If your business invests in another business, keeping the books becomes even more complicated. These five actions are done at the same time in the consolidation journal entry. The one you use depends on how big a stake you have in the other business. Consolidated Balance Sheet Certain account receivable balances and account payable balances are eliminated from the consolidated balance sheet. Consolidated Statement of Income The consolidated financial statements only report income and expense activity from outside of the economic entity.
Ownership is based upon the total amount of stock owned. However, because the subsidiaries form one economic entity, investors, regulators, and customers find consolidated financial statements more beneficial to gauge the overall position of the entity. The revenue generated from one legal entity is offset by the expenses in another legal entity. The majority owner ignores your opinions or wishes. Only companies that are owned are included in the consolidated financial statements.
Ownership Calculation Methods There are three ways to calculate the ownership interest between companies. These add the subsidiary's income, expenses and assets to your own.
There are three accounting methods for this situation, cost, equity and consolidation. You record your acquisition as an asset on the balance sheet, setting the value as equal to the the purchase price. When one company owns part or all of another company, it must account for this ownership interest in the other company. The other company filed suit or complained to regulators to block your investment.
The type of method depends on how much of the second company the first company owns. First, the accounting must eliminate all of the subsidiary's shareholders equity accounts, such as common stock and retained earnings.
Fifth, recognize a goodwill for the change in the assets value. Now you have to use the more complicated equity method. These two methods do not lead to consolidating the financial statements. Fourth, readjust all the subsidiary's balance sheet accounts to the current fair market value of the accounts.
Cost, Equity or Consolidation Cost is the simplest method of accounting for your investment. All subsidiary equity accounts, such as common stock or retained earnings, must be eliminated. To avoid overinflating revenues, all internal revenues are omitted. Consolidated accounting doesn't count the sale as income, because you're really selling to yourself. At this level, you don't just have influence, you're running the show.
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