Financial Reporting · The concepts and principles of groups and consolidated financial statements

Intra-Group Trading and Unrealised Profit in Consolidation

Updated 11 October 2026 · Fact-checked

Intra-group trading is trade between group companies. In consolidation you cancel the intra-group sales, purchases and balances. You also remove any profit still sitting in closing inventory that the group has not sold outside. That unrealised profit reduces group inventory and group profit, and it is shared with the non-controlling interest only when the subsidiary was the seller.

Understand Intra-Group Trading and Unrealised Profit

A group is shown as one economic entity. A sale from one group company to another is not a sale of the group. It is like moving goods from one shelf to another in the same shop. Group revenue and group profit only arise when goods are sold outside the group.

This gives two clean-ups. First, cancel the intra-group items: sales and purchases in profit or loss, and receivables and payables in the statement of financial position. Second, remove unrealised profit: if goods bought from a group company are still in inventory at the year end, the seller has booked a profit the group has not earned. Inventory must be restated to the original cost to the group.

Before you cancel balances, deal with items in transit. If cash has been sent but not yet received, record cash in transit in the group statement. If goods have been sent but not yet received, record inventory in transit. Only then do both sides of the intra-group balance agree, so you can cancel them. Any difference left after that is usually an in-transit item.

The seller decides who bears the unrealised profit. If the parent sells to the subsidiary, the profit sits in the parent's books, so the whole adjustment goes against the group's retained earnings. If the subsidiary sells to the parent, the profit sits in the subsidiary's books. The adjustment reduces the subsidiary's profit and net assets, so the non-controlling interest (NCI) bears its share.

Unrealised profit in opening inventory is a different matter. It was removed last year. This year the goods are assumed sold, so the profit becomes realised. You only need to adjust for the movement in unrealised profit between opening and closing inventory.

Key rules to remember

Unrealised profit (profit as a margin on selling price): URP = intra-group inventory still held (at transfer price) × profit ÷ selling price; Use this when the question gives a margin, for example 25% of selling price.
Unrealised profit (mark-up on cost): URP = inventory still held (at transfer price) × mark-up ÷ (100 + mark-up); A 25% mark-up on cost means profit is 25/125 = 20% of selling price.
Inventory adjustment: Dr Cost of sales (or retained earnings b/f for opening URP), Cr Inventory; Closing URP reduces group inventory. Only the increase in URP over the year is charged to the year's profit.
Eliminating intra-group sales: Dr Revenue, Cr Cost of sales, for the full intra-group sales for the year; Cancel the whole amount sold, not just the part still in inventory. Profit is unaffected by this step.
Cash in transit: Dr Cash, Cr Receivables (or payables), then cancel the agreed balances; Do this before cancelling, so the two sides of the balance agree.
Who bears URP: Parent sells: all URP against the parent's profit. Subsidiary sells: URP against the subsidiary's profit, shared with NCI; The NCI share is calculated on the subsidiary's profit after deducting URP.

How to solve Intra-Group Trading and Unrealised Profit questions

Use the same order every time. Do the working on a separate sheet, then post it to the consolidation.

1Read the question and find out who sold to whom (parent to subsidiary or subsidiary to parent) and the amount sold during the year.
2Deal with items in transit first: add cash in transit or inventory in transit, so the intra-group receivable and payable agree.
3Cancel the intra-group receivable against the payable. Remove both from the consolidated statement of financial position.
4Cancel the intra-group sales against purchases (cost of sales) in the consolidated statement of profit or loss.
5Find the goods still held at the year end (at transfer price) and calculate the unrealised profit using the margin or mark-up.
6Deduct URP from group inventory and charge it to cost of sales. If there is opening URP, charge only the increase and reverse the rest from retained earnings b/f.
7If the subsidiary was the seller, deduct URP from the subsidiary's profit or net assets before calculating the NCI share and the group's share. If the parent was the seller, take it all from the parent's reserves.
8Check: consolidated inventory should equal the sum of the two companies' inventories, plus any inventory in transit, less URP.

Quickest way: The three-line URP shortcut

When to use it: Use in objective test questions and in the first few minutes of a constructed response question, when you need the answer fast.

Write: Sold to whom? Still in stock? Margin or mark-up? Convert the mark-up to a margin using mark-up ÷ (100 + mark-up).
Calculate URP = stock held at transfer price × margin. Post: Dr Retained earnings (or cost of sales), Cr Inventory.
Ask: was the subsidiary the seller? If yes, treat URP as a reduction in the subsidiary's profit and give the NCI its share. If not, NCI is unaffected.

Common mistakes in Intra-Group Trading and Unrealised Profit

Deducting the whole profit on the sale instead of only the profit on the goods still held.
Students see 'intra-group sale' and apply the margin to the full sales figure.
Fix: Apply the margin only to goods still in closing inventory. Goods the buyer has sold on outside the group have realised their profit.
Using the mark-up as if it were a margin.
Mark-up and margin sound alike, and the question wording is easy to skim.
Fix: For a mark-up on cost, use mark-up ÷ (100 + mark-up). A 25% mark-up gives a 20% margin, not 25%.
Sharing the URP with the NCI when the parent was the seller.
Students apply the NCI rule to every adjustment.
Fix: Check who sold the goods. NCI takes a share of URP only when the subsidiary sold. A parent's sale never changes NCI.
Cancelling the receivable and payable without first adjusting for cash in transit.
The two balances differ and students force the cancellation or ignore the gap.
Fix: Dr Cash in transit, Cr Receivables for the gap, then cancel the equal balances. Do the same for goods in transit using inventory.
Charging the whole opening URP to this year's profit.
Students forget that opening URP was already removed last year.
Fix: Charge only the increase in URP to this year's profit. Opening URP is taken from retained earnings b/f and credited to cost of sales this year.
Eliminating only the unsold part of intra-group sales in profit or loss.
Students mix up the two adjustments: cancelling sales and removing URP.
Fix: Cancel the full intra-group sales against cost of sales. Then make the separate URP adjustment to cost of sales.

