts will track the net balance owed between the companies.

In your US ParentCo’s QuickBooks file:

1. Navigate to your Chart of Accounts.
2. Create a new account. Name it something clear and consistent, like 'Due from UK SubCo'.
3. Crucially, the 'Due from [Entity]' account should be set up as an 'Other Current Asset' account type in the Chart of Accounts. This represents money your subsidiary owes the parent company, similar to a receivable from a third party.

In your UK SubCo’s QuickBooks or Xero file:

1. Navigate to your Chart of Accounts.
2. Create a new account named 'Due to US ParentCo'.
3. The 'Due to [Entity]' account should be set up as an 'Other Current Liability' account type in the Chart of Accounts. This represents money your subsidiary owes to the parent, functioning like a short-term loan or payable.

These accounts are mirror images. At any point in time, the balance in ParentCo's asset account ('Due from UK SubCo') should be the exact opposite of the balance in SubCo's liability account ('Due to US ParentCo'). If they don't match, an entry was missed or recorded incorrectly.

Step 2: Record Intercompany Transactions Correctly

With the accounts set up, you must meticulously record both sides of every intercompany transaction. Let’s use two common case studies.

Case Study 1: ParentCo Pays a Bill for SubCo

Imagine US ParentCo pays a $10,000 software bill on behalf of UK SubCo because the vendor only invoices in USD. When dealing with foreign currency, these transactions require translation under accounting standards like IAS 21, FRS 102, or ASC 830, typically using the spot rate on the transaction date.

In US ParentCo’s QuickBooks, you record this with a Journal Entry:

• Debit: Due from UK SubCo ($10,000) – The asset increases because the subsidiary now owes you more.
• Credit: Cash ($10,000) – Your bank balance decreases as you paid the bill.

In UK SubCo’s books, you record the other side of the transaction:

• Debit: Software Expense (£8,000, assuming a 1.25 USD/GBP exchange rate) – The company incurred the expense and it hits the P&L.
• Credit: Due to US ParentCo (£8,000) – The liability increases because you now owe the parent company for paying the bill.

Case Study 2: ParentCo Charges a Management Fee

Now, let's say US ParentCo charges UK SubCo a $20,000 management fee for shared executive and administrative services provided during the month.

In US ParentCo’s QuickBooks:

• Debit: Due from UK SubCo ($20,000) – The amount the subsidiary owes you increases.
• Credit: Intercompany Revenue ($20,000) – You record the revenue from the service provided.

In UK SubCo’s QuickBooks:

• Debit: Management Fee Expense ($20,000, converted to GBP) – You record the operational expense.
• Credit: Due to US ParentCo ($20,000, converted to GBP) – Your liability to the parent company increases.

After these entries, the 'Due from' and 'Due to' balances have changed, but they remain equal and opposite. This is the core of intercompany reconciliation.

Bringing It All Together: The Manual Consolidation Process

Once your transactions are tracked correctly in each QuickBooks entity, the final step is creating the consolidated financial statements for your board and investors. This is where the manual accounting happens in a spreadsheet. We recommend keeping a single master file for consolidation to maintain version control.

1. Export Reports: From each QuickBooks entity, export the Balance Sheet and Profit & Loss statement for the period into a spreadsheet program like Excel or Google Sheets.
2. Structure Your Spreadsheet: Create a standard consolidation worksheet. Typically, this includes columns for each entity, a column for 'Eliminations', and a final 'Consolidated Total' column. For example: | US ParentCo | UK SubCo | Eliminations | Consolidated |.
3. Consolidate the Balance Sheet: Sum each line item (like Cash, Fixed Assets) horizontally across the entities. The critical step is eliminating the intercompany balances. In the 'Eliminations' column on the 'Due from UK SubCo' asset line, enter a credit (a negative number) for its full balance. On the 'Due to US ParentCo' liability line, enter a debit (a positive number) for the same amount. These two entries must sum to zero, perfectly removing the internal loan from the consolidated balance sheet.
4. Consolidate the P&L: The most common P&L elimination is for intercompany revenue and expenses, like the management fee in our example. ParentCo's P&L shows $20,000 in 'Intercompany Revenue', and SubCo's P&L shows a corresponding 'Management Fee Expense'. In your eliminations column, you will enter -$20,000 on the revenue line and +$20,000 on the expense line. The net effect on profit is zero, and the artificial internal revenue is removed from the consolidated top line.

This process ensures the final consolidated report reflects only transactions with external parties, providing a true and fair view of the entire group's performance.

Where Startups Go Wrong with QuickBooks Consolidation

A scenario we repeatedly see is founders trying to manage multiple legal entities within a single QuickBooks file using tools like Classes or Locations. This approach is fraught with risk. It complicates tax filings (like separate VAT returns), creates legal liability issues by commingling assets, and makes a clean audit or exit nearly impossible. Always use separate QBO subscriptions for separate legal entities.

Another common misstep is neglecting to record both sides of an intercompany entry. An expense is recorded in one entity, but the corresponding increase in the 'Due To / Due From' balance is forgotten in the other. What founders find actually works is making it a mandatory checklist item in the month-end close process to reconcile these accounts. Their balances must be equal and opposite. If they are not, you must investigate and fix the discrepancy before starting consolidation.

Finally, many startups undermine their credibility by presenting 'combined' financials instead of 'consolidated' ones. Simply adding two P&L statements together without making elimination entries misrepresents your true external revenue and profitability. This can erode investor trust and lead to poor strategic decisions based on flawed data.

Conclusion: A Scalable Process for Early-Stage Growth

Managing multi-entity financials in QuickBooks Online is entirely achievable for early-stage startups. The process boils down to three key principles: maintain separate QBO files for each legal entity, implement the 'Due To / Due From' accounting method meticulously, and perform a disciplined manual consolidation in a spreadsheet at the end of each period.

This system will serve you well through your early growth stages. However, you should monitor the time it takes. A common trigger point to evaluate more advanced systems (like NetSuite or Sage Intacct) is when the manual consolidation process consistently takes more than one day per month. Investing in this process discipline early saves significant headaches during due diligence, audits, or any event that requires a clear and defensible financial history. For more on group-level rules, review the Intercompany Eliminations topic.

Frequently Asked Questions

Q: Can I use one QuickBooks Online subscription for multiple legal entities?
A: No, this is strongly discouraged. Each legal entity should have its own QuickBooks subscription to maintain separate, clean books for tax, legal liability, and reporting purposes. Using classes or locations to separate entities in one file is fraught with risk and makes accurate reporting and audits extremely difficult.

Q: How often should I perform an intercompany reconciliation in QuickBooks?
A: You should reconcile your 'Due To / Due From' accounts at least monthly as part of your month-end close process. The balances must be equal and opposite before you begin your consolidation. Waiting longer can make it very difficult to find and correct discrepancies from past periods.

Q: What happens if my 'Due To' and 'Due From' accounts don't match?
A: A mismatch indicates an error. It could be a missed journal entry, a one-sided entry, or an incorrect amount or currency conversion. You must investigate the transaction details in both QuickBooks files for the period, identify the discrepancy, and post a correcting entry to bring the accounts back into balance.

Q: Is the 'Due To / Due From' method compliant with US GAAP and FRS 102?
A: Yes, the method itself is compliant. Both US GAAP and FRS 102 require intercompany balances and transactions to be eliminated upon consolidation. The 'Due To / Due From' method is simply an effective internal bookkeeping technique to track these transactions cleanly so they can be eliminated correctly.