Consolidation Basics and Elimination Entries
- Graziano Stefanelli
- Jun 30
- 3 min read

Consolidation is the process of combining the financial statements of a parent company with those of its subsidiaries to present a single set of financial statements for the entire corporate group. This process is essential for providing investors, creditors, and regulators with an accurate picture of a group’s overall financial position, performance, and cash flows. A central aspect of consolidation is the elimination of intercompany balances and transactions to avoid double counting and ensure the financial statements reflect only transactions with external parties.
When Consolidation Is Required
A parent company must consolidate the financial statements of entities it controls, generally through direct or indirect ownership of more than 50% of the voting shares or, under certain circumstances, via contractual or other means of control. Both US GAAP (ASC 810) and IFRS (IFRS 10) require full consolidation of all controlled subsidiaries, regardless of the parent’s ownership percentage, if it has effective control.
The Consolidation Process: Overview
Consolidation involves several critical steps:
Aggregation:Â Combine like items of assets, liabilities, equity, revenue, and expenses of the parent and subsidiaries line by line.
Adjustments:Â Align accounting policies and reporting dates.
Elimination Entries:Â Remove the effects of intercompany transactions and balances, such as sales, receivables, loans, and investments between group companies.
Noncontrolling Interest:Â Present any portion of subsidiaries not owned by the parent as noncontrolling (minority) interest within equity.
Elimination of Intercompany Investments
At the time of acquisition, the parent’s investment in the subsidiary is eliminated against the subsidiary’s equity accounts. This prevents double counting of the same net assets.
Example Elimination Entry at Acquisition:
 Dr. Common Stock (subsidiary)
 Dr. Retained Earnings (subsidiary)
 Cr. Investment in Subsidiary (parent)
          Cr. Noncontrolling Interest (if applicable)
Elimination of Intercompany Receivables and Payables
Any intercompany receivables and payables (loans, advances, or accounts) between the parent and subsidiary (or between subsidiaries) must be eliminated to avoid overstating group assets and liabilities.
Example:
If Parent Co. has a $50,000 receivable from Sub Co., and Sub Co. has a corresponding payable:
 Dr. Accounts Payable (subsidiary)
 Cr. Accounts Receivable (parent)
Elimination of Intercompany Sales and Profits
Sales and purchases between group companies, as well as any unrealized profit in ending inventory from such sales, must be eliminated.
Example:
Parent sells goods to Sub for $20,000 (cost $12,000), of which $8,000 remains unsold at year-end. The unrealized profit in ending inventory is $3,200 ($8,000 × gross margin %).
Elimination Entry:
 Dr. Sales (consolidated)
 Cr. Cost of Goods Sold (consolidated)
          Cr. Inventory (to eliminate unrealized profit)
Noncontrolling Interest in Consolidated Statements
If the parent owns less than 100% of a subsidiary, the share of net assets and profit attributable to other shareholders is presented as noncontrolling interest in equity and as a share of profit in the income statement.
Elimination of Intercompany Dividends
Dividends paid by subsidiaries to the parent (or among subsidiaries) must be eliminated in consolidation to prevent overstating group revenue.
Elimination Entry:
 Dr. Dividend Income (parent)
 Cr. Dividends Declared (subsidiary)
Presentation and Disclosure
Consolidated financial statements present a single set of statements as if the entire group were a single economic entity. Detailed disclosures are required regarding the basis of consolidation, noncontrolling interests, elimination entries, and the effects of acquisitions and disposals.
Relevant Accounting Standards
US GAAP: ASC 810 – Consolidation
IFRS: IFRS 10 – Consolidated Financial Statements
Both frameworks require elimination of all significant intercompany balances and transactions, regardless of whether the entities are fully or partially owned.
Summary Table: Common Elimination Entries in Consolidation
Elimination Type | Accounts Debited | Accounts Credited | Purpose |
Investment in Subsidiary | Subsidiary’s equity accounts | Investment in Subsidiary, NCI | Remove double-counting of net assets |
Intercompany Receivables/Payables | Accounts Payable | Accounts Receivable | Remove intra-group balances |
Intercompany Sales/COGS | Sales | Cost of Goods Sold, Inventory | Remove intra-group sales and unrealized profit |
Intercompany Dividends | Dividend Income | Dividends Declared | Remove intra-group dividend income |
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