Understanding Intercompany Eliminations

Intercompany eliminations adjust for transactions between a parent and subsidiary to prevent overstating revenues, expenses, assets, or liabilities. This process removes the effects of internal transactions, making consolidated statements reflect only external, third-party transactions.

Common Types of Intercompany Eliminations:

1. Revenue and Expense Eliminations: Revenue recorded by the selling entity within the group is matched by an expense recorded by the buying entity. These entries are eliminated to avoid inflating revenue and expenses.
2. Investment and Equity Eliminations: When the parent acquires a stake in the subsidiary, it records an investment on its balance sheet, while the subsidiary lists equity. On consolidation, the parent’s investment is eliminated against the subsidiary’s equity, establishing ownership without double-counting.
3. Asset and Liability Eliminations: Any intercompany loans or asset transfers need to be eliminated to avoid overstating liabilities or assets.

Equity eliminations, particularly, serve to remove the parent’s ownership interest in the subsidiary’s equity accounts, allowing only the noncontrolling interest’s share to be reflected.

Role of Noncontrolling Interest (NCI)

Noncontrolling interest represents the portion of the subsidiary not owned by the parent company. In consolidated financial statements, NCI is displayed as a separate component of equity, highlighting the ownership stake held by external (noncontrolling) investors. This ensures transparency for stakeholders by showing how much of the subsidiary’s results are attributable to external investors versus the parent.

Key Aspects of NCI in Financial Statements:

1. Presentation in Equity: NCI is included in the equity section of the consolidated balance sheet as “Noncontrolling Interest.” This value represents the third-party share of the net assets of the subsidiary.
2. Proportionate Share in Income: In the income statement, a separate line item reflects the share of net income attributable to the NCI. This ensures that the consolidated income attributable to the parent is correctly distinguished from the income belonging to external stakeholders.
3. Adjustments during Acquisitions: When the parent company acquires an additional stake in a subsidiary, the consolidation process adjusts the NCI proportionally. The amount of NCI decreases as the parent’s ownership share increases, affecting the equity elimination entries.
4. Impact on Goodwill: When calculating goodwill during acquisitions, NCI plays a key role. Goodwill is allocated between the controlling and noncontrolling interests, based on the fair value of the subsidiary and the ownership percentages.

Accounting for Equity Intercompany Eliminations with NCI

The primary goal of equity eliminations is to remove the parent’s investment in the subsidiary against the subsidiary’s equity accounts, which includes paid-in capital, retained earnings, and other equity components. This process ensures that only external equity is reflected in the consolidated financials.

1. Initial Consolidation: When a subsidiary is first consolidated, the parent company eliminates its investment in the subsidiary’s equity on the balance sheet. The remaining balance reflects the NCI’s share, which is allocated according to the ownership percentage not held by the parent.
2. Subsequent Adjustments: Over time, if the parent’s ownership changes due to additional acquisitions or divestitures, the consolidation adjustments are recalibrated to reflect the current ownership split. This requires updating both the NCI share and eliminating the parent’s portion of retained earnings and other equity accounts.
3. Dividends and Other Equity Transactions: When subsidiaries declare dividends, the portion belonging to the NCI is recorded as a reduction in the NCI’s share of equity. Similarly, any other equity transactions, like share issuance, require adjustments to ensure proper NCI representation.
4. Complexities with Multiple Layers: For entities with complex ownership structures, such as those with multiple holding companies, intercompany eliminations and NCI calculations require careful layering. Each parent’s equity interest is consolidated progressively, eliminating overlapping ownership percentages at each level.

How Joint Venture Accounting Differs

Joint ventures introduce a unique twist to consolidation accounting because they often do not grant one partner control over the entity. Unlike subsidiaries, which are fully consolidated, joint ventures generally use equity method accounting instead of full consolidation.

1. 1. Equity Method Accounting: When a parent does not have a controlling stake (typically under 50%), joint ventures are accounted for using the equity method. Here, the investment in the joint venture is initially recorded at cost, then adjusted based on the investor’s share of the joint venture’s profits and losses.
   2. No NCI Presentation: Since joint ventures are not consolidated, there is no noncontrolling interest in the balance sheet. Instead, the investor’s share of the joint venture’s income or loss appears in a single line item on the income statement, avoiding the need for separate eliminations or NCI adjustments.
   3. Impact on Dividends: For joint ventures, dividends received reduce the carrying value of the investment rather than adjusting for NCI, as the equity method reflects the parent’s proportionate share without control.
   4. Exceptions with Proportionate Consolidation: In certain industries or under specific arrangements, joint ventures may use proportionate consolidation, where each party consolidates its share of assets, liabilities, revenues, and expenses. This method requires a unique set of eliminations but is less common than the equity method.

Final Thoughts

Equity intercompany eliminations and the treatment of noncontrolling interest are essential in accurately reflecting the financial position of a group. By adjusting for internal transactions and properly accounting for external stakeholders, organizations provide transparent and accurate financial reporting. Joint ventures further illustrate the complexity of intercompany transactions, as they often fall outside full consolidation, reflecting a unique ownership structure.

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What is Cloud ERP?

Cloud ERP is a software-as-a-service (SaaS) model where the ERP system is hosted on the vendor’s cloud infrastructure. Unlike traditional ERP systems that demand physical servers and dedicated IT teams for maintenance, cloud-based ERP software is managed by the service provider. This management includes software updates, security, and data storage. Users access the system via a web browser, enabling real-time data processing and decision-making from any internet-connected location.

Cloud ERP systems typically operate on a subscription basis, reducing the upfront costs associated with traditional ERP implementations. They are scalable, allowing businesses to adjust their use based on current needs, and they provide a flexible, user-friendly interface that can be tailored to meet specific business requirements.

