Consolidated profit and loss statement: a worked example for two companies in Xero

Short answer: a consolidated profit and loss statement shows two or more companies under the same owner as if they were one business. You add each company’s Profit and Loss line by line, then take out everything the companies charged each other (sales from one to the other, rent, management fees, interest on loans between them), because the group did not earn that money from anyone outside it. Net profit usually stays the same, but sales and costs are smaller and the margins change. Xero has no built-in consolidation, so you either export each company’s Profit and Loss to a spreadsheet with an eliminations column, or use a consolidation app. In the worked example below, adding two companies together shows sales of £86,000. The real group figure is £80,000, and the gross margin is 63.8%, not 59.3%.

When you need one

• You own more than one company, such as a trading company and a company that owns the building, or two businesses that sell to each other.
• A bank or investor asks for group figures, or for a group budget.
• You want to know how the whole thing is doing. Two Profit and Loss reports side by side hide the money moving between them, and can make one company look much better than it is.

Whether a group must file consolidated accounts by law depends on its size and country, and small groups are often exempt. That is a question for your accountant. This guide is about the management version you read each month.

A worked example: a roastery and a café

These figures are made up. Priya owns two companies, each with its own Xero organisation. Harbour Roasters Ltd roasts coffee, sells it wholesale and owns the building. Harbour Café Ltd runs a café in that building. In October the café bought £6,000 of beans from the roastery and paid it £3,000 rent.

Line	Roastery £	Café £	Added together £
Sales to outside customers	30,000	50,000	80,000
Sales to the café	6,000		6,000
Rent received from the café	3,000		3,000
Total income	39,000	50,000	89,000
Beans bought from the roastery		(6,000)	(6,000)
Other cost of sales	(18,000)	(11,000)	(29,000)
Wages and other overheads	(12,000)	(25,000)	(37,000)
Rent paid to the roastery		(3,000)	(3,000)
Net profit	9,000	5,000	14,000

Brackets are costs. The “added together” column is what many owners build first, and it overstates the business. The £6,000 of beans counts once as the roastery’s sale and again inside the café’s costs, and the £3,000 rent is income in one company and a cost in the other. Neither came from a customer.

Step 1: eliminate what the companies charged each other

Line	Added together £	Eliminations £	Group £
Sales	86,000	(6,000)	80,000
Rent received	3,000	(3,000)	0
Cost of sales	(35,000)	6,000	(29,000)
Overheads	(40,000)	3,000	(37,000)
Net profit	14,000	0	14,000

Each elimination takes the same amount out of income in one company and out of costs in the other, so net profit is still £14,000. What changes is the picture:

Measure	Added together	Group
Sales	£86,000	£80,000
Gross margin	59.3%	63.8%
Net margin (on sales)	16.3%	17.5%

Sales were overstated by £6,000, 7.5% of the real figure. A group budget or a lender’s covenant built on £86,000 starts from the wrong number.

Step 2: check the profit still sitting in stock

At the end of October the café still had £1,000 of the roastery’s beans on its shelves. The roastery’s cost of sales was half its sales (£18,000 of £36,000), so £500 of that £1,000 is roastery profit on beans the group has not yet sold to anyone. In the group figures it comes out of profit and out of the stock value, so group net profit is £13,500. It comes back in the month the café sells the coffee. For most small groups this is a small number, but if one company sells stock to the other, check it at year end at least.

Step 3: read each company on its own terms

The intercompany prices decide which company shows the profit. At £3,000 a month rent the café makes £5,000. If Priya set the rent at £6,000, the café would show £2,000 and the roastery £12,000, with the group still on £14,000. Before deciding a company is “the weak one”, check whether the prices between them are what an outside landlord or supplier would charge. Tax rules on prices between related companies vary by country, so agree them with your accountant.

