How to Consolidate Income Statements

The main reason to consolidate the financial statements of different businesses is to follow Generally Accepted Accounting Principles (GAAP) which require that businesses under common control should report the results of their operations together as one company. This gives investors, shareholders and other users of the financial statements a more accurate overview of the operations of related companies. Preparing consolidations is usually the job of the controller or accountant as there are specifically allowed and disallowed methods of consolidation. Read on to learn more about how to consolidate income statements.

Things You'll Need

• Most recent financial statements for the companies being consolidated
• Microsoft Excel spreadsheet

Instructions

1. Obtain the most recent financial statements for the companies being consolidated. If the year ends of the companies are different, you will have to prepare a "second year end" financial statement for the company whose year end is not the same as the period being consolidated. For example, if Company A has a year end of September 30 and Company B has a year end of December 31 (the point of consolidation), you will have to prepare a set of financial statements for Company A that run from January 1 to December 31.

2. Enter the financial statement items for each company in side-by-side columns on a Microsoft Excel spreadsheet. Keep the financial statement sections in sync. For example, make sure that all of the current assets for each company are side-by-side and that the totals for each section are lined up. Specific items that are the same, like Cash, Inventory or Accounts Payable, are in the same row so that they will total together.

3. Leave the third and fourth spreadsheet column for debit and credit consolidation adjustments, respectively. The fifth spreadsheet column will be the consolidated value. The sum of each cell in that column will be the sum of the row. In other words, the consolidated Accounts Receivable (A/R) balance will be the total of Company A's A/R balance and Company B's A/R balance plus or minus any consolidation adjustments.

4. One of the adjustments that must be made on consolidation is the elimination of intercompany transactions. We want to show the consolidated entity as if it was one company, so we have to remove the effect of any transactions that occurred between Company A and Company B. For example, if Company A borrowed money from Company B, Company A would show a liability on its balance sheet and Company B would show an asset. To erase the effect of this transaction, you would use a consolidation adjustment entry to debit the liability and credit the asset. This "nets out" the effect of the transaction. Another example would be if Company A sells product to Company B. Company A would show the volume of this activity in its Sales line. Company B would show this in its Cost of Sales (if sold) or Inventory (if not sold) lines. The consolidation adjustment entry would debit Sales of Company A and credit Cost of Sales and Inventory for Company B.

5. Make sure that when you are presenting the consolidated financial statements to outside parties, the statements clearly state that they are consolidated and for which period. In the Notes To The Financial Statements, you would prepare a Basis of Consolidation note to describe which companies were involved in the consolidation.