This blog breaks down:
● Why eliminations matter (with a simple analogy).
● How accountants currently solve it (four common cases, with numbers).
● Which solution works best at different stages of growth.
● How to reduce errors and reclaim hours at month-end.
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Why Intercompany Eliminations Matter
Consolidation is the heartbeat of group reporting. When multiple subsidiaries roll up into a parent company, financials need to reflect the true economic picture of the group. That’s where intercompany eliminations come in.
Let’s begin with a simple story:
• Company A (Consulting) bills Company B (Tech Subsidiary) $1,000,000 for IT support.
• Company A books revenue: $1,000,000.
• Company B books expense: $1,000,000.
• Consolidated P&L (without eliminations): revenue $1,000,000, expense $1,000,000.
Looks fine, right? But in reality, no wealth was created. No external customer paid you. The group didn’t get richer — money just moved between pockets.
If you present this inflated version:
• Revenue is overstated → makes top-line growth look better than reality.
• Expenses are overstated → masks true efficiency.
• Ratios distort → EBITDA margins, cost-to-revenue, and even net profit per employee look off.
• Auditors and regulators will flag it, since IFRS 10 and US GAAP ASC 810 explicitly require eliminating intercompany balances during consolidation.
• Banks and investors may see higher turnover but weaker profitability, creating wrong perceptions of business health.
💡 Analogy: It’s like weighing yourself with your backpack on and reporting your “body weight.” The number looks higher, but it doesn’t represent your actual self. Eliminations remove the “backpack weight.”
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The Four Common Workarounds (with Numbers and Insights)
Most accountants rely on one of four elimination approaches. Each has strengths, weaknesses, and a point where it breaks down.
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Case 1: Manual Journal Entries
How it works:
• Each intercompany invoice is reversed at the parent level using a manual journal.
• Example: Company A invoices Company B for $1 million. Parent books:
o Debit Revenue: $1 million
o Credit Expense: $1 million
Pros:
• Simple, requires no extra tool.
• Works well when there are just a few transactions each month.
Cons:
• Prone to omissions. Miss one invoice → consolidated P&L is wrong.
• Timing differences create mismatches (e.g., one entity records in March, another in April).
• The audit trail is weak unless journals are meticulously documented.
Best Fit:
Very small groups (2–3 entities, <5 intercompany transactions per month).
Accountant Tip: Always maintain a dedicated intercompany elimination log with invoice numbers, amounts, dates, and who prepared/approved the JE. It’s an easy way to answer audit queries.
Mini-Pitfall Example:
If Company A raises its invoice on March 30 but Company B books the expense only on April 2, you’ll have mismatched timing. Eliminating one side without the other creates imbalances in consolidation.
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Case 2: Spreadsheets
How it works:
• Export trial balances or P&Ls from each entity.
• In Excel, manually delete or adjust intercompany revenue/expense lines.
• Recalculate totals for consolidated P&L.
Pros:
• Flexible — you can customize as needed.
• Quick if transactions are few and well-documented.
Cons:
• Scales poorly. With more than 10 eliminations per month, spreadsheets become messy.
• Version control issues. Multiple people editing the file risks overwriting formulas.
• Human dependency. If the one person who “knows the file” leaves, knowledge is lost.
Best Fit:
Groups with light intercompany flows (5–10 eliminations/month).
Accountant Tip: Use pivot tables with filters for “counterparty entity” to reduce missed eliminations. Lock formulas and use protected sheets for integrity.
Example with Three Entities:
• Company A bills Company B $1 million.
• Company B bills Company C $500,000.
• In Excel, you must identify both and delete lines. But if you miss one, revenue is inflated by $500,000.
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Case 3: Classes/Tags in QuickBooks Online
How it works:
• Create a tag (e.g., “Intercompany”) in QuickBooks Online.
• Whenever an intercompany invoice is recorded, it gets tagged.
• During consolidation, simply filter out tagged items.
Pros:
• Cleaner reporting inside QuickBooks.
• Eliminations are more systematic than Excel.
Cons:
• Relies on human discipline. If someone forgets to tag, reports inflate.
• Only “hides” numbers — doesn’t truly balance accounts.
• Doesn’t solve timing mismatches across entities.
Best Fit: Groups on QuickBooks Online Advanced with small but steady intercompany flows.
Accountant Tip: Automate tagging with recurring transactions in QUICKBOOKS ONLINE. That way, invoices between subsidiaries always carry the correct class.
Example:
If Company A invoices Company B $1 million but the bookkeeper forgets the “Intercompany” tag, the report will wrongly show higher revenue.
