(Original post by A.A.T.)
Are you doing AAT or A Level?
You would need to know a little more for AAT than A Level.
Unrealised profits are essentially the profit element one company in a group (for example subsidiary) makes when it sells inventory to another company in the same group (for example to the parent company).
At the year-end, if the parent still has goods in its inventory which it bought from the subsidiary, then this transaction (for consolidation purposes) is merely a transfer of goods from one member company to the next. Any profit on this transfer cannot be recognised because it has not been sold to third parties i.e. entities outside of the group. Therefore for consolidation purposes, this unrealised profit element must be eliminated in order to reduce the inventory back down to the lower of cost or net realisable value (per IAS 2).
To do this you would work out the unrealised profit element and (assuming you are preparing the consolidated SFP) credit the inventory amount and debit consolidated retained earnings. (for AAT Accounting).
A subsidiary is a 'child' business to the 'parent' business.
Example: Parent company e.g. Arcadia Group
You would need to be able to calculate Provision for Unrealised Profit (PUP) and show working. Note "Provision" in Accounting has now changed to 'Allowance' in case you see it mentioned in new text books.
Lastly review the Accounting Concepts - "Realisation Concept" definition and examples as this is the concept being adopted when making a provision typically taught at AS Level.