Transactions Between Subsidiaries Eliminated During Consolidation by the Parent Company

Intercompany Transactions Eliminated in Consolidation

When a parent company consolidates the financial statements of its subsidiaries, it must eliminate certain intercompany transactions to present the group’s financial position and performance accurately. These eliminated transactions include intercompany sales and purchases, intercompany receivables and payables, and intercompany profits on assets.

Eliminating Intercompany Sales and Purchases

What are Intercompany Sales and Purchases?

Intercompany sales and purchases are transactions made between the parent company and its subsidiaries or between the subsidiaries themselves. These transactions must be eliminated during consolidation to avoid double-counting revenue and expenses within the group.

Why Eliminate Them?

Eliminating intercompany sales and purchases ensures that the consolidated financial statements only reflect the group’s external transactions with third parties, providing a true representation of the company’s overall performance.

How to Eliminate Them?

The parent company will identify and eliminate all intercompany sales and purchases by adjusting the relevant revenue, cost of sales, and inventory accounts on the consolidated financial statements.

Eliminating Intercompany Receivables and Payables

Intercompany Receivables

Intercompany receivables are amounts owed by one group company to another. These must be eliminated to avoid overstating the group’s assets and liabilities on the consolidated balance sheet.

Intercompany Payables

Intercompany payables are amounts owed by one group company to another. These must also be eliminated to avoid double-counting liabilities on the consolidated balance sheet.

Elimination Process

The parent company will identify and eliminate all intercompany receivables and payables by offsetting the corresponding accounts on the consolidated balance sheet.

Eliminating Intercompany Profits on Assets

Intercompany Profits on Assets

When a parent company sells an asset to a subsidiary, it may realize a profit. This profit must be eliminated from the consolidated financial statements to avoid overstating the group’s assets and net income.

Elimination Process

The parent company will identify and eliminate any intercompany profits on assets by adjusting the cost basis of the asset and the corresponding depreciation or amortization expense on the consolidated financial statements.

Importance of Elimination

Eliminating intercompany profits on assets ensures that the consolidated financial statements accurately reflect the group’s true financial position and performance, without any inflated asset values or net income.


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