Overview
If you run group reporting, you already know this truth: consolidation only works when inter-company activity disappears in the final view. This guide explains why eliminations matter, the four common ways teams handle them (with numbers), when each approach breaks, and how to reduce errors while saving hours at month-end.
Why Inter-company Eliminations Matter
Two subsidiaries trade with each other:
Company A (Consulting) invoices Company B (Tech) for $1,000,000 in IT support.
A books $1,000,000 revenue.
B books $1,000,000 expense.
On a naive consolidated P&L, you now show $1,000,000 revenue and $1,000,000 expense. It looks “busy,” but the group did not create value. Money moved between pockets.
If you leave this in:
Revenue appears higher than reality.
Expenses appear higher than reality.
Ratios (EBITDA margin, cost-to-revenue, profit per employee) get distorted.
Auditors will flag it. IFRS 10 and ASC 810 require eliminating intercompany balances during consolidation.
Banks and investors may read the wrong story about growth and profitability.
Think of it like weighing yourself while wearing a backpack. Eliminations remove the backpack so the reading reflects you, not your baggage.
The Four Common Workarounds (with Numbers and Insights)
Teams usually fall into one of four patterns. Each can be right at a certain stage.
1) Manual Journal Entries
How it works: Reverse inter-company invoices at the parent via a journal entry.
Example: A → B for $1,000,000. Parent books:
Debit Revenue $1,000,000
Credit Expense $1,000,000
Pros
Simple. No new tooling.
Fine when there are just a handful of transactions.
Cons
Easy to miss an invoice.
Timing differences create mismatches (A posts in March, B in April).
Weak audit trail unless well documented.
Best fit: Very small groups (2–3 entities, fewer than 5 intercompany transactions per month).
Accountant tip: Maintain a single Intercompany Elimination Log with invoice IDs, dates, amounts, and approvers. It pays for itself at audit time.
Mini-pitfall: A invoices on Mar 30, B books on Apr 2. If you eliminate only one side in March, the consolidation is wrong for both months.
2) Spreadsheets
How it works: Export trial balances or P&Ls, then delete or adjust intercompany lines in Excel or Google Sheets.
Pros
Flexible and familiar.
Quick for light, well-documented activity.
Cons
Breaks at scale (>10 eliminations/month).
Version control pain; formula fragility.
Single-owner risk. If the “file owner” leaves, knowledge goes with them.
Best fit: Small groups with 5–10 eliminations per month.
Accountant tip: Use pivot tables with a counterparty field. Lock formulas and protect critical ranges.
Example with three entities:
A → B: $1,000,000
B → C: $500,000
Miss one line and you overstate revenue by $500,000.
3) Classes/Tags in QuickBooks Online
How it works: Create a “Intercompany” class/tag. Tag every intercompany entry. During consolidation, filter out tagged activity.
Pros
Cleaner reporting inside QuickBooks.
More systematic than free-form spreadsheets.
Cons
Human discipline required. One missed tag inflates results.
“Hides” lines rather than fully balancing AR/AP and loans.
Timing mismatches across entities remain.
Best fit: Groups on QuickBooks Online (especially Advanced) with steady but modest intercompany activity.
Accountant tip: Use recurring transactions so intercompany entries are pre-tagged by default.
Example: If A invoices B for $1,000,000 but the tag is missing, your consolidated revenue is wrong.
4) External Tools (e.g., FinBoard.ai)
How it works: Map intercompany accounts once. The software auto-detects and eliminates each cycle, maintaining logs.
Pros
True automation; fewer manual hours.
Strong audit trail and controls.
Handles multi-step chains, partials, and timing differences better.
Cons
Setup effort.
Licensing cost (often minor versus time saved at scale).
Best fit: Medium-to-large groups (20+ eliminations per month) or any group seeking faster, repeatable closes.
Accountant tip: In SOX environments, a system-generated elimination report becomes control evidence. Auditors prefer it to ad-hoc Excel tabs.
Mini-story: One CFO cut ~15 hours per month by moving from spreadsheets to an automation tool. Audit questions dropped because eliminations were traceable and consistent.
Mini-Case: ABC Holdings (Three Entities)
ABC Consulting → ABC Tech: $1,000,000
ABC Tech → ABC Retail: $500,000
Without eliminations: Revenue is overstated by $1,500,000.
With eliminations:
Manual JEs: Reverse both at parent.
Spreadsheets: Remove both lines in the consolidation workbook.
Tags: Filter out tagged entries.
Automation: System detects the chain and eliminates.
Rule of thumb: If eliminations take more than 8 hours a month, automation is likely cheaper and more reliable.
Do not forget the Balance Sheet
Many teams clean the P&L and forget the balance sheet. That introduces real problems.
Inter-company AR/AP
Subsidiary A shows $500,000 AR from Subsidiary B.
Subsidiary B shows $500,000 AP to A.
Consolidation without elimination overstates both assets and liabilities.
Elimination JE:Debit AP $500,000
Credit AR $500,000
Inter-company Loans
Parent lends $2,000,000 to Sub.
Asset and liability cancel in consolidation.
Eliminate interest income/expense as well.
Unrealized profit in inventory
Manufacturing sells internally to Distribution.
If inventory is unsold at period end, remove the embedded profit until goods are sold externally.
These are essential under IAS 27, IFRS 10, and ASC 810.
FX and Currency Translation: Two Frequent Traps
Transaction mismatches
A bills $1,000,000 USD.
B books ₹83,000,000 INR (USD/INR 83).
Different rates and posting dates create differences.
Translation adjustments
Assets/liabilities translate at closing rate; P&L often at average rate.
Intercompany eliminations must reconcile those differences.
Practical moves
Use dedicated FX revaluation accounts for intercompany balances.
Automate FX handling in your consolidation tool when possible.
How to Reduce Errors and Reclaim Hours
Dedicated intercompany GLs: Use specific codes for intercompany revenue, expense, AR, AP, and loans. Keep them clean.
Standard chart of accounts: Harmonize names and structures across entities.
Mid-month AR/AP confirmations: Confirm intercompany balances before close to catch timing issues.
Templates or light automation: If software is not in scope, standardize with protected spreadsheets and repeatable macros.
Operational KPIs: Track number of eliminations, exceptions, and rework time each month.
Case in point: A SaaS group cut close time from 12 days to 6 by reconciling intercompany mid-month, switching on automated eliminations, and training bookkeepers on tagging discipline.
What Good Looks Like at Different Stages
Early stage (few entities, few transactions): Manual JEs + a tight log.
Growing (5–10 eliminations/month): Structured spreadsheets with locks and pivots.
Scaling (20+ eliminations/month, multi-currency): Tooling with audit trails, FX handling, and timing alignment.
What is Next: Where the Space is Heading
AI-assisted matching: Auto-match counterparties and amounts, even with messy descriptions.
Continuous close: Daily refreshes so month-end is a non-event.
Shared ledgers: Experiments with blockchain-style ledgers for intra-group activity to avoid reconciliations altogether.
Quick-Start Checklist
Map every intercompany flow (P&L and balance sheet).
Choose your method (JEs, spreadsheets, tags, or tooling).
Document the policy (tagging rules, timing cut-offs, approval steps).
Reconcile AR/AP and loans monthly; clear timing mismatches.
Track FX differences in dedicated accounts.
If eliminations consume >8 hours/month, move to automation.
