Intercompany and eliminations, explained

A group is often several legal entities: a parent, a subsidiary in another state, one in another country. When they deal with each other, each side books it in its own ledger. A parent lends its subsidiary cash, a subsidiary bills the parent for services, one entity pays a bill for another.

Those balances are intercompany. Each is real in the books of the entity that holds it, but from the group's point of view the group owes itself.

When you consolidate, ASC 810 has you present the parent and the entities it controls as one economic entity. An elimination is the entry that removes the group's dealings with itself: intercompany receivables against payables, intercompany revenue against expense, and any profit on goods still sitting in inventory.

Eliminations are posted in the consolidation, not in the entities' ledgers. Each entity's own books stay correct for its own tax filings and statutory accounts.

Eliminating only works if both sides agree. If the parent shows a $100,000 receivable and the subsidiary a $98,500 payable, something is missing: a timing difference, a foreign exchange rate, a bill one side never recorded. Reconcile the two before the close, and don't hide a difference in the elimination.

Keep intercompany balances in their own accounts, one pair per counterparty, so each can be matched and cleared. A small group can do this in a spreadsheet; the pairs only get hard when the entities are many or the currencies differ.