Question

Why is it important that intercompany transactions are eliminated prior to issuing financial reports? How would that item would be adjusted at the end of a reporting cycle. Please explain in detail.

Answer 1

Intercompany transactions are eliminated from consolidated financial statements while they are continued to be reported in individual company's account. From the overall group perspective intercompany transactions are eliminated because the transactions are made within the group and thus from overall group perspective there is no amount payable or receivable from outside party. The receivable are set-off against payable or revenue is set-off against expense and thus they are eliminated from consolidated financial statement.

The intercompany transactions are eliminated by reporting reversing entries. If there is any intergroup payable and receivable then payable is debited for eliminating liability and receivable is credited for eliminating assets.

If there is any intergroup sales or services provided then revenue account is debited to eliminate revenue and expenses account is credited to eliminate expenses from group accounts.