Intercompany elimination journal entries are necessary to remove the effects of transactions between related companies when preparing consolidated financial statements. These entries prevent double-counting and ensure that the consolidated financial statements reflect only the transactions with external parties.
Example Scenario
Assume the following transactions between Company A (Parent) and Company B (Subsidiary):
- Company A sold goods worth ₹100,000 to Company B.
- Company B paid ₹100,000 to Company A for the goods.
- Company A provided a loan of ₹50,000 to Company B.
- Company B paid ₹5,000 interest to Company A on the loan.
Elimination Entries
Eliminate Intercompany Sales and Purchases
To eliminate the sale of goods from Company A to Company B:
Journal Entry:
Date Particulars Debit (₹) Credit (₹) 2024-06-30 Sales A/c (Company A) 100,000 To Purchases A/c (Company B) 100,000 (Being intercompany sales eliminated) Eliminate Intercompany Receivables and Payables
To eliminate the receivables in Company A and the payables in Company B:
Journal Entry:
Date Particulars Debit (₹) Credit (₹) 2024-06-30 Intercompany Payables A/c (Company B) 100,000 To Intercompany Receivables A/c (Company A) 100,000 (Being intercompany receivables and payables eliminated) Eliminate Intercompany Loan and Interest
To eliminate the loan provided by Company A to Company B:
Journal Entry:
Date Particulars Debit (₹) Credit (₹) 2024-06-30 Intercompany Loan Payable A/c (Company B) 50,000 To Intercompany Loan Receivable A/c (Company A) 50,000 (Being intercompany loan eliminated) To eliminate the interest on the loan paid by Company B to Company A:
Journal Entry:
Date Particulars Debit (₹) Credit (₹) 2024-06-30 Interest Income A/c (Company A) 5,000 To Interest Expense A/c (Company B) 5,000 (Being intercompany interest eliminated)
Summary
Eliminate Intercompany Sales and Purchases:
- Debit Sales A/c (Company A)
- Credit Purchases A/c (Company B)
Eliminate Intercompany Receivables and Payables:
- Debit Intercompany Payables A/c (Company B)
- Credit Intercompany Receivables A/c (Company A)
Eliminate Intercompany Loan:
- Debit Intercompany Loan Payable A/c (Company B)
- Credit Intercompany Loan Receivable A/c (Company A)
Eliminate Intercompany Interest:
- Debit Interest Income A/c (Company A)
- Credit Interest Expense A/c (Company B)
These elimination entries ensure that the consolidated financial statements reflect only the transactions with external parties and do not double-count the transactions within the group.