This gives investors and shareholders an idea of the relative standing of each affiliated company and subsidiary, and thus the prospects for the corporation as a whole.
However, when reporting financial information, the parent company is required to submit financial statements that combine their information with that of their subsidiaries.
Intercompany transactions are those occurring between the parent and the subsidiary or the companies in the group.
Accountants must eliminate these accounts because, if they remain on the books, they may be accounted for twice, one time on the parent's book and again on the subsidiary's books.
It’s probably easiest to buy into the concept in very clear-cut situations.
Suppose a single entity has two long-held wholly-owned subsidiaries, both of which it also manages, each of which holds cash and various straightforward financial assets, earning interest income and each bearing a similar management fee; it then decides to combine the two entities into one, and prepares combined financial statements as if this had always been the case.