Elimination transactions are required when a parent company does business with one or more subsidiary companies and uses consolidated financial reporting. Transactions that occur between companies that are part of the same organization must be eliminated, because consolidated financial statements must include only transactions between the consolidated organization and other entities outside of that organization. Because of this, transactions between companies that are within the same organization must be removed, or eliminated from the financial reports.

You can set up elimination rules to create elimination transactions in a company that is specified as the destination company for eliminations, or the elimination company. Elimination journals can be generated during the consolidations process or using an elimination journal proposal.

Before you set up elimination rules, you should become familiar with the following terms:

  • Source company - The company where the amounts that will be eliminated were posted.

  • Destination company - The company where elimination rules are posted.

  • Elimination company - The company that is specified as the destination company for eliminations.

  • Consolidation company - The company that is created to report financial results for a group of companies. The financial data from the companies is consolidated into this company, and then a financial report is created using the combined data.

These types of transactions might need to be eliminated.

Transaction type

Example/description

Sales order entry and invoicing (centralized processing)

  • Sell a product to a customer on behalf of another company.

Sales order entry (intercompany/intracompany) and invoicing

  • Sell products between companies.

Purchase orders (centralized processing)

  • Purchase inventory, supplies, services, fixed assets, and other products from a vendor on behalf of another company.

Inventory management (intercompany/intracompany)

  • Transfer one company's inventory to another company's fixed assets.

  • Transfer one company's inventory to another company's inventory.

In-transit inventory tracking

Accounts payable centralized invoice processing

  • Record an invoice on behalf of another company.

Accounts payable centralized payment processing

  • Pay an invoice on behalf of another company.

Cash management/treasury (centralized processing)

  • Process tax payments, tax refunds, interest charges, loans, advances, dividends paid, and prepaid royalties/commissions.

  • Pay an expense on behalf of another company where the invoice is entered on the destination company's books and you need to cross-settle between companies. For example, if one company pays the expense report of an employee in another company, an employee's expense report has expenses related to another company.

  • Transfer cash from one company to another.

Accounts receivable (centralized processing)

  • Receive cash for another company's customer invoice and deposit the check into that company's bank account.

Payroll (centralized processing, intercompany/intracompany)

  • Pays another company's payroll. For example, a company might pay its own payroll for its employees, but charge back work that an employee did for another company during that pay run. Or, if an employee worked half-time for company A and half-time for company B, and the benefits are across all pay, this includes both companies. Not only are the salaries posted, but taxes, benefits, deductions, and accruals for salaries also are posted.

  • Labor transfers from one department or division to another.

Fixed assets (intercompany/intracompany)

  • Transfer to another company's fixed assets or inventory.

Allocations (intercompany/intracompany)

  • Process corporate allocations, which are activities to any account that is allocated, regardless of the originating module.

Example

Your company (company A) sells widgets to another company owned by your organization (company B). The following is an example of how transactions that occur between the two companies might need to be eliminated:

  • Company A sells a 10.00 widget to company B for 10.00.

  • Company A sells a 10.00 widget to company B for 10.00, plus 2.00 in actual shipping costs.

  • Company A sells a 10.00 widget to company B for 15.00 and recognizes a margin on that sale.

  • Company A sells a 10.00 widget to company B for 15.00 and recognizes half of the margin on the sale, Company B recognizes the other half of the margin on the sale, splitting the revenue. This is done to give an incentive for ordering from another company within the organization rather than outside of it.

These transactions will result in intercompany transactions being posted to due-to and due-from accounts. In addition, these transactions might include markup and markdown amounts when the intercompany sales and cost of goods sold amounts are not equal.

See Also