When preparing consolidated financial statements, intercompany eliminations remove the effect of transactions between entities within the same group. The principle is straightforward: from the group’s perspective, a sale from one subsidiary to another is an internal transfer — it generates no revenue from external parties and incurs no cost from external parties. Both sides must be removed so the consolidated P&L reflects only what the group earned from, and spent with, third parties.
This guide covers the common P&L elimination entries with journal entries and worked examples for each — including the practical nuances that affect how they’re applied: partial ownership, reversing vs permanent eliminations, and the ongoing depreciation adjustment that follows intercompany asset transfers.
1. Intercompany Sales of Goods — Goods Fully Sold Externally
Where one entity sells goods to another entity within the group, and those goods have been fully sold to external customers by period end, the intercompany revenue and matching cost are eliminated. No unrealized profit remains in inventory.
ScenarioCompany A sells goods to Company B for $50,000 (cost to Company A: $35,000). Company B sells all goods externally before period end.
Elimination entry
| Account | Debit | Credit |
|---|---|---|
| Intercompany Sales Revenue (Company A) | $50,000 | |
| Intercompany Cost of Sales (Company B) | $50,000 |
Effect: Group revenue and group COGS are each reduced by $50,000. Group gross profit is unchanged — the margin sits in Company B’s external sale. The elimination removes the internal leg without affecting overall group profitability.
2. Intercompany Sales of Goods — Unrealized Profit in Inventory
Where the buying entity has not yet sold the goods externally at period end, a portion of profit remains unrealized from the group’s perspective. The intercompany sale must be eliminated and the inventory written down to the group’s cost — what the selling entity originally paid.
ScenarioCompany A sells goods to Company B for $30,000 (cost to Company A: $25,000 — profit on sale: $5,000). All goods remain in Company B’s inventory at period end, carried at $30,000.
Two entries are required:
Entry 1 — Eliminate the intercompany sale
| Account | Debit | Credit |
|---|---|---|
| Intercompany Sales Revenue (Company A) | $30,000 | |
| Intercompany Cost of Sales (Company B) | $30,000 |
Entry 2 — Eliminate the unrealized profit from inventory
| Account | Debit | Credit |
|---|---|---|
| Cost of Sales | $5,000 | |
| Inventory | $5,000 |
Net effect: Group revenue −$30,000. Group COGS −$25,000 (−$30,000 + $5,000). Inventory reduced from $30,000 to $25,000 — the group’s original cost. Group gross profit reduced by $5,000 — the unrealized profit that has not yet been earned from an external customer.
🔄 This elimination reverses naturally: When Company B sells the goods externally in the next period, it records revenue at the external price and COGS at $30,000 (its intercompany purchase price). The group then records the correct external margin without re-applying the elimination — the prior period entry has already reset inventory to cost, so the economics work out correctly on the next external sale.
⚖️ Partial ownership: Where Company A is 80% owned by the parent, only 80% of the $5,000 unrealized profit ($4,000) is eliminated. The NCI’s 20% share ($1,000) remains in the consolidated accounts.
3. Intercompany Services, Management Fees, and Royalties
Where one entity charges another for services rendered — IT support, management services, shared services, royalties for intellectual property use — the income in the provider and the expense in the recipient are both eliminated.
ScenarioCompany A charges Company B: management fee $15,000 | IT services $10,000 | royalty $8,000
Elimination entries
| Account | Debit | Credit |
|---|---|---|
| Management Fee Income (Company A) | $15,000 | |
| Management Fee Expense (Company B) | $15,000 | |
| Service Income (Company A) | $10,000 | |
| Service Expense (Company B) | $10,000 | |
| Royalty Income (Company A) | $8,000 | |
| Royalty Expense (Company B) | $8,000 |
Effect: Group revenue and group expenses each reduce by $33,000. Group operating profit is unchanged — internal charges neither create nor destroy group value.
📌 Transfer pricing note: Management fees, royalties, and service charges between related entities must be priced at arm’s length under most tax jurisdictions. The consolidation elimination removes them from the group P&L but does not affect the entity-level tax position — tax is payable by each entity on its own income, including amounts received from group companies.
