When there is a share purchase, what should be eliminated from the parent's balance sheet?

In the context of accounting for business combinations, when a parent company acquires a subsidiary and consolidates its financial statements, the parent must eliminate its investment in the subsidiary from its balance sheet. This procedure is necessary to prevent double counting, as the financial statements already reflect the assets, liabilities, and equity of the subsidiary.

The investment in the subsidiary represents an ownership stake in that company, and once the subsidiary is wholly integrated into the parent company's consolidated balance sheet, the individual investment account becomes irrelevant. Instead, the parent recognizes the underlying assets and liabilities of the subsidiary directly. This consolidation process ensures that stakeholders get a true and fair view of the financial situation of the entire economic entity formed by the parent and subsidiary.

Understanding this elimination process is crucial in financial reporting, especially in regards to maintaining accurate financial statements that comply with accounting standards.