In Accounts Receivable, what is meant by an intercompany transaction?

Introduction / Context:
In large business groups, there are often multiple legal entities that trade with each other. When one group company sells goods or services to another group company on credit, an intercompany transaction arises. This concept is important in Accounts Receivable, consolidation, and transfer pricing. The question asks you to identify what intercompany transactions mean in the context of Accounts Receivable.

Given Data / Assumptions:

• A corporate group may have several subsidiaries or affiliates under a parent company.
• Each legal entity maintains its own set of accounting records.
• Group entities may buy and sell goods or services to each other on credit terms.
• Such internal transactions create receivables and payables that need special treatment, especially for consolidated reporting.

Concept / Approach:
An intercompany transaction in Accounts Receivable occurs when one company within a group (Company A) supplies goods or services on credit to another company in the same group (Company B). Company A records an intercompany receivable, and Company B records an intercompany payable. While these are normal receivables and payables in the separate legal entity accounts, they must be eliminated in consolidated financial statements because the group cannot owe money to itself. Intercompany AR also involves specific policies for pricing, settlement, and reconciliation between related entities.

Step-by-Step Solution:
Step 1: Focus on the phrase intercompany, which suggests transactions between companies within the same corporate group. Step 2: Recognise that in AR terms, such transactions arise when one group entity extends credit to another, leading to receivables and payables within the group. Step 3: Evaluate option a, which explicitly states that one legal entity sells on credit to another within the same group, creating intercompany receivables and payables. This matches the definition. Step 4: Evaluate option b, which describes a transaction with an external retail customer; this is a normal customer transaction, not intercompany. Step 5: Evaluate option c, which talks about a personal transaction between an employee and a friend, which is irrelevant to company AR. Step 6: Evaluate option d, which refers to tax payments to the government; these are external transactions, not intercompany. Step 7: Conclude that option a is the correct description of intercompany transactions in Accounts Receivable.

Verification / Alternative check:
In practice, ERP systems often flag intercompany customers and vendors separately and use specific posting keys or document types for intercompany invoices. During group consolidation, accountants eliminate intercompany balances so that the consolidated balance sheet reflects only receivables and payables with external parties. Internal guidance documents on group accounting usually define intercompany transactions in terms very similar to option a, confirming that it is the correct choice.

Why Other Options Are Wrong:
Option b involves an external customer of the group, which would be treated as normal trade receivables and is not intercompany. Option c relates to private dealings of individuals, which should not appear in the company's AR records. Option d covers transactions between the company and the government, such as tax payments, which are external and not between two entities of the same group.

Common Pitfalls:
Students sometimes think that intercompany means any transaction between two companies, even unrelated ones. The key is that intercompany transactions occur between related legal entities under common control. Another pitfall is forgetting the consolidation implication: intercompany receivables and payables must be reconciled and eliminated so that the group financial statements do not double count internal flows. Understanding both the AR perspective and the group reporting perspective will help you in advanced accounting topics.

Final Answer:
An intercompany transaction in Accounts Receivable is a transaction in which one legal entity of a corporate group sells goods or services on credit to another legal entity within the same group, creating intercompany receivables and payables.