INTER-COMPANY TRANSACTIONS

The holding company and the subsidiary company may have a number of inter-company transactions in any one or more of the following matters:

(i) Loans advanced by the holding company to the subsidiary company or vice versa. This appears as an asset in the balance sheet of the company which gives loan and as a liability in the balance sheet of the company which takes the loan.

If S Ltd. has taken a loan of Rs.20,000 from H Ltd. then S Ltd.’s balance sheet shows a liability of Rs.20,000, while H Ltd.’s balance sheet shows an asset of Rs.20,000.

(ii) Bills of exchange given by one company and received by another company appears as bills payable in the balance sheet of the accepting company and as bills receivable in the balance sheet of the drawer company. If H Ltd. draws a bills of Rs.10,000 on S Ltd. then H Ltd.’s books will show bills receivable Rs.10,000 while. S Ltd.’s books will show bills payable Rs.10,000.

(iii) Transactions relating to sale and purchase of goods on credit similarly appears as debtors in the balance sheet of the company selling goods and as creditors in the balance sheet of the company purchasing the goods.

(iv) Debentures issued by one company may be held by the other. If S Ltd. issues debentures of Rs.50,000 which are held by H Ltd. then S Ltd.’s books will show a liability of ` 50,000 while H Ltd. books will show an asset of Rs.50,000.

All the above inter-company transaction have to be eliminated while preparing the consolidated balance sheet. This can be done by deducting the inter company transactions from the respective items on both sides of the balance sheet.