Inter Organisation Transfer Accounting

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Inter Org Transfer Accounting:

Inter Org Transactions can be used to Transfer Items from One Organization to Another Organization. Such Transactions can be performed using Direct Transfer or using In transit Shipment. We can also use Internal Requisition for such transfers, but in that case Freight charges are not supported.
In transit Transfer:  Material is transferred between Organizations in 2 steps. The Sending Organization release shipment from its Organization which is to be received by receiving Organization Using Receipt Functionality. FOB point options can be set if Transfer type is set to In Transit.
Receipt: The shipping organization owns the shipment until the destination organization receives it. So Ownership of material is transferred to receiving Organization at point of receipt. In this case, all cost related to freight would be covered by the sending Organization Until material is received in receiving Organization. Such Cost related to Freights is added to Receivables of sending Organization and will be received by sending Organization from receiving Organization.

Shipment: The destination organization owns the shipment item when the sending organization ships it (and while the shipment is in transit). So ownership of material is transferred to receiving Organization as soon as shipment is released. In such case Freight would be beard by receiving Organization in first place and thus would not be reflected in sending Organization accounts as receivables.

Accounting Entries:

Let's take the following Example Org A transfers Item XYZ to Org B at Cost 15. The break up of this Cost is as follows:

Item Cost                    10
Freight                           3
Transfer Charge            2
Total                           15

Now following entries will be created in both cases (FOB Point Receipt or Transfer)

Receipt:

Item Issue from Org A To Org B


Account                                                                                  Owner                         Amount

Dr. In transit Inventory Account (Clearing Account)            *          Org A                                     15
            Cr. Inventory Valuation Account                                Org A                                     10
            Cr. Freight Expense Account**                                  Org A                                       3
            Cr. Transfer Charge***                                              Org A                                      2

*In Transit Inventory Account will be used as Clearing Account and will be credited when material is received by Org B.
** Freight Expense Account would be account which was debited at the time we booked the expense in Payables. As this charge is to be transferred to Receiving Org B so Freight Expense would be credited so the Full Entry would be As Follows for freight charge:

At Invoice Entry:
Dr. Freight Expense Account (Clearing)                                            2
            Cr. Liability                                                                             2
At Shipment Transfer:
Dr. In Transit Inventory Account (Clearing Account)                       2
            Cr. Freight Expense Account (Clearing)                                2
So all expense charges will be cleared and charges to In Transit Inventory Clearing Account at shipment issue point. (All above entries are passed in Org A Accounts)
           
*** Transfer Charge will be the amount Up Charged by Org A to Org B as its sales Income/Profit.

At Receiving in Org B:


Account                                                                                  Owner                         Amount

Dr. Inventory Valuation                                                         Org B                                     15
            Cr. Payables Account                                                 Org B                                     15
Dr. Receivables Account                                                        Org A                                     15
            Cr. In transit Inventory Account (Clearing Account)            Org A                                     15

So it can be clearly seen that in case of FOB Terms as Receipt. Receivable would be booked in Org A when Item is finally received in Org B. Net balance in In transit Inventory Account would be Zero.

Shipment:

Item Issue from Org A


Account                                                                                  Owner                         Amount

Dr. In transit Inventory Account (Clearing Account)            *          Org B                                     15
            Cr. Payables Account                                                 Org B                                     12
            Cr. Freight Charges                                                     Org B                                       3
Dr. Receivables Account                                                        Org A                                     12
            Cr. Inventory Valuation Account                                Org A                                     10
            Cr. Transfer Charge**                                                Org A                                       2

*In Transit Inventory Account will be used as Clearing Account and will be Debited in Org B when material is issued from Org A. So it can be clearly seen liability is booked as soon as item shipment is released by Org A. Org A is also booking its receivables at issue as Ownership is considered to be transferred with issue from Org A.
The total cost of 15 has following breakup
Item Cost                    10
Transfer Charge            2
Freight                           3
Total                           15      

The invoice for Freight Charge would be entered in Org B and treated as Expense of Org B. Later at Point of Issue of Item from Org A the Freight Account Debited as Expense would be credited and thus cleared and charged to In transit Valuation Account.

At Invoice Entry:         (Org B)
Dr. Freight Expense Account (Clearing)                                            2
            Cr. Liability                                                                             2
At Shipment Transfer: (Org B)
Dr. In Transit Inventory Account (Clearing Account)                       2
            Cr. Freight Expense Account (Clearing)                                2
It can also be seen clearly, if FOB term is shipment then Freight would be beard by Receiving Org B and no expense entries related to freight would be passed in Org A at point of shipment issue.

** Transfer Charge will be the amount Up Charged by Org A to Org B as its sales Income/Profit.

At Receiving in Org B:


Account                                                                                  Owner                         Amount

Dr. Inventory Valuation                                                         Org B                                     15
            Cr. In transit Inventory Account (Clearing Account)            Org B                                     15

So it can be clearly seen that in case of FOB Terms as Receipt. Receivable would be booked in Org A when Item is finally received in Org B.

Direct Transfer: Direct Transfer is One step process and all accounting entries are generated as Sending Organization enters shipment release in its Organization. Receiving Organization do not need to carry out receiving in its Organization. FOB terms cannot be set for direct transfer as both Receiving and Issuance Entries are generated Simultaneously. Following entries would be generated taking into Account Above Example:
Account                                                                                  Owner                         Amount

Dr. Inventory Valuation                                                         Org B                                     12
            Cr. Payables Account                                                 Org B                                     12
Dr. Receivables Account                                                        Org A                                     12
            Cr. Inventory Valuation Account                                Org A                                     10
            Cr. Transfer Charge                                                    Org A                                       2

Direct Transfer cannot be used for Lot Enabled Items where items are not Lot enabled in both orgs. As no receiving is carried out in other org, so lots cannot be created during receiving.

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