Enhancing Strategic Decision-Making

One of the key advantages of cloud-based ERP software is its ability to enhance strategic decision-making within an organization. This is achieved through several critical features:

• Real-Time Data Access: Cloud ERP systems provide real-time data access, ensuring that decision-makers have up-to-date information at their fingertips. This immediacy allows for quick, informed decisions, which is crucial in today’s fast-paced business environment. Whether it’s monitoring inventory levels, tracking financial performance, or analyzing customer trends, real-time data helps managers respond proactively to changes in the market or internal operations.
• Data Integration: By integrating all business processes into a single platform, Cloud ERP systems eliminate data silos and ensure consistency across departments. This unified view of the business helps leaders see the bigger picture and make strategic decisions based on a comprehensive understanding of the company’s operations. For example, integrating financial data with supply chain metrics can reveal insights into cost-saving opportunities or potential bottlenecks.
• Scalability and Flexibility: Cloud ERP systems are inherently scalable, which means they can grow with the business. This scalability is critical for strategic planning, as with crypto-accounting for instance, as it allows businesses to adapt quickly to changing market conditions or expansion opportunities without significant additional investments. The flexibility of cloud solutions also enables businesses to customize their ERP system to align with specific strategic goals, whether entering new markets, launching products, or streamlining operations.
• Advanced Analytics and Reporting: Many Cloud ERP solutions come with advanced analytics and reporting tools, enabling complex analyses on large datasets. These tools help businesses uncover trends and patterns, such as predicting demand or identifying risks, which are invaluable for strategic decision-making.
• Cost Efficiency: The cost efficiency of cloud-based ERP software also contributes to better strategic decision-making. With lower upfront costs and reduced IT overhead, businesses can allocate more resources to strategic initiatives rather than maintaining outdated infrastructure. Additionally, the subscription model offers predictable costs, making financial planning more straightforward.
• Improved Collaboration: Cloud ERP systems enhance collaboration across different departments and locations. With a centralized system accessible from anywhere, teams can work together more effectively, sharing information and insights that lead to better strategic decisions.

Conclusion: A Strategic Tool for Modern Businesses

In summary, Cloud ERP systems provide businesses with powerful tools for enhancing strategic decision-making. By offering real-time data access, integrating business processes, and delivering advanced analytics, Cloud ERP enables companies to respond effectively to market changes and internal challenges. The cost-efficiency and improved collaboration that come with cloud solutions further support informed, strategic decisions that drive long-term success. As businesses continue navigating an increasingly complex global market, adopting Cloud ERP systems will be a key differentiator for maintaining a competitive edge.

For more information on how SoftLedger’s cloud-based ERP software can support your business, please contact us here. We look forward to meeting you!

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In this post, we’ll discuss what intercompany reconciliation is, examples of intercompany reconciliation, the manual intercompany reconciliation process, and how to automate the process.

What Is Intercompany Reconciliation?

Intercompany reconciliation is the process of verifying the transactions that occur between various legal entities owned by a single parent company.

It is very similar to standard account reconciliation, though instead of matching the company’s general ledger to a bank’s statement, the accountant reconciles transactions between the company’s various entities.

This is important because it ensures there aren’t any discrepancies in the data and helps avoid double entries across multiple subsidiaries.

While you can manually reconcile the various entities in your company, plenty of automation solutions are also available. We’ll discuss both the manual process and automated solutions below.

Intercompany Reconciliation Process

If there are only one or two small entities within the parent company, you probably won’t have too many intercompany transactions and can perform the reconciliation process either monthly or quarterly. Therefore, you might be able to perform intercompany reconciliation manually.

The first step to manually reconciling your accounting processes is to ensure that you accurately identify all intercompany transactions in each entity’s balance sheet and income statement.

To make this process easier for yourself, use the same identification and data entry standards for all journal entries involved in intercompany transactions. Ideally, all entities within the parent company use consistent data entry standards, though, at the very least, the journal entries for intercompany transactions should be consistent.

From there, you can choose one of three different processes to execute the intercompany reconciliation process:

• G/L Open Items Reconciliation (Process 001): For the reconciliation of open items
• G/L Account Reconciliation (Process 002): For reconciling profit/loss accounts or documents on accounts that don’t have open time management.
• Customer/Vendor Open Items Reconciliation (Process 003): Used for most accounts payable and accounts receivables attached to customer or vendor accounts.

As you can see, manually consolidating entries is time-consuming and can slow down your monthly close process. In addition, it’s also risky. As the month-end draws near, your accountants will feel the pressure to finish the reconciliation process which can lead to errors in the data.

For this reason, we recommend that all companies invest in software to automate the process.

An Example of Intercompany Reconciliation (Automated)

Smaller multi-entity companies can theoretically get away with manually performing intercompany reconciliations in spreadsheets. However, larger corporations that deal with thousands or even millions of intercompany transactions execute the reconciliation process daily and therefore have to invest in automation software.

While various software solutions offer intercompany reconciliation automation, we built SoftLedger because we couldn’t find a solution designed specifically to solve the challenges multi-entity companies face.

We’re particularly proud of it because it automates the entire intercompany accounting and consolidation process. Here’s a brief overview of how SoftLedger handles multi-entity transactions and automates the intercompany reconciliation process:

As you can see, as soon as a transaction for a single subsidiary enters the platform, SoftLedger automatically creates the corresponding journal entries for each intercompany transaction. It also performs any necessary intercompany eliminations and performs the reconciliation process for you.

This way, you always have access to real-time data and never have to worry about manual errors creeping into your consolidated financial statements.

It also makes it easier for you to close the books faster and improves the overall efficiency of your team’s workflow.

However, there are also a few other key benefits of SoftLedger that make it unique from other traditional ERP systems.

First, the platform is 100% programmable via API, making it easy to build just about any integration. This also makes it highly flexible, so you can build out your own customizations to fit specific needs.

It is also the first accounting platform to offer native cryptocurrency capabilities. So rather than purchasing an add-on to integrate your crypto financial data with your fiat financial data, SoftLedger seamlessly combines the two.

As you perform the intercompany reconciliation process, there are probably a few other terms that you’ll hear as well. We’ll discuss these terms below.

Intercompany Payables

An intercompany payable is when a subsidiary in your company owes a payment (like a credit, loan, or advance) to another subsidiary in the parent company. In this case, the company that records the payable consumed the resources provided by the other subsidiary.

That being said, intercompany payables are ultimately eliminated in the final consolidated balance sheet to avoid inflating the company’s financial data.

Intercompany Receivables

Intercompany receivables occur when one subsidiary provides resources to another subsidiary in the parent company. In this case, the subsidiary providing the resources records the intercompany receivable.

Like intercompany payables, all intercompany receivables ultimately need to be eliminated in the final consolidated financial statement.

