The set of processes by which an organization removes – or zeroes- intercompany transactions to avoid any duplication or double counting of the effect of these transaction at the level of the parent company. These eliminations are recorded on the entity’s balance sheet and sometimes certain journal entries would be needed.

When an entity records an intercompany transaction, it would defy accounting sense to add the transaction as a consolidated profit or loss, due to the fact that it is essentially doing business with itself. The elimination aims to removes the double effects arising from such transactions before producing the consolidated financial statements. Such eliminations would produce sensible information about the real impact of the entity’s activities and operations for accurate financial reporting. Once done, these eliminations are key to an accurate consolidation report, free from any overstating of profits, losses, assets and liabilities.

Intercompany eliminations are better be performed every financial year, taking also into consideration the possibility that certain eliminations span more than a financial year. For  that purpose, an entity must first identify the type of intercompany elimination to be carried out, which take the form of intercompany debt, intercompany revenue and expenses, or intercompany stock ownership. For example, sales and purchases between subsidiaries or between a parent and subsidiary are brought to zero during an intercompany revenue and expense elimination. This reflects the accounting logic that the parent company’s consolidated net assets shall remain unchanged when goods or services are sold between entities. Hence, these intercompany purchases must be eliminated prior to consolidation.

The elimination process (usually software enabled) starts at different levels and ideally it  has to be carried out  across all entities within a legal structure. Different types of eliminations can be  performed depending on the type of transaction. In other words, these might be a need for full or partial elimination as determined by the type and effect of a given transaction.