Financial Reporting · Preparation of consolidated financial statements for a simple group

Intragroup Trading and Unrealised Profit in Consolidation

Updated 11 October 2026 · Fact-checked

Intragroup trading is buying and selling between group companies. A group is one economic entity, so you remove intragroup sales, purchases, balances and loans. You also remove profit on goods still in the buyer's inventory at the year end (unrealised profit), by reducing group inventory and the seller's profit.

Understand Intragroup Trading and Unrealised Profit

A group's consolidated statements show the group as if it were one business. A business cannot sell to itself and make a profit. So anything that happens only between group members must disappear from the consolidated figures.

There are three types of item to remove. First, intragroup sales and purchases: remove the same amount from both revenue and cost of sales. Second, intragroup balances such as receivables, payables and loans: cancel one against the other. Third, unrealised profit: if goods sold within the group are still in the buyer's inventory at the year end, the profit has not yet been earned from outside customers.

Unrealised profit is called PUP (provision for unrealised profit). It is only needed on goods still held at the year end. Goods the buyer has already sold to outsiders have made a real profit for the group.

Who sold matters only for where the PUP is charged. If the parent sells to the subsidiary, the whole PUP is deducted from the parent's profit, so it reduces group retained earnings. If the subsidiary sells to the parent, the PUP is deducted from the subsidiary's profit, so it is shared with the non-controlling interest (NCI) in the usual way. Group inventory is reduced by the full PUP in both cases.

Timing differences arise too. Cash or goods in transit at the year end can leave the two sets of records out of step. You first adjust the records so both sides agree, then cancel.

Key rules to remember

Intragroup sales: Consolidated revenue = P revenue + S revenue − intragroup sales; consolidated cost of sales = P + S − intragroup purchases (plus PUP increase); Remove the full invoiced amount, not just the profit.
Unrealised profit on markup: PUP = inventory still held × markup ÷ (100 + markup); Use when the profit is a percentage of cost. Example: markup 25% gives 25/125 = 1/5 of selling price.
Unrealised profit on margin: PUP = inventory still held × margin %; Use when the profit is a percentage of selling price.
PUP, parent sells: Dr Retained earnings of P; Cr Group inventory; No effect on NCI.
PUP, subsidiary sells: Dr S's post-acquisition reserves (full PUP); Cr Group inventory; The full PUP is deducted in S's net assets and post-acquisition reserves. It is then shared between the group and NCI in their holdings. NCI share of net assets = NCI % × S net assets at reporting date after PUP (plus NCI goodwill if full goodwill is used).
Goods in transit: Dr Inventory; Cr Payables (receiving company) before cancelling; Then cancel the intragroup receivable and payable. Add the PUP if the goods are still unsold.
Cash in transit: Dr Cash; Cr Receivables (receiving company) before cancelling; Then cancel the intragroup balances.

How to solve Intragroup Trading and Unrealised Profit questions

Use this order for any question on intragroup trading. It works for both the statement of financial position and the statement of profit or loss.

1Identify who sold to whom, the amount of sales for the year, and what is still in the buyer's inventory at the year end.
2Work out the PUP: use markup or margin correctly on the goods still held, not on total sales.
3Deal with transit items. Record cash or goods in transit in the books of the receiving company so both sides agree.
4Cancel intragroup receivables and payables, and any intragroup loans and accrued interest.
5In the statement of profit or loss, remove intragroup sales from revenue and the same amount from cost of sales. Then add the PUP increase to cost of sales.
6Charge the PUP: to the parent's reserves if the parent sold; to the subsidiary's reserves (affecting NCI) if the subsidiary sold. Reduce group inventory by the full PUP.
7Check that the statement of financial position still balances and that intragroup balances net to nil.

Quickest way: Three-line workings for intragroup items

When to use it: Use in Section C when you are short of time, and for single-answer calculations in Sections A and B.

Write the PUP in one line: inventory still held × fraction. Decide markup or margin before you calculate.
Write the double entry in one line: Dr retained earnings (seller's), Cr inventory.
For a subsidiary seller, put the PUP in the net assets working at the reporting date so NCI is correct automatically.
Cancel receivables against payables. If they differ, find the transit item that explains the gap.

Common mistakes in Intragroup Trading and Unrealised Profit

Calculating PUP on total intragroup sales instead of closing inventory
The sales figure is the first number given in the question.
Fix: Apply the profit fraction only to goods still held by the buyer at the year end.
Using the markup percentage as if it were a margin
A 25% markup looks like 25% of selling price.
Fix: Markup is on cost, so profit is 25/125 of selling price. Margin is on selling price, so profit is the margin % directly.
Sharing the PUP with NCI when the parent sold
Students apply the NCI adjustment automatically.
Fix: Parent sells: all PUP goes to parent reserves. Only a subsidiary sale affects NCI.
Removing only the profit from revenue and cost of sales
Confusion between eliminating the trade and eliminating unrealised profit.
Fix: Remove the full sales value from both revenue and cost of sales. Then the PUP is a separate cost of sales adjustment.
Cancelling intragroup balances that do not agree without adjusting
Students force the balance by writing off a difference.
Fix: Look for goods or cash in transit. Record them in the receiving company's books first, then cancel.
Forgetting the PUP is the current year increase in the profit or loss
Students charge the closing PUP every year.
Fix: In profit or loss, charge only the increase in PUP. Opening PUP goes through opening reserves.

