consolidation meaning in accounting

Excel and Sheets may be cheap, but you’re missing out on cost-savings in the long-run by relying on them for consolidations. The more copying and pasting and data manipulation you have to do in spreadsheets, the more likely you are to have errors in your consolidation process. And because consolidation requires you to pull financial data from multiple ERP instances (and potentially a host of other SaaS tools), the monthly process is highly prone to mistakes. Just because spreadsheets can get a job done doesn’t mean they’re the right tool for a job. And while finance will probably never fully replace spreadsheets, you should move away from them wherever and whenever it makes sense.

Simply put, the CFO and FP&A departments will join the parent company’s numbers with the subsidiaries’ numbers to present accurate and complete pictures of an org’s financials. But in the accounting world,  “financial consolidation” is a well-defined process that includes several complexities and accounting principles. Given the considerable number of steps, it is useful to convert them into a detailed procedure, which the accounting department should follow religiously as part of its closing process. Otherwise, a key step could be missed, which would throw off the financial statement results. Print and review the financial statements for each subsidiary, and investigate any items that appear to be unusual or incorrect.

What is the Consolidation Method?

Combined financial statements are generally easier to prepare than consolidated financial statements. If you are an owner of a parent corporation, it’s important to understand your corporation’s options when it comes to financial statements and reporting. You need to know what the financial statements show about your corporation and the subsidiary companies that the parent corporation controls. The more you know about financial statements, the more likely you’ll be a savvy corporate owner. Once you purge your consolidation audit data, you can no longer run the consolidation audit reports. However, you can still review your consolidation journal batch in your parent ledger.

Consolidation can be helpful for businesses with different subsidiaries or divisions as it allows them to understand their overall performance and financial position better. Depending upon the accounting software in use, it may be necessary to access the financial records of each subsidiary and flag them as closed. This prevents any additional transactions from being recorded in the accounting period being closed. Verify that the contents of all asset, law firm bookkeeping liability, and equity accounts for both the subsidiaries and the corporate parent are correct, and adjust as necessary. If the parent company has been using a common paymaster system to pay all employees throughout the company, ensure that the proper allocation of payroll expenses has been made to all subsidiaries. Selecting the State Controller button will open the General Ledger window related to the consolidation step you need to complete.

Step 1. Record Intercompany Loans

In Disney’s case, the consolidated statements included information from both directly owned subsidiaries and those held through corporate partnerships with outside investors. It resulted in a comprehensive picture of Disney’s operations worldwide and allowed investors to evaluate them as a combined entity instead of separate entities. When it comes to consolidating in accounting, there is a lot of confusion surrounding the different types of consolidation, particularly between the financial statement and legal consolidation. It is vital for those unfamiliar with consolidating to understand that these two processes are quite different. Furthermore, some exceptions exclude consolidation even when ownership levels exceed these thresholds.

consolidation meaning in accounting

Companies must understand accounting consolidation rules to avoid making assumptions or judgments about their financial statements. The purpose of consolidation is to present information about the performance and position of all companies within the parent company’s economic environment as one monetary unit. It allows investors to understand better how well the parent company manages all its subsidiaries together rather than viewing them separately. In addition, you can use the Global Consolidation System to create elimination sets, which are a variation of General Ledger’s recurring journals. With elimination sets, you define eliminating entries that repeat every accounting period. You can transfer the data from some or all of the subsidiaries whose consolidation definitions you’ve included in a consolidation set.