Intercompany eliminations: A guide for multi-entity businesses

Nearly 60% of businesses struggle with managing data scattered across different systems. And multi-entity companies often find this particularly challenging. 

There's also the complexity of internal deals, subsidiaries selling to each other, lending funds, or sharing services, to consider. 

Correctly handling those transactions in your company’s group reports can prevent inflated numbers and provide a clear picture of overall performance. That's where intercompany eliminations come into play.

This process cleans up your consolidated financial statements by removing the effects of those internal transactions. 

The result? A clear, accurate view of your entire group operating as a single entity, showing only transactions with the outside world. 

This guide breaks down how they work, why they're necessary, and how to manage them effectively.

Jump to:

• How intercompany eliminations work
• What is the purpose of intercompany eliminations?
• What is eliminations accounting?
• How intercompany eliminations are performed
• Common challenges in intercompany eliminations accounting
• Best practices for accurate and efficient eliminations
• How Intuit Enterprise Suite can improve intercompany accounting
• Boost productivity and enhance profitability

How intercompany eliminations work

When companies in your group do business with each other, they record those deals in their books. The process starts with spotting these internal deals in your accounting records. 

Common intercompany transactions that companies eliminate when preparing consolidated financial statements:

• Sales of goods or assets, such as one subsidiary supplying equipment to another
• Services, like one company charging another for tech support
• Loans, where a subsidiary lends money to another
• Interest on those loans, creating internal income and expenses
• Dividends, where a subsidiary pays profits to the parent company
• Royalties, like payments for using a group company’s patents

Once you find these deals, you adjust your combined financial records to remove their impact. For example, if one subsidiary sells $10,000 of products to another, the first records revenue, and the second records an expense. 

If you combine their records without making adjustments, the $10,000 appears as both revenue and expense for the group, making your financials look larger than they are. 

Eliminations fix this by canceling out these internal deals, ensuring your reports are accurate, clear, and don’t double-count money that stayed within the group. This helps investors, creditors, and regulators see your group’s true performance, building trust and supporting better business decisions.

What is the purpose of intercompany eliminations?

Intercompany eliminations prevent your financial statements from showing inflated numbers that can result from internal transactions. 

When you combine the records of all companies in your group, these eliminations ensure that your company only counts transactions with outside customers, suppliers, or lenders. This creates a clear picture of the group as one business, helping investors and creditors understand your true financial health.

These eliminations also help you follow accounting rules like the US’s Generally Accepted Accounting Principles (GAAP)  or the global International Financial Reporting Standards (IFRS).

Meeting these standards shows stakeholders your reports are reliable and builds trust. Accurate financials also guide better business decisions, like planning investments or managing debt, by focusing on real performance.

What is eliminations accounting?

Elimination accounting is the process of finding, calculating, and recording intercompany eliminations. It’s a regular task for finance teams in businesses with multiple related companies, like a parent with subsidiaries. 

This work happens during each financial close, monthly, quarterly, or yearly, when preparing combined financial statements, often highlighting areas needing business process improvement.

Accountants or consolidation experts handle this process. They make sure the group’s financial reports don’t include internal transactions, which could mislead stakeholders about performance.

How intercompany eliminations are performed

Intercompany eliminations follow a clear process to identify and remove internal transactions. Each step ensures your combined financial statements are accurate and reflect only external activities.

1. Identify intercompany transactions

Start by finding transactions between companies in your group, including those arising from internal procurement management activities.

Use systems like special codes for vendors or customers within the group or specific account categories in your financial software. 

Check each company’s records for accounts like receivables (money owed to them), payables (money they owe), loans, revenues, or expenses tied to other group companies.

For example, if Subsidiary A sells $10,000 of inventory to Subsidiary B, both record the transaction. Identifying these entries early prevents them from inflating your combined financials. 

Knowing whether the transaction is upstream (subsidiary to parent), downstream (parent to subsidiary), or lateral (between subsidiaries) can help track the flow, but the main goal is spotting the matching records.

2. Match and reconcile balances

Next, compare the records of the companies involved to ensure they match. 

For instance, if Subsidiary A says Subsidiary B owes it $5,000, Subsidiary B’s records should show it owes Subsidiary A the same amount. If the numbers don’t line up, it may be due to timing, errors, or currency differences—you need to figure out why and fix it.

This step is important because mismatched records can lead to incorrect eliminations, which mess up your financial statements. Resolving these issues early saves time and ensures the data you’re working with is reliable.

3. Apply elimination entries

Once the records match, create journal entries to remove the intercompany transactions. These entries are only for the combined financial statements and don’t change each company’s own books. 