Worked examples

Example 1

Parent P owns 80% of Subsidiary S. During the year P sold goods to S for ₹6,00,000 at a markup of 25% on cost. At the year end S still held goods for which it had paid P ₹1,50,000 (the transfer price). At the year end S owed P ₹1,20,000 and P showed a receivable from S of ₹1,20,000. Calculate the adjustments for the consolidated statement of financial position and the consolidated statement of profit or loss.

Show the solution

Remove the intragroup sales: reduce revenue and cost of sales by ₹6,00,000.
Calculate PUP: inventory held at transfer price is ₹1,50,000. Markup 25% gives 25/125 = 1/5 of selling price. PUP = ₹1,50,000 × 1/5 = ₹30,000.
P is the seller, so the PUP reduces P's profit and group retained earnings by ₹30,000. NCI is not affected.
Reduce group inventory by ₹30,000.
In the profit or loss, add ₹30,000 to cost of sales.
Cancel the intragroup receivable and payable of ₹1,20,000 against each other.

Answer: Revenue and cost of sales both fall by ₹6,00,000; cost of sales then rises by ₹30,000. Group inventory falls by ₹30,000, group retained earnings fall by ₹30,000 with no NCI effect, and the ₹1,20,000 balances cancel.

Example 2

Parent P owns 75% of Subsidiary S. During the year S sold goods to P for ₹4,00,000 at a margin of 20% on selling price. At the year end P held goods bought from S for ₹1,00,000. S's net assets at the reporting date before any adjustment are ₹20,00,000. S made the whole of the profit on this sale. Ignore goodwill and fair value adjustments. Calculate the PUP and the NCI share of net assets.

Show the solution

Remove intragroup sales: revenue and cost of sales fall by ₹4,00,000.
PUP = ₹1,00,000 × 20% = ₹20,000.
S is the seller, so the PUP is deducted in S's net assets at the reporting date: ₹20,00,000 − ₹20,000 = ₹19,80,000.
NCI share = 25% × ₹19,80,000 = ₹4,95,000.
Group inventory is reduced by ₹20,000. The full ₹20,000 is debited to S's post-acquisition reserves, then shared 75% to the group and 25% to NCI. So ₹15,000 falls on group retained earnings and ₹5,000 on NCI. The ₹5,000 NCI share is already included in the ₹4,95,000 because that figure uses net assets after the PUP. Do not deduct it from NCI a second time.

Answer: PUP is ₹20,000. NCI share of S's adjusted net assets is ₹4,95,000 (goodwill and fair value adjustments ignored, as stated). Group inventory falls by ₹20,000. The full PUP is deducted in S's post-acquisition reserves, so ₹15,000 falls on group retained earnings and ₹5,000 on NCI. The NCI's ₹5,000 is already inside the ₹4,95,000 and is not a further deduction.

Exam tips

Read for the words markup, margin, sold, and still held. They decide the fraction and who bears the PUP.
In Section A and B objective questions, the answer options often include the PUP on total sales or on the wrong fraction. Do the calculation yourself and do not guess.
In Section C, show the PUP working clearly and label whose reserves it hits. You can pick up method marks even if a number is wrong.
When receivables and payables differ, look for goods or cash in transit before anything else.
Check that your closing inventory working reduces group inventory by the full PUP, not just the parent's share.

Practice questions from Preparation of consolidated financial statements for a simple group

Intragroup Trading and Unrealised Profit in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Intragroup Trading and Unrealised Profit: frequently asked questions

What is unrealised profit in inventory in consolidation?

It is profit one group company made by selling goods to another group company, where those goods are still in inventory at the year end. The group has not yet sold them outside, so the profit is removed from group inventory and profit.

Does it matter whether the parent or subsidiary sold the goods?

Yes, for where the PUP is charged. If the parent sold, all of it reduces group retained earnings. If the subsidiary sold, it is deducted in the subsidiary's net assets, so the NCI bears its share.

How do I treat goods in transit between group companies?

Record the goods in the receiving company's inventory and payables first so both companies' records agree. Then cancel the intragroup balance. If the goods are unsold at the year end, calculate PUP on them too.

Is the PUP charged in full every year?

No. In the statement of profit or loss you charge only the increase in PUP for the year. Any opening PUP is already in opening reserves.