What is an intercompany elimination?
When a company has income statement or balance sheet transactions between two subsidiaries, the activity must be eliminated in the parent company’s financial statements during consolidation. The company would record journal entries to neutralize the impact those transactions have on the financial statements.
For example, if Aspen Ventures sold inventory to Gold Coast Brewery and recorded sales from the transaction, that would artificially inflate the total sales number. In consolidation, the company would eliminate any intercompany sales, otherwise, sales would be overstated. Similarly, the cost of goods sold related to that transaction would also have to be eliminated.
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