Elimination entries are an advanced accounting tool used to simplify the consolidated financial statement of affiliated companies. When one company is the parent company of a subsidiary company, a consolidated financial statement provides an overall picture of the companies' combined financial position. When two or more companies are affiliated elimination entries are used for to avoid redundant
. documentation of stock ownership of a subsidiary company by stockholders, inter-company debt and inter-company revenue and expenses.Stock of a smaller company acquired by a larger company is both an asset of the larger company and a portion of the equity account of each stockholder of both the larger and the smaller company. Elimination entries are used to avoid reflecting this ownership twice, as both a company asset and in the equity accounts of each of the larger company's stockholders. Furthermore, during an acquisition, a portion of the stock owned by each of the smaller company's stockholders is purchased by the acquiring company. Though these original stockholders interest is still reported in their individual equity accounts, the portion of their interest that was purchased is also eliminated.Often a parent company makes an inter-company loan to a smaller company, whether for purposes of expansion, to cover operating expenses or any other business purpose. In such a case, the parent company's financial statement shows a note receivable as an asset, while the subsidiary company shows a note payable as a liability. When combined, an elimination entry removes both since what has essentially occurred is just a cash transfer within the larger, consolidated entity.Finally, inter-company revenue and expenses are eliminated when companies sell one another goods or services, pay rent or loan interest to one another or perform any other transactions that are really a transfer of assets in the same way an inter-company loan is a transfer of cash. A very thorough example of such a scenario is given by an accounting student at http://www.cpanet.com/cpa_forum/forum_posts.asp?TID=20734&KW=ebonyeyes+consolidation. More reference links: http://www.cpanet.com/cpa_forum/forum_posts.asp?TID=20734&KW=ebonyeyes+consolidation http://www.oracleug.com/user-guide/general-ledger/consolidated-statements-and-eliminating-entries
