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welcome back to the channel today i will start explaining inter-company processing or icp and i know how important this is because most of my clients have issues and questions related to icp and i believe this is mostly because icp can include many processes that are complicated and also because icp can be completely different between one company and the other so today i will start by explaining the inter company sales process to external customers i will start by explaining the meaning of icp or intercompany processing then i will explain the different steps in this process and then we will look into the financial entries in every step so keep watching after the intro enter company processing or icp is any process that happens between two different legal entities that belong to the same group of companies these two entities can be in the same country or in different countries so for example if in our group of companies we have a branch in france and another branch in us any transaction that happens between these two different branches will be an intercompany process because every branch is a different legal entity the company that's in france they have to report their own tax reports in france and they have their own tax registration numbers they also have to submit their own financial statements and the same for the branch that is in u.s so this is the difference that you have to pay attention to that they are two different legal entities they can also be in the same country so for example in france we can have two different legal entities for the same company so for example we have one legal entity that produces the product and another legal entity that sells it and there are too many different combinations in this area so the only thing you need to pay attention to is they are two different legal entities as long as we have two different legal entities whether they are in the same country or in different countries then this is an inter-company process and these two different legal entities can also be called sister companies or affiliate companies so when we say a sister or an affiliate company it means that these are two different legal entities that belong to the same group now we know the meaning of icp but what is the meaning of a third party or an external customer this is any entity that doesn't belong to our group of companies and now i will start explaining the inter-company sales process to external customers let's go back to our example we have two sister companies one in u.s and another in france and we have a customer an external customer in france who would like to buy one of our products but the product only exists in u.s so now the company in france is going to create a sales order to sell this product to our customer in france but is going to ship this product from our company in u.s so here is an inter-company process this process actually includes two processes it includes in the background one sales process that will happen between our company that's in us and the other that's in france so the one in u.s is going to sell the product to france in the background and then we have the other process that we have in the foreground which is the sales process from france to the external customer now let's look into the steps of this process before we start you are already familiar with the standard processing of order to cash or sales order processing which i already explained in other video before so if you haven't seen this video yet i will leave you a link here and i completely recommend that you watch this one before you continue watching the intercompany process so this icp process will start by the creation of a sales order in our company in france to the external customer and this sales order will include the different details who is the customer we are selling to what is the product we are selling the different agreements like the payment term and the shipping term and so on that are included in the sales process then based on this sales order we are going to create an outbound delivery in our company in u.s and based on the outbound delivery we are going to create a goods issue also in u.s and then we move to billing and in this process we have two billing documents we have one billing between our company in france and the external customer that will be created in the french company and we have another billing document that's between the company and us and the company in france so this one is an inter-company billing document and this one will be created in the company of us because the company in us is selling the product in the background to our company in france based on this billing document we move to the next step which is posting the supplier invoice and why do we have a supplier invoice this time because our company in france is buying a product from the company in us so at the same time we create a billing document for a customer in u.s we also have to create an intercompany supplier invoice in our company in france now let's look into the different financial entries in the process when we create the sales order in the company in france there is no financial entry and then when we create outbound delivery there is also no financial entry then we move to goods issue and here we have our first financial entry that will be posted in the company in u.s pay attention that in inter-company processing you have to pay attention where the posting will happen because we have two different companies included this time so the goods issue posting will happen in our company in u.s the company that is issuing the product and this financial entry will be a debit to cost of goods sold and a credit to the product inventory and then we move to the billing documents so for the first billing document for the external customer that will be posted in france it will be a debit to the customer accounts receivable account and their credit to the sales revenue in france and for the inter-company billing document that's posted in us the financial entry will also be a debit to accounts receivable and a credit to the sales revenue but most of the time we would have two different accounts for affiliate companies from the accounts that we use for external customers so the entry will be a debit to affiliates accounts receivable and their credit to affiliates sales revenue and now to the final step which is posting the inter-company supplier invoice in our company in france the financial entry will be a credit to affiliates accounts payable so this is the supplier account of our affiliate company and will be a debit to an account that we choose remember that this posting is an inter company posting happening between the two different companies in our group so it can actually be different between different companies but normally it will be something related to cost of goods sold so it would be for example affiliates cost of goods sold now if we look into all of these financial entries we can see that for every affiliate company we have in the process we have a full set of entries that are related to the sales order so for our company that's in us we have the cost of goods sold that's posted when we did the goods issue we have the sales revenue and accounts receivable for affiliates that were posted when we did the inter-company billing document and for our company in france we have the cost of goods sold that was posted when we did the supplier invoice for intercompany and we also have the accounts receivable and the sales revenue for external customers that was posted when we did the external party billing document in the next video i'm going to demonstrate this whole process on sap s4hana 2020 and the video will be released next week but i'm giving early access to the channel members so if you are a channel member and you would like to check this video today you can click on this link thank you for watching and i'll see you again soon