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Case 4: External Tools like FinBoard.ai
How it works:
• Use a consolidation software (e.g., FinBoard.ai).
• Map intercompany accounts once.
• Software auto-detects and eliminates entries every consolidation cycle.
Pros:
• True automation → reduces manual hours.
• Audit-friendly. Tools maintain logs of eliminations.
• Handles complex flows (multi-step, partial eliminations).
Cons:
• Low Costs for multi-entity packages.
• Setup takes time.
Best Fit: Medium-to-large groups (20+ eliminations/month).
Accountant Tip: If you’re SOX-compliant, automation tools double as control evidence. Auditors love a clean system-generated trail versus messy Excel tabs.
Mini-Story:
One CFO described saving 15 hours each month after moving from spreadsheets to an automation tool. Audit queries dropped by half because eliminations were traceable.
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Mini-Case: ABC Holdings with Three Entities
• ABC Consulting → ABC Tech: $1M invoice.
• ABC Tech → ABC Retail: $500k invoice.
Without eliminations:
Consolidated revenue is inflated by $1.5M.
With eliminations (four methods):
• Manual JEs: Reverse both invoices at parent.
• Spreadsheets: Delete both invoices in Excel.
• Tags: Apply “Intercompany” tag and filter.
• Automation tool: System detects and eliminates.
💡 Rule of Thumb: If eliminations take >8 hours/month, invest in automation.
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Common Mistakes Accountants Make (and Fixes)
Beyond the P&L: Balance Sheet Eliminations
Many accountants focus only on the income statement, but the balance sheet also needs eliminations:
Intercompany AR/AP
Subsidiary A shows $500,000 receivable from Subsidiary B.
Subsidiary B shows $500,000 payable.
Consolidated balance sheet (without elimination) shows both → overstating assets and liabilities.
Elimination JE:
Debit AP $500,000
Credit AR $500,000
Intercompany Loans
o Parent lends $2M to Subsidiary.
o Loan asset & liability cancel in consolidation.
o Interest income & expense must also be eliminated.
o Unrealized Profits in Inventory
o Manufacturing Co. sells goods to Distribution Co. within the group.
o If unsold inventory remains at year-end, profit embedded in that stock must be eliminated until it’s sold externally.
These balance sheet eliminations are crucial for compliance with IAS 27, IFRS 10, and ASC 810.
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FX and Currency Revaluation
Groups often operate in multiple currencies. This creates two problems:
1. Transaction mismatches:
o Company A bills $1,000,000 USD.
o Company B books ₹83,000,000 INR (USD/INR 83).
o FX differences can create mismatches.
2. Translation adjustments:
o When consolidating, assets and liabilities are translated at different rates (closing vs average).
o Intercompany eliminations must reconcile these differences.
Solution:
• Use dedicated FX revaluation accounts for intercompany balances.
• Automate FX adjustments in consolidation software.
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How to Reduce Errors & Reclaim Hours
• Dedicated Intercompany Accounts: Use special GL codes for intercompany transactions and park all the intercompany transactions only in that GL.
• Separate GL for Intercompany receivable and intercompany payable can be created.
• Standard Chart of Accounts: All entities should use uniform accounts.
• Monthly AR/AP Reconciliation: Confirm balances with counterparties before month close using the intercompany payables and receivables. This will help to identify the differences and help to account for the pending bills, invoices as of closing date.
• Automation Templates: If automation tools are not in budget, create Excel macros for recurring eliminations.
• Dashboard KPIs: Track number of eliminations, time spent, and mismatches each month.
Case in Point: One SaaS company reduced close time from 12 days to 6 by:
• Implementing intercompany AR/AP reconciliations mid-month.
• Using FinBoard.ai's elimination module.
• Training all bookkeepers on tagging discipline.
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Future Trends in Intercompany Eliminations
1. AI Matching: Tools that auto-match intercompany invoices using machine learning. (FinBoard.ai)
2. Real-Time Consolidation: Continuous close systems update eliminations daily, not monthly.
3. Blockchain for Intercompany: Some groups test blockchain ledgers for intra-group transactions, eliminating reconciliation headaches.
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Quick Start Checklist
✔ Map all intercompany flows.
✔ Decide elimination method (JEs, Excel, Tags, Tools).
✔ Document policies (e.g., mandatory tagging).
✔ Reconcile both P&L and balance sheet eliminations monthly.
✔ Track FX differences separately.
✔ If >8 hours spent on eliminations → automation time.
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