Recognizing the carry forward in the consolidation of debts
Differences that arise from the consolidation of debts are posted either to the accounts in credit or accounts in debit. Those accounts can either be profit and loss accounts or balance sheet accounts. Regardless of where the difference is recognized, a realized difference is usually recognized as the opening balance in the next period within the equity. In this way, the opening balance in the equity schedule matches the closing balance of the previous period for all accounts. Therefore, the consolidation of debts can be carried forward to the next year.
We recommend that you do not carry forward the consolidation of debts. It complicates reconciliation because changes must be considered.
This example shows how the carry forward of the consolidation of debts may cause an issue for reconciliation:
Issue:
Two journals are posted for each entity-intercompany relation in each period. The first journal comes from the carry forward and the other journal recognizes the remaining change. The issue is that those two journals must be added together to understand what value was effectively eliminated. Additionally, all journal entries are doubled, so many journals must be reconciled.
Settings:
| 2020 | 2021 | |||||
| Payables | Receivables | Difference | Payables | Receivables | Difference | |
| Entity A | 100,000.00 | 140,000.00 | ||||
| Entity B | 120,000.00 | 20,000.00 | 145,000.00 | 5,000.00 | ||
Summary explanation of the problem:
Solution:
In 2020, this journal is posted:
| Entity A - receivables 100,000.00 | |
| Entity B - payables 120,000.00 | |
| Entity A - difference account 20,000.00 |
If the carry forward is performed then, in 2021, the journal is posted again at the Rollover Cons. Debts level. If the difference is considered in the profit and loss, then the carry forward journal in 2021 is adjusted. Instead of the profit and loss account, the retained earnings account is used for the difference together with the movement (schedule) element opening balance (OB). This journal entry is posted by the system:
| Entity A - receivables 100,000.00 | |
| Entity B - payables 120,000.00 | |
| Entity A - retained earnings OB 20,000.00 |
Because 100,000.00 and 120,000.00 are eliminated, this journal is posted in 2021:
| Entity B - payables 25,000.00 | |
| Entity A - receivables 40,000.00 | |
| Entity A - difference account 15,000.00 |
A value of -15,000.00 is recognized in the profit and loss.