Elimination Entry

What is an elimination entry?

An elimination entry removes intercompany transactions when consolidating financial statements of related entities. If one company sells to an affiliated company, consolidated statements should not show that revenue and expense since it is internal to the consolidated group. Elimination entries cancel out these intercompany amounts so consolidated financials show only external transactions.

When eliminations are needed

Any time you combine financials of related entities, intercompany activity needs elimination. Parent-subsidiary relationships require elimination in consolidated statements. Brother-sister companies under common ownership may need elimination for combined reporting. Even simple scenarios like an owner operating multiple single-member LLCs may need elimination for a complete financial picture.

Common elimination scenarios

Intercompany sales and purchases eliminate so consolidated revenue reflects only external sales. Intercompany loans and receivables eliminate so consolidated assets and liabilities are not overstated. Management fees between affiliates eliminate. The goal is presenting the economic substance of the combined group as if it were a single entity transacting only with outsiders.