Intercompany Reconciliation Automation Software

While you can theoretically perform the intercompany reconciliation process manually, it’s time-consuming and can slow down the monthly close process.

In addition to creating an operational drag, this delay also means that executives won’t have accurate data for decision-making, leading to poor investment decisions.

To solve this problem, we built SoftLedger, which automates the intercompany reconciliation process.

Designed specifically for multi-entity companies, your team will always have access to real-time data, which makes it easy to close the month faster and improves data accuracy by minimizing the opportunity for human error.

To see for yourself how SoftLedger can streamline your accounting operations and improve efficiency, schedule a demo today!

The post Intercompany Reconciliation Guide With Examples appeared first on SoftLedger.

This is because there are often shared expenses, revenues, and other line items that could bloat the real totals and ultimately land the company in serious legal trouble.

In addition, there isn’t a “one-size-fits-all” accounting method for all subsidiaries. 

So in this post, we’ll discuss the different subsidiary accounting methods, when to use them, and how to establish a subsidiary accounting process that is largely automated.

What Is a Subsidiary?

If a parent company owns more than 50% of a company’s voting rights, then the controlled company is considered a subsidiary company of the parent company. 

There are two main kinds of subsidiaries:

• Partially owned subsidiaries: The parent company has more than 50% yet less than 100% of the subsidiary’s voting rights.
• Wholly owned subsidiaries: The parent company controls 100% of the subsidiary’s voting rights.

Even though the parent or holding company has significant influence over its subsidiaries, each subsidiary still has its own bank account, tax ID, and accounting processes. So in some ways, it still operates like an independent company. However, there are critical differences in the accounting process for a subsidiary and its holding company.

If the parent company has less than 50% of the voting power, it has some influence over the investee. That being said, it still only owns a minority interest (or noncontrolling interest) in the company. In this case, the company is known as an associate of the parent company rather than a subsidiary. This difference is important for accounting professionals as associates require a different accounting method than subsidiaries.

Accounting Methods for Subsidiaries

The two common accounting methods for subsidiaries include:

• Consolidation Method
• Equity Method

Below, we’ll discuss each accounting method, when you would use each one, and provide a few examples.

What Is the Consolidation Method of Accounting?

The consolidation accounting method is the required accounting method for audits. It is most commonly used to account for both partially and wholly subsidiaries. 

This is because the subsidiary’s finances are recorded on the parent company’s financial statements, though the parent company is also recording its income (or loss) from each separate legal entity. 

Therefore, the earnings of a subsidiary could be counted twice. This could significantly inflate the parent company’s earnings and misrepresent its true financial status.

For this reason, a core aspect of the consolidation method of accounting is intercompany eliminations. This ensures that a subsidiary’s gains or losses are accurately represented in the parent company’s financial statements.  

Below we’ll walk through a few examples of the consolidation method in action, or you can read our full guide on consolidated financial statements.

Example of the Consolidation Method of Accounting

You can either perform the consolidation process manually or automate it with software. We’ll start by showing you how to manually consolidate entries and then show you how you can automate it.

Manual Example of Executing the Consolidation Method of Accounting 

To manually consolidate your financial statements, the first step is to match the subsidiaries’ fiscal periods with the parent company’s fiscal periods. 

Once they are aligned, create an Excel spreadsheet with the following labels; liabilities, assets, income, equity, expenses, and cash flow.

Next, copy and paste the data from each subsidiary into the appropriate tab. Be sure to double-check that all of the information is correct, as any inaccurate data could throw off the entire balance sheet. 

Finally, perform the intercompany eliminations (eliminating receivables and payables between subsidiaries) and consolidate the data.

Automated Example of Executing the Consolidation Method of Accounting 

You can probably execute the consolidation process manually if the parent company only has one subsidiary. However, larger companies with many subsidiaries often need to leverage automation to close the books on time and ensure the data is accurate.

Therefore, here’s an example of what it looks like when you automatically consolidate subsidiaries in SoftLedger.

First, you’ll see a consolidated balance sheet along with each of the subsidiaries’ individual balances. 

Note here that the initial cash balance for the subsidiary named “San Francisco” is $135,916.77, and the total consolidated cash balance for the parent company is $776,309.65.

Now, let’s say that the subsidiary San Francisco receives a payment of $100,000. You can enter that journal entry like this:

Then, all you have to do is click “submit” on the journal entry page, and SoftLedger automatically:

1. Adjusts San Francisco’s balance
2. Performs intercompany eliminations
3. Adjusts the consolidated balance sheet to reflect the impact of San Francisco’s latest journal entry.

So when you navigate back to the consolidated balance sheet, you’ll see the following up-to-date consolidated balance sheet:

That’s it! You don’t have to calculate anything or manually perform eliminations. This not only makes your data more accurate but also helps your team close the month faster.

What Is The Equity Method of Accounting?

The equity method is generally used by companies that hold between 20% and 50% of the voting power. So it’s normally reserved for holding companies with significant influence over an associate, but there are scenarios where holding companies use it to account for their subsidiaries.

However, it’s important to note that the equity method often is not acceptable for audited subsidiary financial statements.

So how does the equity method work?

In short, the parent company records its share of a subsidiary’s net profit or loss on its non-consolidated income statement.

Example of the Equity Method of Accounting

To help you visualize this concept, here is a brief example. 

For example, if the subsidiary makes $100,000 and the parent company owns 30% of it, the parent company would record $30,000 in net income on its non-consolidated income statement.

In this case, the holding company would record a $30,000 debit to the Investment in Subsidiary Asset Account and a $30,000 credit to its Investment Income Account.

However, when a parent company initially acquires a portion of a subsidiary, it debits Investment in Subsidiary by the purchase amount and then credits cash by the purchase amount.

For example, if the holding company purchased its share in the subsidiary for $100,000, this is what the entry would look like for the acquirer:

The Best Software for Subsidiary Accounting

We built SoftLedger because we couldn’t find accounting software designed specifically for multi-entity companies that needed accurate, real-time data.

So while plenty of different accounting solutions offer consolidation and intercompany elimination add-ons, SoftLedger is unique in that it seamlessly executes the entire consolidation process for you so that the team always has access to an up-to-date balance sheet.

This saves your team time as you no longer have to spend time manually consolidating data and performing intercompany eliminations. In addition, it eliminates room for human error, which improves financial reporting accuracy and ensures the executive team always has real-time data to make better investment decisions.

