Although the company accounts for its transactions on a monthly basis, there are entries that need some adjustments as each of the companies maintains their books of accounts because they are separate entities. In this case, the books they prepare have to be consolidated to the parent company. For instance, if we own 90 percent of a company, our claim will be 90 percent of the liabilities, assets, income, and the retained earnings of that company. However, in the case whereby we own 100 percent of the company, we will not be able to transfer all the items as they might have a positive or a negative balance. For example at year-end, if the parent sells assets to its subsidiary, the accounts have to be eliminated as they involve intercompany transactions (Baker, Lembke, King, and Jeffrey, 2009) .
In addition, there are transactions that need to be maintained at every financial year. For example, if the parent company sold motor vehicles to its subsidiary at an amount that is above cost, the parent company has to reduce the motor vehicle amount by that specific amount every time the company prepares the consolidated statements; this amount should be reduced as long as the subsidiary is using the motor vehicle. In this case, regardless of the consolidated amounts adjusting the totals in the individual accounts, it does not affect the accounts prepared by these separate entities. In this case, it is imperative that each consolidating company prepares its own set of accounts in each financial year. Therefore, when consolidating the books, we must ensure they merge appropriately to prevent frauds and audit nightmares.
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References
Baker, R., Lembke,.King. T. and Jeffrey, C. (2009) Advanced Accounting (8 th ed.)
