What is the workpaper elimination entry for intercompany inventory transactions?

In the context of intercompany inventory transactions, the purpose of the workpaper elimination entry is to eliminate the effect of profits that have been built into inventory due to sales between associated entities. When one subsidiary sells inventory to another subsidiary, any profits included in the inventory need to be eliminated from the consolidated financial statements to avoid overstatement of assets and income.

The correct entry involves debiting intercompany sales to remove the revenue that is not realized from a consolidated perspective. This reflects the fact that the profits booked by the selling entity have not yet been realized from the viewpoint of the consolidated entity since the inventory is still held within the group. Concurrently, there are credits to both inventory and cost of goods sold (COGS), which serve to remove the corresponding profit that inflated both the inventory of the purchasing entity and the sales figures of the selling entity.

By debiting Intercompany sales, the entry effectively decreases the revenue recognized by the selling entity, acknowledging that the sale has not created genuine external value until the inventory is sold to a third party. The credit to inventory removes the excess profit from the asset, ensuring a more accurate representation of the group’s financial position. Lastly, the credit to COGS signifies that expenses should reflect only the costs associated with