How to consolidate Xero companies in a spreadsheet

1. Make the charts of accounts match. Use the same account names and codes in each organisation where you can, so the exported reports line up row by row. Where they differ, keep a mapping table.
2. Give intercompany items their own accounts in each organisation: for example “Intercompany sales”, “Intercompany purchases”, “Rent from group companies”, and an “Intercompany loan” or “Owed by/to group companies” account on the Balance Sheet. They are then easy to find and eliminate.
3. Close the month in every company before you start: bank reconciled, and both sides of every intercompany invoice entered. If the roastery has invoiced the beans and the café has not entered the bill, the two sides will not match.
4. Run the Profit and Loss for the same dates in each organisation under Reporting (Accounting › Reports in the older menu), and export each to Excel or Google Sheets.
5. Build one sheet with a column per company, an eliminations column and a group column. The group column is the companies plus the eliminations.
6. Check the eliminations net to zero and that each pair matches: the roastery’s intercompany sales should equal the café’s intercompany purchases. A difference is nearly always a timing or coding mistake.
7. Do the same for the Balance Sheet: if the café owes the roastery £9,000, that is a debtor in one and a creditor in the other, and both come out of the group figures.

If the companies use different currencies, convert each Profit and Loss to one currency at the average rate for the period before adding them. If their year ends differ, compare the same calendar months, not the same “month 4”.

Spreadsheet or app?

A spreadsheet works for two or three companies with a handful of intercompany items a month, once the template is set up. It gets slow and error-prone with more companies, several currencies or many intercompany invoices. Consolidation apps such as Joiin, Fathom and Syft connect to each Xero organisation and do the adding and eliminating for you; the Xero reporting tools comparison sets out what each one covers. Xero itself has had consolidation on its product ideas list for years without a built-in feature.

If the “companies” are really two sites or departments of one company, you do not need consolidation at all. Use one Xero organisation with tracking categories, and the tracking categories report gives a Profit and Loss per site.

Common mistakes

• Adding the reports together and stopping there, so intercompany sales and recharges inflate both income and costs.
• Eliminating one side only, for example removing the roastery’s £6,000 of sales but leaving the café’s £6,000 of beans in costs, which understates group profit by £6,000.
• Intercompany invoices entered in one company and not the other at month end.
• Different account names in each organisation, so the same cost lands on different rows.
• Judging each company by its own profit when the prices between them were set for tax or convenience.
• Forgetting the loans between companies on the Balance Sheet, and the interest on them in the Profit and Loss.

Common questions

What is a consolidated profit and loss statement? It is one Profit and Loss for a group of companies under the same owner, showing them as if they were a single business. Each company’s lines are added together and everything they charged each other is removed.

What are intercompany eliminations? They are the adjustments that remove sales, purchases, rent, fees and interest between companies in the same group. Each one takes the same amount out of income in one company and out of costs in the other, so group profit is not changed by money that never left the group.

Can Xero consolidate multiple companies? Not with a built-in report at the time of writing. Each company is a separate Xero organisation with its own reports. You can export each Profit and Loss to a spreadsheet and consolidate there, or connect the organisations to a consolidation app.

Does consolidation change the group’s profit? Usually not, because each elimination removes the same amount of income and cost. The exception is profit on stock one company sold to another that is still unsold at the period end, which comes out of group profit until it is sold.

Do small companies have to prepare consolidated accounts? It depends on the country and the size of the group, and many small groups are exempt from filing them. Ask your accountant. A monthly management consolidation is still useful when you own more than one company.

What is the difference between consolidated and combined figures? Combined usually means the companies’ figures simply added together. Consolidated means added together with intercompany items removed, which gives the group’s true sales and costs.

Every company, every Monday

ReportPilot does not consolidate. It connects to each Xero organisation with read-only access and sends a short plain-English email for each one every Monday: sales and profit against last month and the same month last year, the cash in the bank, money owed to you that is past due, and bills due in the next two weeks. That is a quick way to see each company’s week before you do the group figures at month end. The Owner plan covers one organisation; the Bookkeeper plan covers up to 15. There is a 14-day free trial with no card.