When a business buys either the controlling stock in or ownership of another business, the bought business often continues to act as a separate entity with a separate set of financial records. However, once a company buys a sub-company, the IRS views the separate financial records for the two companies as one record and the owning company must file financial documents that way. Consolidation accounting is the combining of assets, equity, liabilities and operating accounts of a parent company with all the companies it owns or owns controlling stock in.
Prepare a balance sheet for each company listing a summary of the company’s assets on one side and liabilities and equity on the other. The balance sheet shows the basic accounting equation, assets = liabilities + owner’s equity. A balance sheet is a standard accounting report you can generate using any business financial software. The balance sheet shows the financial position of a company on a specific date.
Combine and subtotal the company’s “Current Assets” and enter the figures under the heading “Assets” on the left side of the balance sheet. These assets include cash, trading securities, accounts receivables and inventories.
Combine and subtotal the company’s “Property, Plants & Equipment.” The land may be valued at more or less than the combined book value of the two companies. Enter these figures on the “Assets” side of the balance sheet.
Combine and subtotal the values of any “Intangible Assets.” Intangible assets are legal rights and intellectual property. They include patents, copyrights and goodwill. Goodwill includes the worth of a company’s identity and location. For example, if you purchased a store in Time Square in NYC, the location of the store where hundreds of thousands of potential customers pass every day means the store has goodwill value.
Combine and subtotal all your “Current Liabilities” on the right side of the balance sheet. These include accounts payable, salaries payable and interest payable. Enter this figure under the heading “Liabilities” on the right side of your balance sheet.
Combine and subtotal all the “Long-term Liabilities” including notes payable and mortgage liability.
Combine and subtotal all the “Stockholders’ equity” including capital stock and retained earnings. Capital stock is the total amount of a firm’s capital represented by the value of its issued stock. Retained earnings are the profits generated by a company that the company does not distribute to shareholders as dividends.
Combine the “Current Assets,” subtotal, “Property, Plant & Equipment” subtotal and the “Intangible Assets” subtotal to get a “Total Assets” figure.
Combine the “Current Liabilities” subtotal and “Long-term Liabilities” subtotal to get a “Total Liabilities.”
Add the “Total Liabilities” to “Stockholders’ Equity” to get the “Total Liabilities and Equity” total. This figure should match the “Total Assets” figure because the basic accounting equation is Assets = Liabilities + Equity.
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