To see for yourself how SoftLedger can help you improve your company’s efficiency, schedule a demo today!

The post Guide to Subsidiary Accounting: Methods and Examples appeared first on SoftLedger.

In this guide, we discuss the types of accounting used in hospitals, best practices, and key considerations when selecting hospital accounting software to streamline financial operations.

What Is Hospital Accounting?

Hospital accounting encompasses all aspects of managing a hospital’s finances, including tracking patient revenues, additional services, and staff salaries. Hospitals face unique accounting complexities due to the diverse parties involved, such as patients, insurance providers, healthcare suppliers, and government programs (e.g., Medicare and Medicaid).

What Are the Goals of Hospital Accounting?

The goal of hospital accounting is to:

1. Ensure the hospital has the cash to operate and that it’s paying expenses. 
2. Ensure all of the financial data is accurate and compliant with regulations.
3. Provide up-to-date information for the CFO, other executives, and stakeholders to make informed strategic decisions and accurately forecast future performance. 

While this may seem relatively straightforward, there are a lot of complexities in hospital accounting. 

For example, most hospitals have multiple different entities within the larger parent company, each of which has its own separate financial data that has to be consolidated at the end of the month. 

Additionally, hospitals have significantly more complex accounts receivables than traditional businesses as they typically receive a portion of their payments from insurance providers and a portion of it from patients. 

To add to the complexity, insurance might not agree to pay for certain bills. As a result, this slows down the time between when a patient receives treatment and when the hospital receives payment.

This makes a hospital CFO’s job tricky and it’s critical that the accounting is up-to-date and accurate at all times.

Cost Accounting in Hospitals

Hospitals use two main approaches to cost accounting: standardized cost assignments and specific cost tracking. The standardized method assigns set costs to each procedure or type of care, which can simplify processes but may lead to inaccuracies in complex cases where resource usage varies. For instance, two nurses might use different amounts of medical supplies, affecting the true cost of care.

Alternatively, tracking specific costs provides a more detailed view, allowing hospitals to control costs more precisely and improve financial forecasting. This approach also supports better patient outcomes by giving medical staff insights into care-related trends, enhancing patient care management.

Hospital Accounting Processes

1. Financial Reporting for Hospitals

Like other entities that follow GAAP, hospitals produce financial reports indicating fiscal performance. Relevant audiences include the public, hospital trustees, and senior management.

These reports may include cash flows, changes in net assets, and balance sheets. In addition, tax-exempt hospitals have to itemize uncompensated community care benefits, such as charity care.

2. Depreciation of Hospital Assets

Hospitals hold significant assets, including IT infrastructure, commercial buildings, and medical equipment, all of which depreciate over time. As with other sectors, depreciation accounting in hospitals involves estimating an asset’s useful life and spreading its cost over that period. This systematic approach allows hospitals to reflect an asset’s expense gradually, rather than absorbing the full cost upfront.

For instance, if a piece of essential medical equipment is expected to last ten years, spreading its cost over that period maintains an accurate view of the hospital’s net income each year. Recording annual depreciation expenses ensures that the asset’s value is represented correctly on financial statements, supporting informed decisions on asset management and budget forecasting.

3. Accounts Receivable and Billing in Hospitals

Hospital accounts receivable (AR) systems are uniquely complex due to the variety of payment sources, including patients, insurance companies, government programs, and charitable organizations. Often, multiple entities contribute to a single payment, such as a patient and their insurance provider.

Hospitals also use multiple billing methods—ranging from itemized charges for procedures and supplies to flat fees and daily rates. Effective hospital accounting software must track all incoming payments and assign them accurately to respective accounts, while also considering negotiated rates and balance billing requirements to maintain compliance.

Additionally, hospitals must manage credit balances resulting from overpayments, billing adjustments, or insurance claim corrections. In many cases, payments from insurers cover only a portion of service costs, leaving a remaining balance owed by the patient. Further complexity is added by insurers’ unique fee schedules, requiring hospital accountants to monitor a web of receivables, payments, and allowances for an accurate financial overview.

4. Credit Balances and Outstanding Checks

In hospital accounting, a credit balance or outstanding check occurs when a patient or their insurer overpays a bill. While this may appear minor, these overpayments must be refunded, creating additional administrative tasks for hospital accountants. Hospitals also need to maintain sufficient cash flow to cover these refunds, adding another layer of complexity.

The process becomes even more challenging if a patient has moved or passed away. Additionally, unclaimed property laws in some states require hospitals to remit uncollected funds from outstanding checks to the state government. Navigating these regulations is crucial to ensure compliance and maintain accurate financial records in healthcare.

5. Multi-Entity Accounting

Many hospitals operate as multi-entity organizations with multiple locations or independent departments, making hospital accounting more complex. Each entity within the hospital system has its own balance sheet and accounting processes, but all financials must be consolidated monthly to give an accurate overview of the parent company’s finances.

Manually managing multi-entity accounting is time-consuming, as it requires more than combining numbers; accountants must also conduct intercompany eliminations to avoid double-counting. Utilizing robust hospital accounting software with built-in multi-entity capabilities streamlines this process, allowing for accurate, efficient consolidation.

6. Allowance for Doubtful Accounts

In hospital accounting, it’s uncommon for hospitals to collect the full amount billed, as insurance companies may dispute claims, and patients may struggle to pay their portions. This creates a significant cash flow challenge for hospitals, as they must manage the gap between services provided and revenue collected.

Hospitals record the total billed revenue at the time of service but often collect only a portion. To address this, hospital accountants use a doubtful allowance—an adjustment based on an estimated percentage of revenue, typically between 2% to 5%, to more accurately reflect the revenue likely to be collected. This adjustment ensures a realistic financial overview and helps maintain effective cash flow management.

Common Challenges With Hospital Accounting Software

Many traditional ERP systems struggle to address the unique needs of hospitals, leading to inefficiencies in data access, integration flexibility, and real-time reporting. Here are some common challenges:

• Limited Real-Time Data: Hospitals need real-time data for informed decision-making.
• Integration Flexibility: Modern hospital accounting software should offer easy integrations with other applications.
• Multi-Entity and Multi-Currency Consolidation: Automating these functions saves time and reduces errors.
• Implementation and Maintenance Costs: Legacy systems may require costly implementation and maintenance.

