GROUP ACCOUNTING
In group accounting, adjustments are necessary when preparing consolidated financial statements to reflect the
group as a single economic entity. The key adjustments help eliminate intra-group transactions and align accounting
treatments.
Below are five key adjustments with journal entries and illustrations for each:
1️⃣ Elimination of Investment in Subsidiary against Share Capital
🧠 Concept:
When a parent acquires a subsidiary, the investment in subsidiary recorded in the parent’s books is eliminated
against the subsidiary’s equity (share capital + pre-acquisition reserves).
📊 Illustration:
Parent (P Ltd) acquires 100% of Subsidiary (S Ltd) for Ksh 1,000,000
Share capital of S Ltd = Ksh 700,000
Pre-acquisition reserves = Ksh 200,000
Goodwill = Ksh 100,000 (Balancing figure)
📘 Consolidation Journal:
Dr Share Capital (S Ltd) 700,000
Dr Pre-acquisition Retained Earnings 200,000
Dr Goodwill 100,000
Cr Investment in Subsidiary (P Ltd) 1,000,000
2️⃣ Unrealised Profit in Inventory (Intra-group Sales)
🧠 Concept:
When a group company sells inventory to another at a profit, and the inventory is still unsold at year-end, the
unrealised profit must be eliminated.
📊 Illustration:
S Ltd sells goods to P Ltd for Ksh 300,000 (Cost = Ksh 200,000)
Inventory still held by P Ltd at year-end = Ksh 150,000
Unrealised profit = 50% × Ksh 150,000 = Ksh 50,000
📘 Consolidation Journal:
Dr Group Retained Earnings 50,000
Cr Inventory 50,000
3️⃣ Unrealised Profit in Non-Current Assets (Intra-group Transfer of PPE)
🧠 Concept:
If one group company sells a fixed asset to another, any unrealised gain must be eliminated, and depreciation
adjusted.
📊 Illustration:
P Ltd sells machinery to S Ltd for Ksh 120,000, original cost was Ksh 100,000, net book value Ksh 80,000
Gain = Ksh 40,000; still within group
📘 Consolidation Journal:
Dr Group Retained Earnings 40,000
Cr Property, Plant & Equipment 40,000
If depreciation was charged by S Ltd on Ksh 120,000 instead of Ksh 80,000:
📘 Depreciation Adjustment:
Dr Accumulated Depreciation 4,000
Cr Group Retained Earnings 4,000
(Assuming over-depreciation of Ksh 4,000)
4️⃣ Intra-group Balances Elimination
🧠 Concept:
Intercompany balances (receivables/payables, loans, etc.) must be eliminated to avoid overstating group assets and
liabilities.
📊 Illustration:
P Ltd has a receivable of Ksh 200,000 from S Ltd
S Ltd records a payable of the same amount
📘 Consolidation Journal:
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Dr Intercompany Payables (S Ltd) 200,000
Cr Intercompany Receivables (P Ltd) 200,000
5️⃣ Non-controlling Interest (NCI) Recognition
🧠 Concept:
When the parent does not own 100% of the subsidiary, the portion attributable to external shareholders is shown
as NCI.
📊 Illustration:
P Ltd owns 80% of S Ltd
Net assets of S Ltd = Ksh 1,000,000
NCI = 20% × Ksh 1,000,000 = Ksh 200,000
📘 Consolidation Journal:
Dr Share Capital (S Ltd) 800,000
Dr Retained Earnings (S Ltd) 200,000
Cr Investment in Subsidiary (P Ltd) 1,000,000
Cr NCI 200,000
(Alternatively, goodwill and NCI can be calculated using the full goodwill or proportionate share method.)
6️⃣ Dividends from Subsidiary to Parent
🧠 Concept:
When a subsidiary pays a dividend to the parent, it should be eliminated in consolidation because it's an internal
transfer of funds — not income to the group.
📊 Illustration:
S Ltd declares and pays Ksh 100,000 in dividends.
P Ltd owns 100% of S Ltd and has recorded it as dividend income.
📘 Consolidation Journal:
Dr Dividend Income (P Ltd) 100,000
Cr Retained Earnings (S Ltd) 100,000
🎯 If P Ltd owns less than 100%, only the parent’s share of the dividend is eliminated. The rest is retained by NCI.
7️⃣ Fair Value Adjustments on Acquisition
🧠 Concept:
At acquisition, the identifiable net assets of the subsidiary are recorded at fair value, not book value. Adjustments
must be made to align carrying amounts with fair values.
📊 Illustration:
S Ltd has equipment with book value of Ksh 600,000, but fair value is Ksh 800,000 at acquisition date.
The additional Ksh 200,000 must be added to the net assets and depreciation adjusted accordingly.
📘 Consolidation Journal (at acquisition):
Dr Property, Plant & Equipment 200,000
Cr Retained Earnings (Pre-acq. S Ltd) 200,000
📘 Depreciation Adjustment (in later years):
Assume equipment’s remaining life = 5 years → annual depreciation difference = Ksh 40,000
Dr Retained Earnings (Group) 40,000
Cr Accumulated Depreciation 40,000
📌 The depreciation adjustment ensures group profit is not overstated.
✅ Final List of 7 Key Adjustments in Group Accounting:
No. Adjustment Purpose
1 Elimination of Investment vs Equity Avoid overstating assets and equity
2 Unrealised Profit in Inventory Avoid overstated profit on unsold intra-group goods
3 Unrealised Profit in PPE Correct overstatement of assets and depreciation
4 Intercompany Balances Eliminate internal receivables/payables
5 Non-controlling Interest (NCI) Recognize ownership not held by parent
6 Dividends from Subsidiary Eliminate internal income within the group
7 Fair Value Adjustments on Acquisition Record acquired net assets at fair value, adjust depreciation
