Introduction
A due from account is an asset ledger entry that records amounts a company holds at another firm or amounts expected to be received from another entity. These accounts are central to accurate cash and intercompany accounting, support audit trails, and are especially important in international operations where foreign-currency deposits are involved.
Key takeaways
– A due from account is an asset (receivable) that tracks money a company expects to receive or holds at another firm.
– It is different from a due to account, which records obligations or payables to other entities.
– In international banking, a due from-type account is often referred to as a nostro account (deposits held in a foreign location and currency).
– Proper recording, reconciling, and internal controls reduce errors and improve auditability.
What a Due From Account Is
– Definition: A due from account records assets held with another company or entity that are receivable by the reporting company. Examples include intercompany receivables, deposits with correspondent banks, and customer funds held in another firm.
– Alternate names: Intercompany receivables (when between group entities), nostro account (in international banking contexts).
– Nature: Balance-sheet asset, usually classified as short-term (current) unless terms indicate otherwise.
How a Due From Account Functions in Financial Recording
– Purpose: Keeps incoming funds separate from outgoing obligations for clarity, simplified reconciliation, and audit trails.
– General journal entry examples:
– Parent transfers cash to a subsidiary:
– Parent: Debit Due From Subsidiary (asset); Credit Cash/Bank.
– Subsidiary: Debit Cash/Bank; Credit Due To Parent (liability).
– Customer deposit received at another firm on company’s behalf:
– Company: Debit Due From Other Firm (asset); Credit Customer Deposits or Revenue (as appropriate).
– Period-end considerations:
– Revalue foreign-currency balances using appropriate exchange rates.
– Classify short-term vs. long-term based on expected settlement.
The Role of Nostro Accounts in International Finance
– Definition: Nostro accounts are “our” accounts held by the company at a foreign bank, denominated in the foreign bank’s local currency. They facilitate cross-border payments, FX settlement, and trade transactions.
– Typical functions:
– Hold customer funds or company funds in the foreign currency prior to conversion or transfer.
– Enable quicker local disbursements and receipt processing in foreign jurisdictions.
– Operational considerations:
– Monitor FX exposure and revalue balances for reporting.
– Use netting, pooling, or hedging to manage balances and currency risk.
– Ensure compliance with cross-border regulatory and reporting rules, and set clear settlement instructions (e.g., SWIFT).
Comparing Due From Accounts and Due To Accounts
– Nature:
– Due From: Asset (receivable) — funds owed to the company.
– Due To: Liability (payable) — funds the company owes to another.
– Use:
– Due From: Records incoming deposits, intercompany receivables, nostro balances held by others.
– Due To: Records outgoing earmarked funds, amounts payable to suppliers, or due to parent/subsidiary.
– Balances:
– Neither should normally show a negative balance; negative results usually indicate posting errors or the need to reclassify as cash if actually transferred.
– Practical implication: Keeping these accounts separate improves transparency, simplifies reconciliation, and supports tax and audit requirements.
Benefits of Using a Due From Account in Financial Management
– Clear segregation of incoming vs. outgoing funds.
– Simplified internal and external audits through a dedicated receivable trail.
– Better visibility on intercompany cash positions and cross-border liquidity.
– Easier tax and regulatory reporting because transfers and source/destination are traceable.
– Improved cash management (e.g., pooling and netting strategies when multiple entities are involved).
Practical Steps — Recording, Reconciling and Managing Due From Accounts
1. Set up clear account structure
– Create distinct GL accounts for: intercompany due from, nostro/due-from-bank, customer deposits held by others.
– Add sub-ledger or memo details to capture counterparty, purpose, currency, and expected settlement date.
2. Recording transactions (examples)
– Intercompany advance:
– Lender entity: Debit Due From [Borrower]; Credit Bank/Cash.
– Borrower entity: Debit Bank/Cash; Credit Due To [Lender].
– Funds received at correspondent bank on company’s behalf:
– Debit Due From Correspondent Bank; Credit Revenue or Customer Liability (depending on transaction).
3. Daily/periodic reconciliation
– Reconcile due from balances to bank statements, confirmations from other companies, and intercompany sub-ledgers.
– Investigate discrepancies promptly; common causes: timing differences, transposition errors, duplicate or missing entries.
4. Currency and valuation controls
– Revalue foreign-currency due from balances at each reporting date; record FX gains/losses to P&L or OCI per accounting policy.
– Apply consistent exchange rates and document source of rates.
5. Internal controls and segregation of duties
– Segregate duties for initiating transfers, recording entries, and reconciling accounts.
– Require dual approvals for intercompany funding and for moving large nostro balances.
6. Intercompany netting and settlement
– Where multiple intercompany balances exist, consider netting agreements to reduce operational transfers.
