Journal reversals in elimination subsidiaries are a common occurrence in consolidation processes, particularly for balance sheet accounts. Here’s why they happen:
Purpose of Elimination Entries:
- When a parent company owns subsidiaries, intercompany transactions (sales/purchases between subsidiaries) distort the consolidated financial picture.
- Elimination entries are created to remove these intercompany transactions from the consolidated statements.
Reversal of Elimination Entries (Balance Sheet):
- Elimination entries for balance sheet accounts (e.g., inventory, accounts payable) often reverse at the beginning of the next period.
- This is because these accounts might be impacted by fluctuations like foreign exchange rates.
- Reversing the elimination entry allows for recalculating a new elimination amount based on the updated account balances at the new period’s start.
Non-Reversal Accounts:
- Elimination entries for income statement accounts (e.g., revenue, expense) typically don’t reverse.
- These accounts are usually translated using average exchange rates for the period, making them less sensitive to period-end fluctuations.
Benefits of Reversal:
- Ensures accurate consolidated balances that reflect current account values.
Drawbacks of Reversal:
- Can be confusing if not understood.
- Requires additional processing at the start of each period.
Here are some additional points to consider:
- Your accounting software: Specific functionalities for elimination entries and reversals might vary depending on the software used (e.g., NetSuite).
- Company policy: Your company’s accounting policies might dictate specific procedures for handling elimination entries and reversals.