When you consolidate a group, the hard part isn’t adding the entities together — it’s removing everything they did with each other. A group can’t sell to itself, lend to itself, or profit from itself. Inter-company eliminations are the adjustments that strip out that internal activity so the consolidated statements show only real business with the outside world.
This guide explains each type of elimination with concrete journal entries.
Inter-Company vs. Intra-Company
First, a distinction that trips people up:
- Inter-company: between two separate legal entities under common control (Parent Co. → Subsidiary A). These require elimination.
- Intra-company: within one legal entity (Branch 1 → Branch 2 of the same company). These net out inside the entity and need no consolidation elimination.
Only inter-company activity gets eliminated, because only it crosses a legal-entity boundary that shows up in separate sets of books.
Type 1: Inter-Company Sales and COGS
When one group entity sells goods or services to another, both the seller’s revenue and the buyer’s cost are internal. They must cancel.
Scenario: Parent sells $50,000 of product to Subsidiary A.
The transactions on each entity’s books:
- Parent: Revenue +$50,000, COGS +$30,000 (cost of the goods)
- Subsidiary A: Inventory/Purchases +$50,000
Elimination entry at consolidation:
| Account | Debit | Credit |
|---|---|---|
| Inter-company revenue | $50,000 | |
| Inter-company COGS | $50,000 |
This removes the internal sale entirely. Consolidated revenue does not include the $50,000, because the group only “moved goods to itself.”
Type 2: Unrealized Profit in Inventory
If the buying entity still holds some of those goods at period end, the seller’s profit on them hasn’t been earned yet — the group hasn’t sold them to an outside customer. That profit must be deferred.
Scenario: Of the $50,000 sale above (40% gross margin), Subsidiary A still holds $20,000 of the goods in inventory. Unrealized profit = 40% × $20,000 = $8,000.
Elimination entry:
| Account | Debit | Credit |
|---|---|---|
| Cost of goods sold | $8,000 | |
| Inventory | $8,000 |
Consolidated inventory is now carried at the group’s original cost, and the $8,000 of profit is deferred until the goods are sold outside the group.
Type 3: Inter-Company Loans and Interest
Money lent between group members isn’t group debt, and interest paid on it isn’t a group expense.
Scenario: Parent lends $200,000 to Subsidiary B at 5%, generating $10,000 of interest for the year.
Two eliminations:
| Account | Debit | Credit |
|---|---|---|
| Inter-company loan payable (Sub B) | $200,000 | |
| Inter-company loan receivable (Parent) | $200,000 | |
| Interest income (Parent) | $10,000 | |
| Interest expense (Sub B) | $10,000 |
The loan disappears from the consolidated balance sheet, and the interest disappears from the consolidated income statement.
Type 4: Inter-Company Balances (Receivables & Payables)
Any receivable one entity is owed by another group member is matched by a payable on the other side. For the group, they net to zero.
Scenario: Subsidiary A owes Parent $15,000 for the goods above.
| Account | Debit | Credit |
|---|---|---|
| Accounts payable (Sub A) | $15,000 | |
| Accounts receivable (Parent) | $15,000 |
Type 5: Investment in Subsidiary
The parent carries an “Investment in Subsidiary” asset equal to what it paid; the subsidiary carries the matching equity. Both represent the same ownership, so the investment is eliminated against the subsidiary’s equity at consolidation (with any excess allocated to goodwill or identifiable assets). This prevents the group’s equity from being double-counted.
Why Software Beats Workpapers Here
Every elimination above has to be re-identified and re-posted each period, and every one depends on the two sides agreeing. In a spreadsheet, that means hunting down inter-company invoices across separate files and rebuilding elimination columns — the single most error-prone task in group reporting.
Multi-entity accounting software changes the model:
- Record an inter-company transaction once — both sides post simultaneously, so they always match.
- The system flags inter-company accounts and applies the matching elimination during consolidation.
- Adding a new subsidiary doesn’t break the elimination logic.
The result is consolidated statements that are correct by construction, with a full audit trail — instead of correct only if nobody fat-fingered a workpaper.
To see how eliminations fit into the broader close, read how to consolidate financial statements across subsidiaries, or learn how EmLedger handles this for holding companies.