Home Office and Branch

Accounting

Sales Agency vs. Branch

Sales Agency
Does not carry stocks
Takes orders but
approval and
shipment of items
done by HO
Only a working fund is
provided
No separate
accounting entity

Branch
Carries merchandise
w/c may be
purchased from
outsider or from HO
May function as an
independent business
unit.
Has a branch
accounting system

Accounting for an Agency

Normal accounting is followed in the books
of home office.
Certain accounts are extended with
Agency.

Accounting for Sales Agency

Cash - Imprest fund

Sales agency income is not tracked separately:
records sales agency sales and expenses in in the
HOs own revenue and expense accounts
If the home office wants to determine the net
income of the sales agency - it must maintain
distinct revenue and expense accounts for the
sales agency in its GL by appending the account
with the agency name

Prepared by: Rona Corda-Prado

Inventory Accounting for

Sales Agency in HO books
Perpetual System:
COGS - Sales Agency
Merchandise Inventory

xxx
xxx

Periodic System:
COGS - Sales Agency
Shipments of Merchandise Sales Agency
Under the periodic system, the Shipments of
Merchandise - Sales Agency is deducted from HOs
COGAFS.

Inventory Accounting for

Sales Agency in HO books
Fixed Asset Transfers:
Appropriate Asset Account - Sales Agency xxx
Appropriate Asset Account

xxx

Sales Agency: Illustration

Iloilo Fashion House opened a
sales agency in Bacolod. The
revenues and expenses of the
agency are recorded
separately from those of the
home office. Income from
sales and home office
operations are determined
separately at the end of each
accounting period. Assume
that the home office uses the
periodic inventory system.
7

Sales Agency: Illustration

Transactions
Home Office Books
Working fund of P18,000 is established Working Fund - Bacolod Agency
Cash
Shipped merchandise to Bacolod
Agency for use as samples - P3,800

Samples Inventory - Bacolod Agency

Shipments to Agency

18,000
18,000
3,800
3,800

Fill sales orders from Bacolod Agency, Accounts Receivable

P162,000
Sales - Bacolod Agency

162,000

COGS identified with agency sales,

P108,000 (periodic system)

COGS - Bacolod Agency

Shipments to Agency

108,000

Replenishment of working fund with

agency for the following expenses:
Rent, P5,000; Office Supplies,
P3,000; Salaries, P6,400

Rent Expense - Bacolod Agency

Office Supplies Expense - Bacolod Agency
Salaries Expense - Bacolod Agency
Cash

Close revenue and expense accounts Sales - Bacolod Agency

of the agency
COGS - Bacolod Agency
Rent Expense - Bacolod Agency
Office Supplies Expense - Bacolod Agency
Salaries Expense - Bacolod Agency
Bacolod Agency Income

162,000

108,000
5,000
3,000
6,400
14,400
162,000
108,000
5,000
3,000
6,400
39,600
8

Branch Accounting
Reciprocal Accounts
Journal entries on the books of Branch
and Home Office
Combined Financial Statements
Reconciliation of Reciprocal Accounts

Accounting System For A

Branch
Branches normally keep a separate and
complete set of accounting records at
each branch.
Branch maintains a complete set of
accounting records consisting of:
Journals
Ledgers
Chart of accounts

Transactions with outside parties are

recorded similar to that of an
independent business enterprise.
10

Accounting System For A Branch

Financial statements are prepared by
branch accountant and forwarded to
home office.
The home office usually establish
policy such as
Number and types of ledger accounts
The internal control structure
Form and content of the financial statements
Accounting policies
11

Accounting System For

A Branch
Both the home office and the branch must
record transactions with one another
(intraoffice transactions) in their respective
accounting systems
Transactions between the home office and
branch are recorded in intracompany
(reciprocal) accounts
When the books of both branch and home
office are completely updated, the
reciprocal accounts in both books should
have equal but opposite balances and be
eliminated for the preparation of
consolidated financial statements
12

Reciprocal Ledger
Accounts Branch Books
Accounting records maintained by a branch
include a Home Office ledger account
This account reflects all activity between the
branch and home office
Home office account is a quasi-ownership
equity account that shows the net investment
by the Home Office in the branch.
Home office is credited for all merchandise,
cash or other assets provided by the home
office (investment from HO);
13

Reciprocal Ledger Accounts

Branch Books
Home office is debited for all cash,
merchandise, or other assets sent by the
branch to the home office or the other
branches (drawings by HO).
At the end of an accounting period when the
branch closes its accounting records, the
Income Summary account is closed to the
Home Office account.
Net income increases the credit balance of
the Home Office account; a net loss
decreases (debit) this balance.
14

Reciprocal Ledger Accounts

Home Office Books
In the home office accounting records, a
reciprocal ledger account with a title such as
Investment in Branch is maintained.
Investment in Branch is non-current asset
account
Debited for cash merchandise, and services
provided to the branch, and for the net
income reported by the branch (receivable
from branch).
Credited for the cash or other assets received
from the branch, and for net losses reported
by the branch.
15

Reciprocal Ledger Accounts

Home Office Books
Thus the Investment in Branch account
reflects the equity method of
accounting.
A separate investment account
generally is maintained by the home
office for each branch.