4. Intercompany Interest on Loans
Where a parent or sister entity lends funds to another group entity and charges interest, the interest income in the lender and interest expense in the borrower are both eliminated on consolidation.
ScenarioCompany A lends $200,000 to Company B at 5% per annum. Annual interest: $10,000.
Elimination entry
| Account | Debit | Credit |
|---|---|---|
| Interest Income (Company A) | $10,000 | |
| Interest Expense (Company B) | $10,000 |
Effect: Group finance income and group finance costs each reduce by $10,000. The intercompany loan balance (receivable in Company A, payable in Company B) is also eliminated on the consolidated balance sheet.
5. Intercompany Dividends
Where a subsidiary declares a dividend and a group entity is the recipient, dividend income in the recipient is eliminated against dividends paid in the declaring entity.
ScenarioCompany B (100% owned by parent) declares and pays a dividend of $20,000 to Company A (its parent).
Elimination entry
| Account | Debit | Credit |
|---|---|---|
| Dividend Income (Company A) | $20,000 | |
| Dividends Paid (Company B) | $20,000 |
Effect: The dividend is an internal transfer — it moves retained earnings from Company B to Company A within the group. From the group’s perspective it is neither income nor a distribution. The group’s retained earnings reflect Company B’s accumulated profits directly.
⚖️ Partial ownership: Where the parent owns 80% of Company B, only 80% of the dividend ($16,000) is intercompany and eliminated. The remaining 20% ($4,000) is paid to the NCI — a real outflow from the group — and is not eliminated.
6. Intercompany Asset Transfers
When one entity sells a fixed asset to another entity within the group at a profit, two elimination entries are required: one to remove the gain at the point of transfer, and one to reverse the excess depreciation charged each year over the asset’s remaining life.
ScenarioCompany A sells equipment to Company B for $60,000. Net book value in Company A: $50,000. Gain on sale: $10,000. Remaining useful life: 5 years, straight-line. Company B depreciates at $12,000/year; group cost basis gives $10,000/year.
Entry 1 — Eliminate the gain on sale (year of transfer)
| Account | Debit | Credit |
|---|---|---|
| Gain on Sale of Asset | $10,000 | |
| Fixed Assets (net book value) | $10,000 |
Entry 2 — Reverse excess depreciation (each year, years 1–5)
| Account | Debit | Credit |
|---|---|---|
| Accumulated Depreciation | $2,000 | |
| Depreciation Expense | $2,000 |
Why the depreciation adjustment: Company B depreciates at $12,000/year based on its $60,000 cost. The group’s cost is $50,000, giving $10,000/year. The $2,000 excess depreciation per year overstates group costs and must be reversed each period. Over five years the cumulative reversal of $10,000 fully unwinds the original gain elimination.
7. Intercompany Leases
Where one entity leases property or equipment to another entity within the group, the lease income and lease expense are both eliminated on consolidation.
ScenarioCompany A leases office space to Company B for $25,000 per year.
Elimination entry
| Account | Debit | Credit |
|---|---|---|
| Lease Income (Company A) | $25,000 | |
| Lease Expense (Company B) | $25,000 |
Effect: The group owns the property through Company A and occupies it through Company B — both are the same economic unit. The internal lease charge is eliminated. Under IFRS 16, the right-of-use asset in Company B and the corresponding lease liability are also eliminated on the consolidated balance sheet, restoring Company A’s property to its group carrying value.
Reversing vs Permanent Eliminations
| Elimination Type | Reverses? | Notes |
|---|---|---|
| Intercompany sales — goods fully sold externally | N/A | Single period; no carry-forward required |
| Unrealized profit in inventory | Yes | Reverses when goods are sold externally |
| Services, management fees, royalties, interest, leases | N/A | Re-eliminated each period as charges recur |
| Intercompany dividends | N/A | Eliminated in the period declared |
| Gain on intercompany asset transfer | Yes — gradually | Unwound over remaining useful life via annual depreciation reversal |
BrizoConsol’s auto-elimination identifies and eliminates intercompany transactions automatically — matching both sides of each intercompany relationship, calculating unrealized profit in inventory, and flagging mismatches where the two sides of a transaction don’t agree. Manual elimination entries can also be posted directly within the consolidation for items requiring judgement. Learn more or see it in action →