Here are the main types of eliminations and why they’re needed:

• Intercompany debt: Remove loans and interest between companies. For example, if Subsidiary A lends $20,000 to Subsidiary B, you cancel A’s receivable and B’s payable, plus any interest. This keeps internal loans from looking like real debts.
• Intercompany sales/services: Remove revenue and costs from internal sales or services. If Subsidiary A sells $10,000 of goods to Subsidiary B, you eliminate A’s revenue and B’s expense, plus any receivables or payables. This avoids counting internal sales as group revenue.
• Unrealized profit in assets: Adjust for profits on goods or equipment still held within the group. If Subsidiary A sells inventory to Subsidiary B for $15,000 (with a $5,000 profit), and B hasn’t sold it yet, you remove the $5,000 profit. This keeps the group’s profits tied to external sales only.
• Intercompany ownership: Remove the parent’s investment in a subsidiary against the subsidiary’s equity. If the parent records a $100,000 investment in Subsidiary C, you eliminate it against C’s equity to avoid counting it as an asset. This treats the group as one entity.

These entries ensure your financial statements reflect only external transactions, making them accurate for stakeholders.

Common challenges in intercompany eliminations accounting

Intercompany eliminations can be tough, and finance teams often run into problems that slow things down or cause mistakes. 

Here are common issues and why they’re problematic:

• Mismatches in balances: One company’s records might not match another’s due to timing (e.g., recording a sale in different months), errors, or currency exchange rates. This delays reconciliations and risks inaccurate financials.
• Inconsistent accounting rules: If companies in the group use different ways to record transactions, it’s hard to align their records. This can lead to errors in eliminations.
• Tracking lots of transactions: In big organizations, there can be thousands of intercompany transactions. Without good systems, it’s easy to miss some, causing financial misstatements.
• Foreign currency issues: When companies use different currencies, exchange rate changes can create mismatches. This complicates reconciliations and eliminations.
• No standard process: If each company handles intercompany transactions differently, the process becomes slow and error-prone, wasting time during the financial close. 
• Finding unrealized profits: It’s tricky to spot profits on goods or assets still held within the group, like inventory. Missing these inflates profits in reports.
• Time pressure: Financial closes have tight deadlines. Rushing eliminations can lead to mistakes that affect report accuracy.

These challenges can make financial reporting less reliable, so addressing them with clear processes and tools is important.

Best practices for accurate and efficient eliminations

Intercompany eliminations don’t have to be a headache. With the right strategies, you can turn a complex process into a smooth, reliable routine. 

These seven practices offer practical ways to save time, cut errors, and produce financial reports that stakeholders trust. Each approach brings a fresh angle to streamline your workflow, helping your team shine.

1. Set clear accounting rules from the top

Mismatched records, like one subsidiary logging a $10,000 sale as revenue while another calls it something else, spell trouble for eliminations. 

To avoid this, create a company-wide playbook for intercompany deals. Write a one-page policy stating, for example, that all internal sales use the same account and format, and share it with every finance team. 

Hold a quick meeting to walk through it, ensuring everyone’s on board. Aligned records mean fewer headaches during eliminations, letting you deliver accurate reports to investors faster.

2. Make internal deals easy to spot

Struggling to find intercompany deals in a sea of transactions?  

Set up a standard chart of accounts with unique codes, like “IC-SALE” for internal sales or “IC-LOAN” for loans, across all subsidiaries. 

Then you can use advanced accounting software to tag these codes automatically. This lets you filter internal activity in seconds, speeding up eliminations. 

With clear tracking, your financials stay clean, ready for creditors to review without delays.

3. Catch issues with monthly check-ins

Year-end surprises, like a $5,000 debt one subsidiary claims but another doesn’t, can stall your financial close. 

Instead, schedule a monthly review of intercompany records. Then, pull reports from your accounting system, compare balances (e.g., Subsidiary A’s receivable vs. Subsidiary B’s payable), and flag any gaps. Fix them within days, not weeks. 

These check-ins keep your process smooth, ensuring reports are spot-on when deadlines loom.

4. Streamline disputes with a shared system

When two subsidiaries argue over a $3,000 loan balance, your close can grind to a halt. 

Build a simple dispute resolution system, like a shared Google Sheet or a module in your ERP, where teams log mismatches with details (e.g., date, amount, issue). 

Make sure to assign a finance lead to review and settle disputes within 48 hours. This keeps eliminations on track, delivering accurate financials that auditors trust without last-minute scrambles.

5. Automate with the right tools

Manual eliminations are slow and error-prone. Invest in an advanced accounting solution, like Intuit Enterprise Suite, designed to automate tracking intercompany deals. For example, these systems can spot a $15,000 internal sale, match records, and suggest elimination entries in one click. Set up alerts for mismatches to catch issues early.

