SAP Financial Accounting (SAP FI) Practice Exam

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What is the purpose of elimination entries in accounting?

To reduce the number of records
To ensure duplicate entries are not counted
To consolidate financial statements
To prepare data for reports

The correct answer is: To ensure duplicate entries are not counted

Elimination entries serve a crucial role in the consolidation process within financial accounting, particularly when combining the financial statements of a parent company and its subsidiaries. The primary purpose of these entries is to eliminate the effects of intercompany transactions that may inflate figures when aggregating the financial statements. This ensures that, in consolidated financial statements, revenues, expenses, or profits resulting from transactions between related entities do not distort the overall financial picture. By removing these intercompany transactions, elimination entries help present a true and fair view of the financial performance and position of the group as a whole. This distinguishes consolidated results from those of individual entities, making it clear that the income and expenses attributable to one part of the group do not lead to double-counting in the aggregate figures. The other choices do not adequately reflect the fundamental purpose of elimination entries. While they may address aspects of accounting practices, they do not capture the essential role of ensuring the accuracy and integrity of consolidated financial reporting.