– Maintain settlement schedules and confirmations to avoid duplicate payments.
7. Audit and documentation
– Maintain supporting schedules showing transactions, counterparty confirmations, and bank statements.
– Obtain third-party confirmations for balance materiality and include in audit documentation.
Common Mistakes and How to Fix Them
– Posting to the wrong account (e.g., due from vs. cash): Reclassify with a correcting journal entry and document reason.
– Negative balances in due-from/due-to: Investigate — often caused by duplicate entries, missed reclassifications, or actual payments that require reclassification to cash.
– Failure to revalue foreign balances: Restate prior period balances and record FX adjustments following accounting standards; disclose policy.
– Poor intercompany reconciliation: Implement monthly intercompany close and reconciliation process with escalation for unresolved items older than a set number of days.
Audit Considerations
– Provide reconciliations and third-party confirmations for material due from balances.
– Demonstrate timely intercompany reconciliation and settlement policies.
– Ensure cutoffs are supported and FX revaluations are documented.
Bottom line
Due from accounts are essential ledger tools for tracking assets held at other firms and amounts receivable from related or third-party entities. Proper account design, consistent recording practices, regular reconciliation, and strong internal controls reduce errors, improve liquidity visibility, and strengthen auditability — particularly when international nostro accounts and foreign currencies are involved.
Source
Content adapted and summarized from Investopedia — “Due From Account” (Investopedia / Sydney Burns). https://www.investopedia.com/terms/d/due-from-account.asp
(Continuing and expanding on due from accounts — practical guidance, examples, and a concluding summary.)
Source: Investopedia — “Due From Account” (https://www.investopedia.com/terms/d/due-from-account.asp)
Additional contexts and use cases
– Treasury and cash management: Corporations use due from accounts to track cash placed with other legal entities (other group companies, foreign branches, correspondent banks). These balances are often short-term, highly liquid, and treated as receivables.
– Intercompany settlements: Subsidiaries that collect cash on behalf of the parent (or vice versa) record amounts as due from (asset) or due to (liability) depending on which entity is owed.
– Correspondent banking (nostro accounts): Foreign deposits maintained with a local bank to facilitate FX and local payments are typically tracked as due from/nostro balances in the general ledger and revalued for currency movements.
Practical steps for recording and maintaining due from accounts
1. Identify the nature of the balance
– Is it an intercompany receivable, a deposit at another bank, or a customer deposit held by a third party?
2. Choose the correct ledger account name
– Use descriptive accounts (e.g., Due From: Subsidiary A, Due From: Bank UK (Nostro), Intercompany Receivable — Region X).
3. Record the initial transaction
– Use a journal entry that reflects the real economic movement (examples below).
4. Reconcile timely and regularly
– Reconcile due from balances at least monthly; for treasury/nostro accounts consider daily or weekly checks.
5. Adjust for foreign exchange and interest
– Revalue foreign-currency due from balances at period end and record realized/unrealized FX gains or losses and accrued interest as appropriate.
6. Obtain confirmations and supporting documents
– For audits and internal control, keep bank statements, intercompany statements, invoices and transfer instructions.
7. Eliminate during consolidation
– Prepare elimination entries to remove intercompany due from / due to balances in consolidated financial statements.
Journal-entry examples (practical, numbered)
Example 1 — Domestic intercompany receivable
Situation: Subsidiary B sells goods to Parent A on credit for $10,000.
– At sale (Subsidiary B):
– DR Accounts Receivable / Due To Parent A 10,000
– CR Sales Revenue 10,000
– At sale (Parent A):
– DR Inventory / Purchases 10,000 (or DR Due From Subsidiary 10,000 if purchaser records receivable-type arrangement)
– CR Accounts Payable / Due To Subsidiary 10,000
– When payment of $10,000 is made by Subsidiary B to Parent A’s bank account:
– Subsidiary B: DR Accounts Payable / Due To Parent 10,000; CR Cash/Bank 10,000
– Parent A: DR Cash/Bank 10,000; CR Due From Subsidiary 10,000
Example 2 — Deposit held at another bank (nostro) with FX revaluation
Situation: Home company (EUR) maintains a USD nostro at a UK bank with USD 100,000 on 31 Dec. At period-end the USD/EUR spot rate changed.
– Initial placement (when funds transferred into the nostro):
– DR Due From Bank – Nostro (USD 100,000) [translated to EUR at rate on transfer]
– CR Cash/Bank (local) [same EUR amount]
– Period-end revaluation (assume at initial recognition on transfer 1 USD = 0.90 EUR; at year-end 1 USD = 0.95 EUR)
– Carrying value initially = 100,000 * 0.90 = EUR 90,000
– Year-end value = 100,000 * 0.95 = EUR 95,000
– Unrealized FX gain = EUR 5,000
– Journal entry:
– DR Due From Bank – Nostro EUR 5,000
– CR Unrealized FX Gain (P&L or OCI depending on policy) EUR 5,000
– On settlement (funds repatriated), reverse the due from and record realized FX differences accordingly.