Inability to Access Real-Time Data

In healthcare, access to real-time data is critical for up-to-date financial decision-making. However, many hospital accounting software solutions lack the capacity to offer true real-time data due to limitations in multi-entity and multi-currency consolidation. To achieve real-time insights, a platform should automate consolidations across entities and currencies without waiting until month-end, along with necessary calculations like intercompany eliminations. Ensure the software provides comprehensive real-time capabilities to maximize data accuracy and operational efficiency.

Lack of Flexibility to Quickly Build Integrations With New Apps

Many legacy ERP systems lack the flexibility to integrate seamlessly with modern apps due to outdated code. This lack of adaptability can be a barrier in healthcare, as it often requires hiring specialized developers to build integrations, adding time and cost. Look for hospital accounting software with a REST API, allowing easy and rapid integration with new applications. This feature ensures that the system adapts quickly to the evolving healthcare landscape, supporting efficient and scalable operations.

Challenges in Consolidating Multiple Entities and Currencies

While many ERP solutions offer add-ons for consolidating multiple entities and currencies, few provide these capabilities as core features. Additionally, many solutions fail to automate calculations such as intercompany eliminations, leaving accountants to perform these manually. Look for multi-entity accounting software with built-in support for consolidations and currency revaluations to streamline financial management and save valuable time.

High Costs for Implementation, Training, and Maintenance

Implementing traditional ERP systems can be costly and time-intensive, with expenses reaching into the thousands, plus ongoing training and maintenance fees. Additionally, many systems require hiring third-party experts for implementation and regular maintenance. When evaluating new software, consider the total cost of ownership, including implementation time, ease of use, and long-term maintenance requirements, to ensure the solution fits both your budget and operational needs.

Security and Patient Data Privacy

Hospitals face added challenges in securing both financial and patient data, making data protection critical. Choose a healthcare accounting platform with a SOC 1 Type II report, which ensures that the software’s design and controls are compliant with healthcare industry standards. This safeguard is essential for maintaining data privacy and meeting regulatory requirements. 

Selecting the Right Solution

Healthcare ERPs couldn’t keep up – so we built it ourselves. SoftLedger is purposefully designed to conquer the complexities of healthcare accounting, simplifying multi-entity management, the month-close process, and providing real-time data for CFOs. Built with an adaptable REST API, SoftLedger integrates seamlessly with other apps, supports rapid implementation (about 45 days), and ensures data protection aligned with healthcare standards.

Discover how SoftLedger fills the gaps other ERPs can’t—purpose-built for healthcare accounting, our software streamlines your processes with unmatched precision. Explore Your Solution today.

The post Hospital Accounting: A Complete Guide for 2024 appeared first on SoftLedger.

However, when subsidiaries transact with each other or the parent company, these transactions must be handled differently from traditional transactions between two unrelated companies.

In addition, a parent company with subsidiaries must perform intercompany reconciliations at the end of each accounting period. This ensures transactions are not duplicated, missed, or erroneously entered. 

In this guide, we’ll discuss what intercompany accounting is, how to create an efficient intercompany accounting process, and how you can automate many of the complexities associated with intercompany accounting and financial reporting.

What Is Intercompany Accounting?

Intercompany accounting is the process of recording financial transactions among parent companies and their subsidiaries and consolidating these entities’ financial statements into a single set of financial statements. This single set of financial statements then reflects the entire parent company’s performance, including its subsidiaries.

However, there’s more to intercompany accounting than simply putting numbers in a spreadsheet. 

For example, if subsidiaries operate in different countries, they might have to translate currencies and ensure their processes comply with local accounting standards. Accounting teams also have to reconcile their financial statements at year-end to ensure their financial statements are complete and accurate.

What Are Intercompany Transactions?

There are three types of intercompany transactions:

• Upstream transactions: when a subsidiary pays a parent company
• Downstream transactions: when the parent company pays a subsidiary
• Lateral transactions: when a transaction occurs between multiple subsidiaries

Intercompany transactions are recorded in different ways, depending on the transaction. 

For example, suppose one subsidiary sells inventory to another. In this case, the transaction gets recorded as an accounts receivable entry for the selling subsidiary and accounts payable for the purchasing subsidiary. 

Meanwhile, if the parent company loans to one of its subsidiaries, this loan will be recorded as an asset for the parent company and a liability for the subsidiary.

What Are Intercompany Eliminations?

Intercompany eliminations cancel intercompany transactions that don’t impact the parent company’s net assets. As a result, these eliminations ensure the parent company’s financial statements are accurately consolidated during the close process. 

Otherwise, the parent company’s balance sheet might become inflated.

However, not every intercompany transaction needs eliminating. For example, if underlying and intercompany transactions are tied together, the elimination shouldn’t be performed.

Let’s say a parent company transfers cash to a subsidiary to help fund operations. In this case, an elimination doesn’t need to be performed, but the transferred cash balance still needs to be recorded at the consolidated level.

The goal with intercompany eliminations is to make sure any activity that’s purely between entities is equal to zero. However, the cash did transfer in this case, so this transaction would reflect at the consolidated level.

The Intercompany Accounting Process – Critical Considerations

Before consolidating entities, several key steps have to be taken to ensure the data is recorded accurately.

Here’s an overview of critical considerations during the intercompany accounting process:

Partial Ownership Considerations

There are different accounting procedures for entities depending on the percentage of each entity the parent company owns. 

For example, if the parent company owns a controlling interest (more than 50%) in the subsidiary, it should be accounted for with traditional accounting methods. 

However, if the parent company only owns a minority interest in the subsidiary (less than 50%), the parent should only record its gain or loss equivalent to its ownership percentage. 

These conditions mean if the parent company owns 30% of an entity and the entity records a monthly gain of $10,000, the parent company should record a gain of $3,000 on its consolidated balance sheet.

Of course, you should always consult the relevant accounting standards in your jurisdiction to ensure you are recording such entries correctly.

Matching Fiscal Periods

Not all entities will have the same fiscal periods, so it’s essential to match them before producing a consolidated financial statement.

The maximum acceptable difference between the parent and subsidiary company’s reporting period is usually three months. 

