Consolidated vs consolidating balance sheet
Accounting rules require that parent companies eliminate these types of transactions.
When a company owns all the common stock of its subsidiaries, the company doesn’t really need to publish reports about its subsidiaries’ individual results for the general public to peruse.
Shareholders don’t even need to know the results of these subsidiaries.
Other key transactions that a parent company must eliminate when preparing consolidated financial statements are However, the consolidated income statements shouldn’t show these sales as revenue and shouldn’t show the purchases as expenses.
Otherwise, the company would be double-counting the transaction.
Most major corporations comprise numerous companies bought along the way to create their empires.
In preparing consolidated financial statements, the parent company must eliminate numerous transactions among the parent and its affiliates before presenting the consolidated financial statements to the public.
For example, the parent company must eliminate transactions among the parent and its affiliates for accounts receivable and accounts payable to avoid counting revenue twice and giving the financial report reader the impression that the consolidated entity has more profits or owes more money than it actually does.