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A Brief Understanding Of The Consolidation Accounting

The term ‘consolidation accounting’ means the preparation of the consolidated financial statement from the individual financial statements of the parent undertaking and its subsidiaries. The consolidation accounting means the presentation of the financial information of the group as a single entity. The consolidation accounting helps in realizing the true picture of the holding company’s performance as a group. In the consolidation accounting the consolidated account helps the external as well as the internal agencies in knowing the true picture of the financial as well as the operating conditions of the group. Doing consolidation accounting means performing the complex set of consolidating as well as eliminating entries, while working back from the individual financial statements to a collective financial statement that would give the accurate representation of the operations of the organization.

Some of the steps that are required towards approaching the consolidation accounting procedure are:

  1. Original investment as well as the past periods: This step includes the allocation of the differential to the identifiable accounts, determining the goodwill and then allocating the differential to the non-controlling interests.
  2. Right through the current period: This includes the reporting of the subsidiary net income using the equity method and then the receipt of the dividends.
  3. Setting up of the work sheet: This includes the income statement, the balance sheets, as well as the statement of the retained earnings.
  4. Elimination of the entries: This is one of the most difficult parts of the consolidation accounting that includes converting the initial value to the equity method, eliminating the equity section of the subsidiary, adjust identifiable accounts to the fmv and then recognizing goodwill. It also includes the elimination of the subsidiary net income and the intercompany dividend payments. The subsequent amortization/depreciation of the differential and then eliminating any intercompany transfers or debts.
  5. The preparation of the financial statements: The final step includes the closing of the entries.
The consolidation accounting gives a correct picture of the accounts of the business entity as a whole.  
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