Worked examples

Example 1

P owns 80% of S. During the year P sold goods to S for ₹8,00,000. The goods cost P ₹6,00,000. At the year end S still held goods bought from P at a transfer price of ₹2,00,000. S owed P ₹1,50,000 for these goods. S's records show a payable of ₹1,20,000, because S sent P ₹30,000 just before the year end and P has not yet received it. P's retained earnings are ₹20,00,000. S's post-acquisition profits are ₹4,00,000. P's receivables are ₹6,00,000 (including the ₹1,50,000) and S's receivables are ₹4,00,000. P's inventory is ₹5,00,000 and S's is ₹3,00,000. Calculate consolidated inventory, receivables and the group's retained earnings, and state the effect on NCI.

Show the solution

Margin: profit on the sale is ₹8,00,000 − ₹6,00,000 = ₹2,00,000. Margin = 2,00,000 ÷ 8,00,000 = 25%.
URP = ₹2,00,000 × 25% = ₹50,000.
Consolidated inventory = ₹5,00,000 + ₹3,00,000 − ₹50,000 = ₹7,50,000.
Cash in transit: Dr Cash ₹30,000, Cr P's receivables ₹30,000. P's receivable is now ₹1,20,000, which matches S's payable of ₹1,20,000. Cancel both.
Consolidated receivables = ₹6,00,000 + ₹4,00,000 − ₹30,000 (cash in transit) − ₹1,20,000 (cancelled) = ₹8,50,000. Cash is increased by ₹30,000.
P was the seller, so the whole URP is charged to P's retained earnings.
Group retained earnings = ₹20,00,000 − ₹50,000 + 80% × ₹4,00,000 = ₹20,00,000 − ₹50,000 + ₹3,20,000 = ₹22,70,000.
NCI share of post-acquisition profit = 20% × ₹4,00,000 = ₹80,000. It is not changed by the URP.

Answer: Consolidated inventory ₹7,50,000; receivables ₹8,50,000 (cash increased by ₹30,000); group retained earnings ₹22,70,000. NCI is unaffected by the URP because the parent sold the goods.

Example 2

P owns 75% of S. During the year S sold goods to P for ₹12,00,000 at a mark-up of 25% on cost. At the year end P still held goods from this sale with a transfer price of ₹3,00,000. There was no opening inventory from group sales. P's own profit for the year is ₹6,00,000 and S's profit for the year is ₹10,00,000. Show the adjustments in the consolidated statement of profit or loss and calculate profit attributable to NCI and the owners of P.

Show the solution

URP = ₹3,00,000 × 25 ÷ 125 = ₹60,000.
Eliminate the intra-group sale: Dr Revenue ₹12,00,000, Cr Cost of sales ₹12,00,000.
Remove URP: Dr Cost of sales ₹60,000, Cr Inventory ₹60,000. Group cost of sales is therefore higher by ₹60,000 compared with simply cancelling the sale.
S was the seller, so URP reduces S's profit: ₹10,00,000 − ₹60,000 = ₹9,40,000.
Group profit for the year = ₹6,00,000 + ₹9,40,000 = ₹15,40,000.
NCI share = 25% × ₹9,40,000 = ₹2,35,000.
Owners of P = ₹15,40,000 − ₹2,35,000 = ₹13,05,000. Check: ₹6,00,000 + 75% × ₹9,40,000 = ₹6,00,000 + ₹7,05,000 = ₹13,05,000.

Answer: Revenue is reduced by ₹12,00,000. Net effect on cost of sales is a reduction of ₹11,40,000 (₹12,00,000 cancelled less ₹60,000 URP). Group profit is ₹15,40,000, of which ₹2,35,000 belongs to NCI and ₹13,05,000 to the owners of P.

Exam tips

Underline who sold and who still holds the goods. A single word swap changes whether NCI is affected.
Check whether the question gives a margin or a mark-up before doing any calculation. This is the most common trap in objective test questions.
Show the journal for every adjustment in a constructed response question, for example Dr Retained earnings, Cr Inventory. Marks go to method even if one number is wrong.
Spot the cash-in-transit hint early. If the intra-group receivable and payable do not agree, adjust for the difference before cancelling.
In the statement of profit or loss, eliminate the full intra-group sales, then show the URP as a separate change to cost of sales. Do not combine them without showing both amounts.

Practice questions from The concepts and principles of groups and consolidated financial statements

Intra-Group 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.

Intra-Group Trading and Unrealised Profit: frequently asked questions

How do you eliminate unrealised profit in closing inventory?

Work out the profit element in the intra-group goods still held at the year end, using the margin on the transfer price. Then reduce group inventory and increase cost of sales (or reduce retained earnings) by that amount. This puts the inventory back to its cost to the group.

Does unrealised profit affect the non-controlling interest?

Only when the subsidiary sold the goods to the parent. Then the URP reduces the subsidiary's profit, and the NCI bears its share of the reduced figure. If the parent sold to the subsidiary, the whole URP is deducted from the parent's profit and the NCI is unchanged.

How do you treat cash in transit in consolidation?

If one company has sent cash that the other has not yet received, record Dr Cash in transit, Cr Receivables in the consolidation. Then both sides of the intra-group balance agree and you can cancel them against each other.

What happens to unrealised profit in opening inventory?

It was removed from the group accounts last year. This year the goods are treated as sold, so the profit is realised. Reduce retained earnings b/f by the opening URP and credit cost of sales. Then charge the closing URP in the usual way, so only the movement hits this year's profit.