The calendarization process can be used if the parent and subsidiary have reporting periods more than three months apart. This process standardizes reporting periods, see below for an example.

Source

Currency Consolidations

If a subsidiary deals with multiple currencies, the subsidiary must consolidate the currencies before producing a consolidated financial statement.

Calculating currency conversions manually is often a slow and laborious process. However, with SoftLedger, this process is automated.

Automating Intercompany Accounting With SoftLedger

Executing intercompany accounting processes manually is cumbersome and can take days for your accounting team to complete. 

This also means that manual errors are likely to creep into the data, and executives have to wait longer to receive financial reports.

Even if you have a modern general ledger accounting software, many processes like intercompany eliminations still have to be manually executed before the data can be consolidated. In addition, with small business accounting software, extra fees are added for different legal entities, which can get expensive.

To solve these problems, we built SoftLedger: a general ledger accounting solution that’s built specifically for multi-entity companies. It automates processes like intercompany eliminations and consolidates financial data in real-time.

It also leaves an easy-to-access, accurate audit trail for each entity. This makes accounting management more straightforward and less time-consuming.

See it in action here:

SoftLedger is also highly flexible and about 95% of the platform is fully programmable via API. You can also link your bank accounts and credit cards with just a few clicks.

Despite its robust capabilities, customers say it is super easy to navigate and only requires a week or two to onboard the team and get comfortable. 

Schedule a demo today to see if SoftLedger is the best solution for you.

The post Intercompany Accounting: Everything You Need To Know (2023) appeared first on SoftLedger.

What Is an ERP System vs. Accounting Software?

ERP (Enterprise Resource Planning) Systems: An ERP system is a comprehensive software solution that integrates various business processes, including accounting, HR, supply chain, CRM, inventory management, and procurement. Examples include NetSuite, Microsoft Dynamics 365, and Sage Intacct. ERP systems are typically used by large enterprises due to their robust capabilities and the technical expertise required to maintain them.

Accounting Software: In contrast, accounting software is designed primarily to manage financial transactions for smaller businesses. It offers essential features like general ledger management, invoicing, and financial reporting. QuickBooks, FreshBooks, and Xero are popular examples. While easy to use and quick to implement, accounting software may not meet the advanced needs of larger organizations.

Key Differences Between ERP Systems and Accounting Software

ERP Features vs. Accounting Software Capabilities: ERP systems offer a wide range of business functionalities beyond accounting, making them more comprehensive. Even when focusing solely on accounting functions, ERP systems provide advanced features like multi-entity consolidation, foreign exchange accounting, and detailed reporting—capabilities that typical accounting software lacks.

ERP Setup vs. Accounting Software Onboarding: Accounting software is generally cloud-based and can be set up quickly without needing technical expertise. In contrast, ERP systems involve a more complex setup process due to their advanced features and customizability, often requiring several months to implement.

Comparing Flexibility and Scalability of ERP and Accounting Software: While accounting software is user-friendly, it can become limiting as your business grows. ERP systems, on the other hand, are designed to scale with your business, offering greater flexibility in customization and integration with other tools.

ERP Compliance and Controls vs. Accounting Software: ERP systems provide advanced compliance and control options, essential for larger companies that need to ensure data security and audit readiness. Accounting software, while easier to use, may not offer the same level of security and control, which can be a concern for businesses with stringent compliance requirements.

Choosing the Best Accounting Solution for Your Business Size

Small businesses might find accounting software like QuickBooks sufficient for their needs. However, as businesses grow, they often require the advanced features of ERP systems like NetSuite or Sage Intacct.

SoftLedger: Positioned between these two solutions, SoftLedger is designed for mid-market companies that need more than basic accounting software but don’t require the full complexity of an ERP system. SoftLedger offers the advanced features and scalability of an ERP system, without the complexity, making it an excellent choice for growing businesses.

Here are a few key differentiators that make SoftLedger an excellent solution for mid-market businesses.

Real-Time Data and Multi-Entity Consolidation in ERP

A common pain point with most accounting software is the need to manually consolidate data at month-end. Even with some ERP solutions, aspects of this process often require manual effort. SoftLedger addresses this challenge by automatically consolidating all entries as soon as they enter the platform. Additionally, it automates processes like intercompany eliminations and monthly foreign currency revaluation.

To see how SoftLedger automatically updates the entire balance sheet the instant you make an entry, check out this video:

With automatic consolidation and real-time data, you can provide up-to-date financial information to executives at any moment, facilitating better investment decisions. This automation not only saves your team countless hours but also reduces the likelihood of manual errors, ensuring more accurate data during audits.

Leveraging ERP Flexibility with a REST API

Most accounting software limits users to a predefined set of app integrations. If the software doesn’t support the app you need, you’re out of luck.

ERP systems offer more flexibility but often require extensive engineering resources for custom integrations, taking weeks or even months to complete.

SoftLedger simplifies this process with a REST API, making 95% of the platform programmable. This allows developers to build integrations in days, saving you time and costly resources. Plus, our comprehensive API documentation ensures a seamless experience.

Quick ERP Implementation and User-Friendly Onboarding

Most ERP systems require extensive training and onboarding, often taking several weeks or even months due to their complex automation features. While this is suitable for large enterprises, mid-market businesses usually need only a fraction of these capabilities.

SoftLedger provides the necessary automation and advanced features without the complexity of traditional ERP systems. As a result, customers report implementing SoftLedger in just a few weeks, with teams quickly adapting to the platform.

See how simple it is by watching our walkthrough:

ERP vs. Accounting Software: Find the Right Fit for Your Business

Small business accounting software suits local businesses, while ERP systems are ideal for large enterprises with extensive accounting teams. However, SoftLedger offers a balanced solution—simple yet robust enough to handle multi-entity corporations and automate complex processes.

SoftLedger’s modern and flexible design delivers all the functionality mid-market companies need without complicating the user experience.

Discover if SoftLedger is the perfect fit for your business by booking a demo today.

The post ERP vs. Accounting Software: How to Choose the Best Solution for Your Business appeared first on SoftLedger.

If exchange rates change dramatically or the company frequently deals with a high volume of foreign currency transactions, this can impact the company’s financial reporting burden.

So in this post, we’ll discuss what foreign currency revaluation is, and when they occur. We will also walk through journal entry examples, discuss key challenges, and provide automation solutions.