Example 3 — Clearing an intercompany due from with a due to (consolidation)
Situation: Subsidiary owes Parent $25,000 (Subsidiary: Due To Parent 25,000; Parent: Due From Subsidiary 25,000).
– Consolidation elimination:
– DR Due From Subsidiary 25,000
– CR Due To Parent 25,000
(Amounts eliminated on consolidation to avoid double-counting internal balances)
Reconciling a due from account — step-by-step practical procedure
1. Obtain external statement(s)
– Bank statements, subsidiary subledger, or counterparty statement for the reconciliation period.
2. Compare the ledger to the external statement
– Tick off matched items (deposits, receipts, transfers).
3. Identify timing differences
– Outstanding deposits/transfers in transit or checks not yet cleared.
4. Investigate exceptions
– Query the counterparty, examine remittance advices, and inspect underlying documents (agreements/invoices).
5. Record adjusting entries
– Correct mispostings, accruals (interest), and FX revaluations.
6. Prepare reconciliation schedule and obtain approval
– Document reconciling items, responsible owner, and target resolution dates.
7. Retain evidence
– Keep the schedule and support for audit trails.
Internal controls and best practices
– Segregation of duties: Different people should authorize transfers, post entries, and reconcile balances.
– Authorization and documentation: Require approval for intercompany loans, deposits, and transfer pricing terms.
– Periodic confirmations: Periodically request written confirmations from counterparties and intercompany entities.
– Standardize account naming: Ensure GL account names are clear and consistent across entities (e.g., “Due From — Parent/Subsidiary/Bank”).
– Reconciliation frequency: Monthly minimum for intercompany; daily or weekly for treasury/nostro accounts.
– Automated workflows: Use treasury management systems (TMS) or ERP intercompany modules to reduce manual errors and create auditable trails.
– Policy on FX revaluation: Have clear accounting policy (IFRS/GAAP consistent) for how to treat unrealized currency gains/losses on due from accounts.
Common errors, red flags, and how to address them
– Negative balances in due from/due to accounts: Usually indicate miscoding or that the balance should be in the opposite account. Investigate and reclassify if necessary.
– Unreconciled age-old balances: Stale receivables may indicate that transfers never occurred — require escalation and investigation.
– Missing documentation: Lack of invoices, transfer instructions, or approvals increases audit risk — request retroactive support and implement controls.
– Not eliminating intercompany balances on consolidation: This overstates assets and liabilities — ensure elimination entries are part of consolidation closing.
– Incorrect FX treatment: Failing to revalue foreign-currency due from balances leads to misstated assets and income.
Tax and regulatory considerations
– Withholding taxes: Cross-border payments may be subject to withholding taxes; ensure due diligence on treaty benefits and documentation.
– Transfer pricing: Intercompany receivables or charges need to be at arm’s length where relevant; maintain transfer-pricing documentation.
– Reporting and disclosure: Large intercompany balances and related-party transactions usually require disclosure in financial statements; follow local GAAP/IFRS requirements.
– VAT/GST: Depending on the transaction, cross-border services or goods may give rise to indirect tax obligations — consult tax counsel.
Audit considerations
– Auditors will typically request reconciliations, confirmations from counterparties, and supporting documents for large or unusual due from balances.
– For nostro accounts, auditors will review bank statements, test FX revaluation, and verify interest income.
– Maintain supporting board/management approvals for intercompany loan agreements or significant deposits.
Additional examples (short scenarios)
– Scenario A — Customer deposit held by a third party: A company has customer deposits of $15,000 held by a payments processor. Record: DR Due From Payments Processor $15,000; CR Customer Deposits Liability (until applied) or Cash Out depending on flow.
– Scenario B — Branch balances: A foreign branch remits funds to head office; until receipt, head office shows Due From: Branch; branch shows Due To: Head Office. On receipt, both clear to cash.
Concluding summary
Due from accounts are asset ledger entries that track monies held by other firms, subsidiaries, or banks (including nostro accounts). They are essential for accurate cash and intercompany accounting, treasury management, auditability, and consolidated reporting. Proper account naming, timely reconciliations, clear FX revaluation policies, segregation of duties, supporting documentation and elimination of intercompany balances at consolidation are practical measures that improve accuracy and reduce risk. Regular monitoring, confirmations, and adherence to tax and transfer-pricing rules complete the control framework around due from accounts.
For the basic definition and overview used as the foundation for this discussion, see Investopedia’s “Due From Account.” (https://www.investopedia.com/terms/d/due-from-account.asp)
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