What is consolidation?

Definition

Consolidation is the work of putting two or more related entities onto one set of financial statements. The combined pack presents the group as if it were a single company for reporting.

Each legal entity still keeps its own books. The combined view is built on a worksheet after those books are closed, not by merging the companies in the legal sense.

Where it shows up

Balance Sheet: Related to combining every entity's assets, liabilities, and equity into one statement.

P&L: Related to combining every entity's income and expense into one statement.

Cash flow: Related to combining every entity's cash activity into one statement.

See also: Elimination Entry · Chart Of Accounts Mapping · Financial Statement Package

When you look at a combined Balance Sheet, every entity's assets, liabilities, and equity sit on one statement. The owner reads one picture of what the group owns and owes.

When you look at a combined Income Statement, every entity's income and expense sit on one P&L. Revenue from outside customers remains; activity that only existed between the entities does not.

The Statement of Cash Flows is combined the same way. Cash the group received from or paid to outsiders is what remains.

The result is delivered as a Financial Statement Package for the group. Lenders and owners often ask for this pack when they need one view of the whole.

How it works

Each entity closes its own period and produces a Trial Balance. Those trial balances are the starting file for the combined pack.

Chart of accounts mapping lines the accounts up so cash sits with cash and rent sits with rent. Without that mapping, adding the two files would mix unlike lines.

The worksheet then adds like accounts across entities. Retail Store LLC's $40,000 of assets and Warehouse LLC's $25,000 of assets become $65,000 before any internal amounts are removed.

Internal activity is then taken out so the group does not report dealing with itself. That cleanup is a neighboring step; this page is about the combined package, not that posting.

Account roll-up is how the detailed accounts become the lines shown on the combined statements. Many ledger accounts may become one Balance Sheet line.

The combined pack does not replace either company's own statements. Each LLC still has its own general ledger for taxes, bank accounts, and day-to-day bookkeeping.

After month-end close, the separate books stay as they are. The worksheet is extra work on top of those books, not a posting that overwrites them.

If one entity was bought rather than started, the combined Balance Sheet may also show goodwill. That is the extra paid above the fair value of the identifiable net assets, and it is a purchase topic, not a day-to-day add-together.

The support for the pack is each entity's trial balance plus the worksheet that adds them. Keep that file with the combined statements so a reader can see how the group numbers were built.

Example

An owner has Retail Store LLC with $40,000 of assets and Warehouse LLC with $25,000 of assets. Both companies are under common ownership, and the owner wants one statement of the group.

Each LLC already has its own trial balance. The worksheet maps the two charts, then adds cash to cash, inventory to inventory, and payables to payables.

The first add shows $65,000 of assets. Internal balances between the store and the warehouse are then removed so the group does not show money it owes itself.

The owner receives one Financial Statement Package. The combined Balance Sheet is the group picture; each LLC's own Balance Sheet is still the picture for that legal entity.

Common mix-ups

Consolidation is not the same as adding two QuickBooks files without cleanup. A raw add would leave internal revenue, expense, and matching due-to and due-from balances in the totals.

The combined package is the group after those internal amounts are gone. The cleanup posting has its own page.

Consolidation is also not a legal merger. The two LLCs remain separate legal entities with their own books.

Combining for reporting does not close either company. It produces one pack for readers who need a group view.

People also mix this with account roll-up inside a single company. Roll-up is how one entity's detailed accounts become statement lines.

Consolidation is how two or more entities become one pack. Both can happen on the same worksheet, but they are different jobs.

Related terms

• Elimination Entry: The consolidation entry that removes transactions between related entities.
• Intercompany Account: An account tracking balances between related entities under common ownership.
• Chart Of Accounts Mapping: Aligning one account structure to another for reporting or system migration.
• Financial Statement Package: The bundled set of statements and schedules delivered after a close.
• Trial Balance: A listing of every ledger account balance, used to check that debits equal credits.
• Due To Due From: The paired receivable and payable accounts recording what one entity owes another.
• Goodwill: The premium paid for a business above the fair value of its identifiable net assets.
• Account Roll-Up: How detailed accounts summarize into the lines shown on a statement.