by In group accounts, transactions between the holding company and its subsidiary (intra-group transactions) should be eliminated because they do not represent actual gains or losses to the group as a whole. Similarly, unrealized profits arise when goods or assets are sold within the group but remain unsold to outsiders at the reporting date; such profits are not yet realized from the group’s perspective and must be eliminated.
Common Intra-group Transactions:
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Sale of goods between companies in the group.
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Loans, interest payments, or receivables/payables.
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Management fees, rent, or service charges.
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Transfer of assets (e.g., fixed assets).
Unrealized Profits Elimination:
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If goods are sold at a profit within the group and remain in closing stock, remove the profit portion from the group’s inventory value.
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If fixed assets are transferred, reverse the excess profit and adjust depreciation accordingly.
Accounting Treatment:
| Transaction | Adjustment in Consolidation |
|---|---|
|
Intra-group sales/purchases |
Cancel sales and purchases in full. |
|
Intra-group receivables/payables |
Eliminate against each other. |
|
Intra-group loans/interest |
Eliminate interest income and expense. |
|
Unrealized profit in stock |
Reduce inventory and retained earnings by profit portion. |
|
Unrealized profit in fixed assets |
Reduce asset value and adjust depreciation. |
Elimination of Intra-group Transactions:
| Transaction | Consolidation Adjustment Journal Entry | Explanation |
|---|---|---|
| Intra-group sales/purchases | Dr Sales A/c (in full) Cr Purchases A/c (in full) |
Cancels out internal sales & purchases as they are not external revenue/expense for the group. |
| Intra-group receivables/payables | Dr Accounts Payable A/c Cr Accounts Receivable A/c |
Removes internal balances to avoid double counting. |
| Intra-group loans | Dr Loan Payable A/c Cr Loan Receivable A/c |
Eliminates internal loans within group. |
| Intra-group interest | Dr Interest Income A/c Cr Interest Expense A/c |
Removes internal interest that is not from outside parties. |
Elimination of Unrealized Profits:
|
Transaction |
Consolidation Adjustment Journal Entry |
Explanation |
|---|---|---|
|
Unrealized profit in closing stock |
Dr Group Retained Earnings A/c (or Seller Co.’s profits) Cr Inventory A/c |
Reduces inventory value to cost to the group and adjusts profits. |
|
Unrealized profit in fixed assets |
Dr Group Retained Earnings A/c Cr Fixed Assets A/c |
Removes excess profit from transfer of assets within the group. |
|
Depreciation on unrealized profit (fixed assets) |
Dr Accumulated Depreciation A/c Cr Depreciation Expense A/c |
Adjusts extra depreciation due to inflated asset value. |
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