What is an elimination entry?

Definition

An elimination entry is a journal entry posted on a combining worksheet, not in either company's live general ledger. Its job is to reverse the internal revenue, expense, and matching due-to and due-from amounts that related entities recorded with each other.

On each company's own books those amounts are real. On a combined view they would count the same dollars twice, so the entry takes them out.

Where it shows up

P&L: Related to removing revenue and expense that only exist between related entities.

Balance Sheet: Related to removing the matching due-to and due-from balances.

Cash flow: Related to nothing extra on a combined cash view; internal transfers cancel.

See also: Consolidation · Intercompany Account · Due To Due From

When you look at a combined Income Statement, the entry is why internal rent, management fees, or interest no longer appear. Those lines were real on each company's own P&L, and they are gone from the combined P&L.

When you look at a combined Balance Sheet, the matching due-to and due-from balances disappear too. One company's receivable from a sister company is the other company's payable, so leaving both in would inflate assets and liabilities.

Cash flow does not get an extra line for the cleanup. Internal cash that moved from one entity to the other already cancels when the two cash accounts are added.

The entry is not a line you open in QuickBooks on either company. It lives on the worksheet that builds the combined Financial Statement Package.

How it works

Each related entity keeps its own books. One bills the other, or one pays a cost the other owes, and both companies record their side.

Those postings stay on the separate ledgers. The elimination entry is added later, after each entity's Trial Balance is ready.

The worksheet starts by lining the two Trial Balances up. Chart of accounts mapping puts like accounts next to like accounts so rent sits with rent and due-from sits with due-to.

Then the elimination entry is written. A typical P&L cleanup debits the internal revenue and credits the internal expense for the same amount.

A typical Balance Sheet cleanup credits the due-from asset and debits the due-to liability for the same amount. The pair was a wash between the two companies, so it should not survive on the combined statement.

Posting here means posting to the worksheet, not to either company's live ledger. After month-end close, each entity still shows its own internal balances.

If the two sides do not match, the entry cannot be written cleanly. An account reconciliation of the related-entity accounts comes first so the amounts to remove are the same.

The support is the two Trial Balances plus the internal activity. A source document for the original bill or transfer proves the amount being removed.

Example

A property-management company billed $2,000 of rent to its rental LLC. On the management company's books, that is $2,000 of intercompany revenue.

On the rental LLC's books, that is $2,000 of intercompany rent expense. Both amounts are correct for each separate company.

When the owner wants one combined Income Statement, those $2,000 lines would make the group look as if it earned rent from itself. The elimination entry takes both lines out.

Debit: Intercompany revenue $2,000

Credit: Intercompany rent expense $2,000

Combined revenue falls by $2,000, and combined rent expense falls by $2,000. Net income does not change, because income and expense of the same amount both leave.

If the rent was still unpaid, a second worksheet entry would also remove the matching due-from and due-to balances. That Balance Sheet pair is the open amount of the same internal rent.

Common mix-ups

An elimination entry is not the original bill between the two companies. The original journal entry on each set of books records the rent; the elimination only removes that rent from a combined view.

It is also not the intercompany account itself. That account stays on each entity's books so each company remains complete.

The elimination is the later worksheet step that takes those balances out of a combined statement. Leaving the accounts in place on the separate books is still required.

People also mix this posting with the whole combining process. Combining adds the two Trial Balances and presents one package.

The elimination entry is only the cleanup that stops internal activity from surviving on that package. It is one worksheet posting, not the full combining job.

Related terms

• Consolidation: Combining multiple entities into one set of financial statements.
• Intercompany Account: An account tracking balances between related entities under common ownership.
• Due To Due From: The paired receivable and payable accounts recording what one entity owes another.
• Journal Entry: A dated record of debits and credits posted to the ledger.
• 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.
• Chart Of Accounts Mapping: Aligning one account structure to another for reporting or system migration.
• Revenue: The total value of goods and services the business earned in a period.