8 - Individual entity accounts and consolidated accounts

Summary

The distinction between entity accounts and consolidated accounts

General distinction

There is an important distinction between the accounts of an individual entity, such as a company, and the consolidated accounts of a group. An individual entity could take a number of forms. The most common example is a single company, but an entity for accounting purposes could be a partnership or joint venture – that is, it does not need to have separate legal personality. A group typically comprises a parent company and a number of subsidiary undertakings.

Entity accounts, sometimes called ‘individual’, or ‘solus’ accounts, are the accounts of the entity itself. Thus, where a company transacts much of its business through subsidiaries rather than directly itself, its entity accounts will record an investment in one or more subsidiaries in its balance sheet and will record dividend income in its profit and loss account. The trading transactions will be included in the individual entity accounts of the subsidiaries themselves and are not reflected in the parent's individual entity accounts.

It is generally accepted that the individual accounts of a parent entity, while they have some uses, do not properly reflect the parent's results, assets and liabilities. For example, where much of the business is carried out in one or more of the parent's subsidiaries, this would not be reflected in the entity accounts of the parent. Hence, for many years, it has been the practice to prepare ‘group accounts’ for groups of companies, albeit with exceptions as discussed below.