In consolidated accounts, how should dividends from a subsidiary be treated?

In consolidated accounts, the appropriate treatment of dividends from a subsidiary involves cancelling the dividends against the parent's dividend income. This is because, in a consolidated financial statement, the parent and subsidiary are treated as a single economic entity. Therefore, any inter-company transactions, including dividends paid from the subsidiary to the parent, should be eliminated to avoid double counting and to present an accurate picture of the financial position of the consolidated group.

When dividends are declared by the subsidiary, they represent a distribution of profits that, from the perspective of the consolidated accounts, are not income to the parent because they reflect transfers within the entity. Thus, the income recognized by the parent for its share in the subsidiary's profits does not need to include these dividends. Instead, they are cancelled out to ensure that the consolidated income reflects only the profits earned from external operations.

This treatment helps maintain the integrity of the financial statements by ensuring that all transactions within the group do not inflate income or assets, providing a clearer understanding of the group's actual financial performance and position.