What Is Foreign Currency Revaluation?

Foreign currency revaluation is the period-end process of re-valuing a financial account or transaction from a foreign currency into a company’s reporting currency using a foreign exchange rate. 

To illustrate the concept as simply as possible, pretend you’re an American citizen visiting Canada. It’s January 15th, and you went to the store with your friend to buy something but forgot your wallet. Your friend agrees to purchase a product for you, costing 10 Canadian dollars (CAD). Let’s assume that on that day, 1 CAD is equal to .75 USD. At this exchange rate, you’re planning to pay back your friend 7.50 USD for the product.

However, let’s pretend that you don’t actually pay back your friend for the product until January 30th. If the exchange rate on January 30th changed and 1 CAD now equals 1.5 USD, you’re now paying the equivalent of 15 USD for the product rather than 7.50USD. So you technically lose 7.50 USD. This is the concept of a foreign currency revaluation, and a realized loss.

As you can see, even though the agreed-upon transaction amount remains the same (it’s still 10 CAD), the value of that transaction changed based on foreign currency exchange rate fluctuations. The same applies to companies that follow accounting standards.

So, foreign currency revaluation processes are applicable to open transactions where the exchange rate fluctuates from the date the transaction agreement was entered into and the date the transaction is settled.

What Does This Mean?

This means that foreign currency revaluations always occur whenever:

• The company has an accounts receivable entry and is expecting payment in a currency other than its functional currency.
• The company has an accounts payable entry and is planning to make the payment in a currency other than its functional currency.

Foreign currency revaluations can also occur across entities within a parent company and impact intercompany payables and receivables. We discuss this scenario at length in our guide to foreign currency translation.

What Is The Purpose of Foreign Currency Revaluation?

The purpose of foreign currency revaluation is to help companies remain compliant with accounting standards and keep an accurate record of how much they owe/are owed while factoring in foreign currency exchange rates. In some situations, foreign currency revaluation is also necessary to comply with tax laws. 

So whenever a company has a financial transaction that involves a foreign currency, a revaluation is mandatory at period end. This is to ensure accurate records of the realized or unrealized gain or loss, and to comply with the company’s financial reporting requirements, to shareholders, and tax authorities. 

If the company doesn’t perform the revaluation when the books close, it is at risk of reporting inaccurate financial data.

Foreign Currency Revaluation Example

To illustrate the concept of foreign currency revaluation, here’s a simple example.

Let’s say that Company A purchases office supplies from Company B on May 15th. Company A’s functional currency is euros and agrees to pay 100,000 EUR for the equipment in 30 days. However, Company B’s functional currency is US dollars and therefore records the accounts receivable transaction in USD.

For the sake of simplicity, let’s assume that on the date of the transaction agreement, 1 EUR is equivalent to 1 USD (so the exchange rate from EUR to USD is 1).

In this case, here’s the journal entry that Company B would record on May 15th:

Remember that because Company B’s functional currency is US dollars, they still record the transaction in USD even though they will be paid in EUR.

However, let’s assume that when Company B closes the books at the period end, the exchange rate changes. For the sake of this example, we’ll say that when Company B closes the books on May 30th, 1 EUR is now worth 1.5 USD.

So even though the agreed-upon amount never changed, the value of the amount owed did change. In this case, the 100,000 EUR due (which, on May 15th, was worth 100,000 USD) is now (May 30th) worth 150,000 USD.

This is where the revaluation occurs. The original 100,000 USD recorded on May 15th is now worth (revalued at) 150,000 USD on May 31st due to the exchange rate fluctuation.

To account for the gain or loss created by the exchange rate fluctuation, we need to create another journal entry at the period end:

Now let’s pretend that Company A finally pays Company B on June 5th. We can call this the settlement date. If the exchange rate on the settlement date for 1 EUR is now 1.7 USD, the unrealized gain is reversed, and if the unrealized gain is reversed, the differences in value are recorded as a realized gain. This is what the settlement date journal entry would look like:

Key Challenges With Foreign Currency Revaluation

The example above is relatively straightforward. However, companies that handle thousands, or even millions of foreign currency transactions monthly often face a variety of challenges with foreign currency revaluation. 

Many small business accounting software solutions claim to automate this process. That being said, most users typically end up manually cleaning up accounting entries related to foreign currencies. 

This is because the recommended exchange rate provided by the software might not align with your bank’s exchange rate. Additionally, intercompany transfers may not be supported between foreign currency accounts.

Fortunately, you can solve these challenges with automation.

The Foreign Currency Revaluation Process (Automated)

We were frustrated by the common pain points mentioned above regarding foreign currency revaluation. As a result, we built SoftLedger to automate the process.

So here’s how SoftLedger automates the foreign currency revaluation process.

Identify All ledger Accounts to Be Revalued

In general, this is any balance sheet account you expect to have a posted currency different from the reporting currency of your locations.

For any ledger accounts that need to be revalued at the month end, check the Revalue Forex Rates box when creating or editing Ledger Accounts under Financial>Accounts:

Set the Forex Gain/Loss Account

The next step is to navigate to each location and set the Forex Gain/Loss Account. 

This is the account that SoftLedger uses to calculate the gain or loss from foreign currency fluctuations. It will be on the other side of the ledger accounts chosen to be revalued in the previous step:

Revalue Forex Rates

Next, go to “Accounting Periods” and select the lock button icon under Forex for the period you want to close. 

If there are any locations with transactions in currencies other than that location’s reporting currency, you can set a new rate:

After adding or accepting the rates, click on the “Approve Re-Valuations” tab and then click “Post Revaluations and Close FX”:

After clicking Save Rates and then Approve Re-Valuations, SoftLedger automatically executes the following processes:

1. It records a journal entry for any gains and losses caused by the foreign exchange rates. 
2. It automatically adjusts the balance for any ledger accounts set to be revalued.

This way, you never have to manually calculate gains and losses caused by foreign currency transactions, which saves your team time and reduces the possibility of manual errors creeping into the company’s financial data. 

Automate The Foreign Currency Revaluation Process Today!

While it’s possible to account for foreign currency devaluations manually, SoftLedger does the entire process for you automatically.

This automation saves your team’s time so that they can close books faster and improve data accuracy. 

