Intercompany elimination journal entries are used to remove the effects of transactions between entities within the same corporate group from the consolidated financial statements. This ensures that the consolidated statements reflect only transactions with external parties.
Example Scenario
Let’s consider a scenario where Company A sells goods worth ₹1,00,000 to Company B, and Company B subsequently pays Company A. We will need to eliminate these transactions from the consolidated financial statements.
Transactions:
- Sale from Company A to Company B:
- Company A (Seller):
- Debit: Intercompany Receivable ₹1,00,000
- Credit: Sales Revenue ₹1,00,000
- Company B (Buyer):
- Debit: Purchases ₹1,00,000
- Credit: Intercompany Payable ₹1,00,000
- Company A (Seller):
- Payment from Company B to Company A:
- Company A (Receiving Payment):
- Debit: Cash ₹1,00,000
- Credit: Intercompany Receivable ₹1,00,000
- Company B (Making Payment):
- Debit: Intercompany Payable ₹1,00,000
- Credit: Cash ₹1,00,000
- Company A (Receiving Payment):
Elimination Entries:
To eliminate the intercompany transactions, we will need to reverse the effects of these transactions in the consolidated financial statements.
Elimination of Sales and Purchases:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 31-12-2024 | Sales Revenue | 1,00,000 | Eliminate intercompany sales | |
| 31-12-2024 | To Purchases | 1,00,000 | Eliminate intercompany purchases |
Explanation:
- Sales Revenue (Debit): This decreases the revenue account, eliminating the sales recorded by Company A.
- To Purchases (Credit): This decreases the expense account, eliminating the purchases recorded by Company B.
Elimination of Intercompany Receivable and Payable:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 31-12-2024 | Intercompany Payable | 1,00,000 | Eliminate intercompany payable | |
| 31-12-2024 | To Intercompany Receivable | 1,00,000 | Eliminate intercompany receivable |
Explanation:
- Intercompany Payable (Debit): This decreases the liability account, eliminating the payable recorded by Company B.
- To Intercompany Receivable (Credit): This decreases the asset account, eliminating the receivable recorded by Company A.
Conclusion
Intercompany elimination entries are essential for accurately presenting the financial position and performance of a corporate group. By removing the effects of intercompany transactions, these entries ensure that the consolidated financial statements reflect only external transactions. Properly managing these entries helps maintain transparency and compliance with accounting standards.