The purpose of the term "Elimination of balances" in intercompany reconciliation is to remove any double-counting or understating of the company's financial position that may result from transactions between different entities within the same company.
When two or more entities within a company engage in transactions with each other, the transactions are initially recorded in the books of each entity separately. These transactions can create imbalances in the financial statements of each entity, which can impact the overall financial position of the company.
To address this issue, intercompany reconciliation involves the elimination of balances between different entities within the same company. This means that any transactions between entities are recorded in a way that ensures that the financial statements of each entity accurately reflect their true financial position, and any intercompany transactions are recorded once in the consolidated financial statements of the company.
For example, if Entity A sells goods to Entity B, the transaction is recorded in the books of Entity A as a sale and in the books of Entity B as a purchase. To eliminate the intercompany balance, the sale is eliminated from the books of Entity A, and the purchase is eliminated from the books of Entity B, resulting in a single transaction recorded in the consolidated financial statements of the company.
Overall, the purpose of eliminating balances in intercompany reconciliation is to ensure that the company's financial statements accurately reflect the true financial position of the company as a whole, without any double-counting or understating of financial transactions between different entities within the company.
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CMA Bharat Kumar Swami
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