For example, these systems can spot a $15,000 internal sale, match records, and suggest elimination entries in one click. Set up alerts for mismatches to catch issues early. 

Automation saves hours, reduces mistakes, helps you hit tight deadlines with reliable reports, and can free up resources for better business intelligence analysis.

6. Build a rock-solid audit trail

Every elimination, like canceling a $20,000 internal loan, needs a clear explanation. 

Use a spreadsheet or software feature to log each entry, noting the deal (e.g., “Loan between Subsidiary A and B”), amount, and reason (“Removed to avoid double-counting”). 

Back it up with emails or reports showing the original transaction. This audit trail makes audits painless, proving to regulators your financials are trustworthy and saving time during reviews.

7. Keep your team sharp with training

A confused accountant can turn a simple elimination into a big mistake. Equip your team to handle eliminations like pros with regular training, ensuring they understand how accurate eliminations impact metrics used in capital investment analysis. 

Equip your team to handle eliminations like pros with regular training. 

Consider scheduling quarterly workshops to review processes, like matching balances or logging entries, using real examples from your books.

Or creating a simple one-page checklist: 

• Verify account codes
• Reconcile balances
• Document entries 

To build confidence, you can even try role-playing scenarios, such as resolving a $5,000 discrepancy. 

A well-trained team works fast, sidesteps mistakes, and delivers reports that stakeholders trust, freeing you to focus on bigger goals.

How Intuit Enterprise Suite (IES) can improve intercompany accounting

Intuit Enterprise Suite (IES) simplifies business operations, creating a stronger foundation for tasks like intercompany eliminations. While it doesn’t directly handle elimination entries, it improves the processes that make accurate eliminations possible, saving time and reducing errors.

It ensures data accuracy 

IES’s detailed time tracking and automatic payroll processing ensure that each company has accurate labor cost records from the start. 

Why does this matter for eliminations? 

Because inaccurate source data, especially for shared employee costs, creates phantom discrepancies that waste hours during intercompany reconciliation. 

When the initial numbers feeding into service charges or cost allocations are trustworthy, accountants can focus on resolving actual intercompany differences, not chasing ghost errors originating from sloppy time entries or payroll mistakes.

It enhances controls and compliance

Consistency is often a challenge when managing multiple entities. 

Each might develop slightly different ways of handling routine tasks, leading to mismatched records later on—a classic headache for intercompany accounting. 

Intuit Enterprise Suite helps bridge these gaps by providing tools like HR and compliance features that encourage standardized workflows. These features are supported by robust account management capabilities for user permissions and controls.

This alignment builds comparability into your data, making matching intercompany receivables and payables much smoother.

It streamlines workflows

Month-end close always feels like a sprint. If your finance team manually processes piles of vendor bills or painstakingly codes transactions, they have less mental energy for the nuanced work that eliminations involve. 

Here, automation within IES—like streamlining accounts payable or using AI to help categorize expenses—acts as a time-saver. 

That reclaimed time can be directly invested in meticulously investigating intercompany variances, accurately calculating unrealized profits, or ensuring the documentation for eliminations is audit-proof.

It improves cash flow visibility 

Trying to reconcile intercompany loans or track dividend payments without a clear view of cash movements is like navigating in the dark. 

Common questions: 

• "Did Subsidiary B make that loan payment?" 
• "What's the real balance outstanding?"

Intuit Enterprise Suite's integrated payment systems and reporting capabilities highlight these areas. 

It helps answer those questions faster by speeding up payment processing and providing clearer visibility into each entity’s cash flow and transaction history. 

This context is invaluable when preparing for eliminations, allowing for better management of intercompany balances throughout the period, not just at the stressful end.

It reduces the administrative burden

A cluttered administrative environment can lead to mistakes when performing eliminations, especially during high-pressure times like month-end close. 

Time spent fixing payroll errors, manually setting up intercompany vendors, or dealing with inefficient onboarding processes pulls focus from accounting tasks. 

Intuit Enterprise Suite is a customizable solution that reduces this administrative 'noise' by:

• Streamlining various operational functions
• Centralizing employee information
• Simplifying vendor onboarding
• Automating routine report generation 

The finance team faces fewer distractions when these background tasks run more smoothly. This improved focus allows them to dedicate cleaner, more concentrated effort to the meticulous demands of the financial close and consolidation.

Boost productivity and enhance profitability

Intercompany eliminations are a key step for multi-entity businesses. They ensure that your combined financial statements are accurate and show only external transactions. They remove internal dealings to help you present a true picture of your group’s performance. 

Want to simplify intercompany accounting? Intuit Enterprise Suite improves data accuracy, streamlines workflows, and supports compliance.