In this article we will discuss about the accounting treatment of consolidated profit and loss account in the preparation of consolidated balance sheet, explained with the help of illustrations.

Consolidated Profit and Loss Account:

The consolidated Balance Sheet is prepared to show the financial position of the group. Similarly the object of preparing a consolidated Profit and Loss Account is to give a true and fair view of the earnings of the financial period for the group as if it were a single entity from the point of view of any holding company. The shareholders of the holding company are enabled to judge the trend of the profits which are being earned in the business in which they have invested their capital.

The following steps are involved in the preparation of consolidated Profit and Loss Account:

(i) Consolidated Profit and Loss Account is prepared in a columnar form. On each side there is one column for each company, one column for adjustments and one for total.


(ii) Revenue incomes and revenue expenditures of holding company and subsidiary companies are recorded.

(iii) Transfer of goods within the group should be eliminated. Thus, if the subsidiary bought goods from the holding company for Rs 1,00,000 (or vice versa), Rs 1,00,000 shall be deducted from the purchases of the subsidiary and the sales of holding company (or vice versa).

(iv) Eliminate inter-company transactions and all similar operating items are combined.

(v) Determine separate profit or loss of each company in the usual manner.


(vi) The following amounts are ascertained in the usual manner on the basis of profit or loss disclosed by each of the subsidiary companies:

(a) Share of profit of minority shareholders in the profit of subsidiary company is found out and is recorded in the debit side of this account.

Consolidated Profit & Loss A/c Dr.

To Minority Shareholders A/c


If there is a loss in subsidiary company, then share of loss of minority interest is recorded in the credit side of this account as under:

Minority Shareholders A/c Dr.

To Consolidated Profit & Loss A/c

(b) For the share of profit of holding company in the pre-acquisition profit of subsidiary company, the following record is made:


Consolidated Profit & Loss A/c Dr.

To Capital Reserve A/c

(c) For the share of loss of holding company in the pre-acquisition loss of subsidiary company following record is made:

Capital Reserve A/c Dr.


To Consolidated Profit & Loss A/c

(vii) The balance left in the total column will be the current year’s profit. This will be taken to the Consolidated Balance Sheet.

Illustration 1:

H Ltd. holds 3,000 Equity shares of Rs 10 each is S Ltd. whose capital consists of 10,000 Equity shares of Rs 30 each and 14% 1,000 Cumulative Preference shares of Rs 100 each. S Ltd. has also issued 14% Debentures to the extent of Rs 2, 00,000 out of which H Ltd. holds Rs 1, 00,000.


The following are the Profit and Loss Account of the two companies for the year ended 31st March 2004.

To following further information is given:

(i) The share were acquired by H Ltd. on 1st July 2003 but the debentures were acquired on 1st April 2003. S Ltd. was incorporated on 1st April 2003.


(ii) The income-tax deducted from dividends and interest is @ 20% and 10% respectively.

(iii) During the year, S Ltd. sold to H Ltd. goods costing Rs 1, 00,000 at the selling price of Rs 1, 50,000. One fourth of the goods remain unsold on 31st March 2004. The goods were valued at cost to the holding company for closing stock purposes. Prepare consolidated Profit and Loss Account.

Holding Company Having A Number of Subsidiaries

Illustration 2:

The following are the Balance Sheets of H Ltd. A Ltd. and B Ltd. as on 31st Dec. 2004.

H Ltd. purchased 80% of shares in A Ltd. when latter’s Profit and Loss Account was Rs 80,000 and Reserve was Rs 40,000.

A Ltd. purchased 75% of shares in B Ltd. when latter’s Profit and Loss Account was Rs 40,000 and Reserves was Rs 20,000.

Prepare consolidated Balance Sheet of H Ltd. and its subsidiaries A Ltd. and B Ltd. as on 31 st December 2004 together with consolidation schedules.