Intercompany Transactions
Why Eliminations Are Necessary
Transactions between companies within the consolidated group do not represent transactions with outside parties. Therefore, they must be eliminated to avoid overstating revenue, expenses, assets, liabilities, or profits.
- Intercompany sales
- Intercompany receivables and payables
- Intercompany loans
- Intercompany interest
- Intercompany dividends
Note
Only transactions with external parties remain in consolidated financial statements.
Summary
Eliminating intercompany activity prevents artificial inflation of financial statement amounts.