Elimination Entry

Consolidated accounts combine the financial statements of a parent and its subsidiaries as if they were one company. Simply adding the accounts together would double count items arising from transactions within the group. Elimination entries remove them.

Common eliminations include intercompany sales and purchases, so that only sales to outside customers are reported; intercompany loans and the interest on them, since the group does not owe itself money; unrealized profit in inventory sold between group companies but not yet sold outside the group; and the parent's investment in each subsidiary against the subsidiary's equity.

For example, a parent lends 2,000,000 to a subsidiary. The parent records a loan receivable and the subsidiary a loan payable. On consolidation, an elimination entry removes both, along with the related interest income and expense.

Elimination entries are made only in the consolidation process, not in the individual companies' own books. Mismatched intercompany balances between group companies are a common source of difficulty and delay in the financial close.