Intercompany eliminations, explained for owners

Picture a typical two-company holding: an operating business and a property company that owns the building. Every month, the operating company pays the property company $8,000 in rent. Both sets of books are correct. Both bookkeepers did their jobs. And if you add the two P&Ls together, your group just invented $8,000 of revenue.

That is the intercompany problem in one paragraph: transactions between your own companies are real to each entity but not real to the group. The group cannot get richer by charging itself rent.

What gets eliminated

• —Rent and management fees between entities — the most common case in owner-led holdings.
• —Intercompany sales — when one of your companies supplies another, the revenue on one side and the cost on the other must both come out of the group view.
• —Intercompany loans and interest — the loan is an asset in one entity and a liability in another; at group level they cancel.
• —Owner recharges — shared payroll, insurance or software billed from one entity to the others.

Why it goes wrong in spreadsheets

Eliminations fail quietly. The two sides of an intercompany charge are entered by different bookkeepers, in different months, sometimes with different amounts — one books $8,000 in May, the other $8,000 in June. A spreadsheet that simply subtracts a fixed number misses the timing gap, and the group view drifts away from reality a little more each quarter.

The honest way to handle this is matching: each elimination should reference the actual pair of transactions it offsets, and anything unmatched should be flagged — not assumed away. If the two sides disagree, the right output is a question ("these don't match — which is right?"), not a silent plug.

The two checks that keep a group view honest

• —Sum of entities − eliminations = consolidated, to the cent. If the identity doesn't hold, the consolidation is wrong — full stop.
• —The balance sheet must balance in every entity and in the combined view. An out-of-balance entity invalidates the group until it is explained.

This is exactly how the Composenz engine works: eliminations are computed deterministically, listed pair by pair with their source transactions, and the two identities above are enforced on every run. When something doesn't reconcile, the Monday Brief says so, plainly — because a group view you can't audit is a group view you shouldn't trust.