If you need an accounting software platform that automates the foreign currency revaluation process, book a demo of SoftLedger today.

The post Foreign Currency Revaluation: Definition, Process, and Examples appeared first on SoftLedger.

Specifically, if a transaction occurs on the 5th of the month, the foreign exchange rate might be different when you close the books on the 30th. 

A Cumulative Translation Adjustment (CTA) is required in order to distinguish between gains and losses resulting from operations, versus those that have resulted from fluctuations in foreign currency. 

Below, we’ll discuss what a CTA is, why they’re important, and finally, how to record them on the balance sheet.

What Is Cumulative Translation Adjustment (CTA) In Accounting?

The Cumulative Translation Adjustment (CTA) is a line item in the balance sheet that shows the gains and losses created by exchange rate fluctuations. CTA entries are important because of the fluctuations that take place with exchange rates over time. The US GAAP, Financial Accounting Standards Board (FASB) Statement 52, and IFRS, per International Accounting Standards (IAS) 21, all require CTA entries. This is so that investors can accurately assess gains and losses from business operations versus fluctuations in exchange rates.

In this post, we’ll discuss why CTA entries are important, how to record them on the balance sheet and how to automate the entire process.

Example of A Cumulative Translation Adjustment (CTA)

Let’s walk through an example to visualize how cumulative translation adjustment (CTA) works.

Company A is from the United States, and the dollar is its functional currency. However, Company A has a subsidiary in Singapore that reports in SGD. The Singapore subsidiary sold widgets for 100,000 SGD on 12/15/2021. 

At the time of the transaction, the exchange rate from SGD to USD was $.73213, but at the time the retained earnings entry was booked on 1/1/2022 the rate was $.74148. Instead of a retained earnings balance of $73,213, the balance is $74,148 as a result of revaluation at the end of the period, creating a variance of $935.

The variance is resolved, and the consolidated balance sheet is balanced through the Cumulative Translation Adjustment. A debit entry is booked to Accumulated Other Comprehensive Income on Company A’s books for $935, with a credit booked to Other Comprehensive Income. This entry offsets the initial variance created on the Singapore entity’s books, therefore resulting in a balanced consolidated balance sheet.

Why Are Cumulative Translation Adjustments Important?

Cumulative translation adjustments are important because foreign currency fluctuation can falsely inflate the business’s profits or losses. 

In the example above, you can see that the company would have inaccurately recorded its net income if the CTA of $935 was not recorded.

How to Calculate A Cumulative Translation Adjustment?

To calculate the cumulative translation adjustment (CTA) entry, take the difference between the transaction amount in the foreign currency multiplied by the exchange rate on the date the transaction occurred and the transaction amount in the foreign currency multiplied by the exchange rate on the date the transaction was entered.

Here’s a visual representation of the cumulative translation adjustment formula:

To help you better visualize this, here’s an example of this in action:

• A U.S. based company with a functional currency of US dollar purchases a factory in England for 500,000 euros.
• The exchange rate of one euro is $0.96 on the date the transaction occurred
• The exchange rate of one euro is $0.98 on the date the transaction is recorded

In this case, here’s what the formula would look like:

In this case, you would debit accumulated other comprehensive income and credit other comprehensive income for $935. 

Cumulative Translation Adjustment Journal Entry

To help you accurately enter a CTA journal entry, here’s a step-by-step overview of how to do so in SoftLedger.

Step 1: System Setup 

Here, we set up two locations/legal entities. The global entity operates in USD, and SGD is a subsidiary operating in SGD.

Step 2: Establish Accounting Periods

For this example, we’ll assume that the business’s fiscal year is the same as the calendar year. If that’s the case, you don’t have to do anything here.

Step 3: Accounts Setup

For this example, we’ll book a journal entry (see Step 5 below) for the SGD location so that you can see how this impacts the consolidated balance sheet. Here are some of the accounts we’ll be using. You’ll need to create an account for both Other Comprehensive Income and Accumulated Other Comprehensive Income if you don’t have those already.

Step 4: Set Up System Account Default Settings

Now you can navigate to Settings and under “Accounts” set the default settings. Select your desired accounts in the “Financial Close” section to be used in the automatic journal entry calculations.

Step 5: Update The Balance Sheet

In this example, we’ll update our balance sheet as noted above.

Once you’ve completed that step, you’ll see the unconsolidated balance sheet:

Step 6: Close The Year

As you can see, the SGD subsidiary is showing $100,000 in total assets, and the balancing amount is equal to retained earnings. 

Now, when we switch over to the consolidated view, you’ll see that the SGD$100,000 in total assets is automatically converted to USD$73,212.90 (assuming that we’re using 0.732129, which was the exchange rate on 12/15/21 – the transaction date of the journal entry).

Note that SoftLedger automatically pulled this exchange rate and executed the calculation. As a result, you never have to perform a single calculation yourself.

Now switch over to the USD tab, and you’ll see the automatically consolidated view:

When you first look at the first SGD and Global locations, they don’t balance.

Specifically, the total assets are recorded as $73,212.90, and the total retained earnings are recorded as $74,148.20.

This is because the exchange rate from the initial date the transaction was recorded (12/15/21) was different from the exchange rate on the date the books closed (12/31/21). Therefore, there is a USD$935.30 discrepancy.

To solve this imbalance at the consolidated level, SoftLedger automatically books the CTA entry at the parent level under Accumulated Other Comprehensive Income.

On the other side, it is booked as the Other Comprehensive Income, which doesn’t exist on the balance sheet.

This ultimately gives you a balanced consolidated number without performing a single manual calculation.

Finally, to close the year, all you have to do is navigate to the admin page and go to “Accounts Periods”, and close out 2021 FY. This process will book the retained earnings and CTA entry.

Software to Automate the Cumulative Translation Adjustment Process

If your company has foreign subsidiaries or frequently processes foreign currency transactions, you know that it can be complicated to accurately account for the impact of foreign exchange rate fluctuations. 

It can be a manual process that is tedious and time-consuming for accountants. Additionally, it exposes your financial data to human error.

To solve this problem, we built SoftLedger to automate the entire foreign exchange process.
To see for yourself how SoftLedger can improve your team’s efficiency, schedule a demo today!

The post Cumulative Translation Adjustment (CTA): The Ultimate Guide appeared first on SoftLedger.