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Intercompany eliminations, explained
Updated
An intercompany elimination removes money that moved between companies in the same group, so combined statements don't count it twice. If one of your companies pays another a fee, the group as a whole didn't earn or spend anything. The elimination takes out both sides.
A worked example
Holdings charges Retail an $18,000 management fee for October. Holdings records $18,000 of revenue. Retail records $18,000 of expense. Add the two companies and the group shows $18,000 of revenue it earned from itself.
| October | Holdings | Retail | Elims | Combined |
|---|---|---|---|---|
| Management fee income | 18,000 | – | (18,000) | – |
| Management fee expense | – | 18,000 | (18,000) | – |
| Effect on net income | 18,000 | (18,000) | – | – |
The fee disappears from the combined statements, and net income doesn't move, because both sides were on the profit and loss.
The common pairs in a small group
- Fees and rent. Management fee income in one company against the fee expense in another. Same for rent, shared staff or software recharged between companies.
- Loans. "Due from" or "Loan to" in the lender against "Due to" or "Loan from" in the borrower. Interest on the loan is a second pair on the P&L.
- Investments. The parent's "Investment in" account against the subsidiary's capital or contributions account.
- Distributions and contributions. Money one company sends up or down the group, recorded as a distribution in one and a contribution in the other.
- Sales between companies. One company sells goods or services to another: its revenue against the buyer's cost.
When the two sides don't agree
In practice they often don't. One company booked the fee in October, the other in November. A transfer went to the wrong account. One side is simply missing. The honest fix is to remove both sides in full and post the difference to a balancing account in Equity, where it shows until someone corrects the books. Netting it away quietly makes the statements look right and hides the problem.
A good monthly check is that every pair nets to zero. When one doesn't, look at the latest month's entries on both sides first.
How SigmaClose handles them
SigmaClose suggests pairs from account names and mirrored balances, and you confirm each one. Eliminations get their own column on every statement, so you can see exactly what came out. If a pair doesn't net to zero in a month, the difference goes to that pair's balancing account in Equity and the month-end checks flag it.
Questions
What is an intercompany elimination?
An adjustment in consolidated statements that removes transactions between companies in the same group, so the combined numbers show only what the group did with outsiders. Both sides are removed: the revenue in one company and the matching expense in the other, or the receivable and the matching payable.
Why do intercompany transactions have to be eliminated?
Because otherwise they're counted twice. A $10,000 fee one of your companies charges another shows up as $10,000 of revenue and $10,000 of expense when you add the companies together. The group didn't earn anything from it.
What if the two sides of an intercompany pair don't match?
Usually one company recorded the entry in a different month, or one side is missing or coded to the wrong account. Remove both sides in full and post the difference to a balancing account in Equity, so it stays visible until the books are fixed. Don't net it away.
Do eliminations change consolidated net income?
Not when both sides are on the P&L: removing $10,000 of revenue and $10,000 of expense leaves net income the same. Eliminations between a balance sheet account and a P&L account, or a pair that doesn't match, can.
Does SigmaClose find elimination pairs for me?
It suggests them. It looks for accounts named after another company in the group and for balances that mirror each other month after month, and shows why it thinks each pair belongs together. A person confirms each one before it changes any statement.