16

Reciprocal Ledger Accounts

Investment in Branch
(Home Office books)
Asset
transfers to
branch

Asset
transfers
from branch

Branch profit

Branch loss

Home Office
(Branch books)
Asset
transfers
from
branch
Branch loss

Asset
transfers to
branch
Branch
profit

17

Illustration
Smaldino opened a new branch called
Mason branch.
Assume that Smaldino Company bills
merchandise to Mason Branch at home office
cost and that Mason Branch maintains
complete accounting records and prepares
financial statements.
Both the home office and the branch use the
perpetual inventory system. Generally,
equipment used at the branch is carried in the
home office records unless specifically stated.
Expenses, such as advertising and insurance,
incurred by the home office on behalf of the
branch, are billed to the branch.
18

Illustration
Cash of $1,000 was forwarded by the
home office to Mason Branch.
Home Office Journal
Entries

Mason Branch Journal

Entries

Investment in Mason
Cash
1,000
Branch
1,000
Home Office
Cash
1,000

1,000

19

Shipment of Merchandise
Three alternative methods.

Billing at home office cost simplest of all.

Billing at a percentage above home office cost.
Billing at the branchs retail selling price.

Transfer of merchandise at cost is recorded

the same way as any other asset transfer.
Freight costs incurred in shipping merchandise
from the HO to a branch become part of the
branch inventory cost.
Shipment of merchandise to a branch does
not constitute a sale because ownership title
has not changed
20

Illustration
Merchandise with a home office cost of
$60,000 was shipped by the home office to
Mason Branch.
Home Office Journal
Entries

Mason Branch Journal

Entries

Investment in Mason
Inventories 60,000
Branch
60,000
Home Office
60,000
Inventories
60,000

21

Inventories
Purchase of branch from outside supplier
Ex. Bacolod Branch purchased P100,000
worth of merchandise from a local supplier, on
account.

Shipments of Merchandise to Branch

Ex. Makati head office shipped merchandise
costing P250,000 to its Davao Branch. These
merchandise were billed at costs and freight
paid by HO amounted to P25,000.

Acquisition of Fixed Assets

Used in Branch
Transactions recorded by a
branch should include all
controllable expenses and
revenue initiated by the branch
If the branch manager has
responsibility over all branch
assets, liabilities, revenue and
expenses, the branch
accounting records should
reflect this responsibility.
23

Acquisition of Fixed
Assets Used in Branch
Expenses such as depreciation often are not
subject to control by a branch manager.
Branch plant assets and the related
depreciation ledger accounts are generally
maintained by the home office (would apply
if the problem is silent).
The policy adopted by the company would
depend on where the acquisition of plant
assets are recorded and who does the
actual acquisition.
24

Acquisition of Fixed Assets

Used in Branch
If a fixed asset is acquired by the home office
for a branchs usage and the accounting
record for the fixed asset is maintained by the
home office, the accounting treatments are:
Home Office Journal Entries
Fixed Asset Branch
Cash or Liability Account

Branch Journal Entries

No entry

25

Acquisition of Fixed
Assets Used in Branch
If a plant asset is acquired by a branch for its
usage but the accounting record for this plant
asset is maintained by the home office, the
accounting treatments are:
Home Office Journal
Entries
Fixed Asset Branch
Investment in Branch

Branch Journal Entries

Home Office
Cash/Liability Account
26

Acquisition of Fixed Assets

Used in Branch
If a fixed asset is acquired by the home office for the
branch and the accounting record for this asset is
maintained by the branch, the accounting treatments
are:
Home Office Journal
Entries
Investment in Branch
Cash/Liability Account

Branch Journal Entries

Fixed Asset Account
Home Office
27

Illustration
Equipment was acquired by Mason
Branch for its use and paid $500, to be
carried in the home office accounting
records.
Home Office Journal
Entries
Equipment - Mason
Branch
500
Investment in
Mason Branch

Mason Branch Journal

Entries
Home Office 500
Cash

500

500
28

Illustration
Credit sales by Mason Branch amounted to $80,000; the
branchs cost of the merchandise sold was $45,000
Home Office Journal Entries
None

Mason Branch Journal Entries

Accounts
Receivable
Sales
Cost of Goods
Sold
Inventories

80,000
80,000

45,000
45,000
29

Illustration
Collections of trade accounts receivable
by Mason Branch amounted to $62,000.
Home Office
Journal Entries
None

Mason Branch Journal Entries

Cash
62,000
Account Receivable 62,000

30

Start-Up Costs
Based on IAS38 Intangible Assets, all
start-up costs, including costs
associated with organizing a branch
or division should be expensed in the
accounting period in which the costs
are incurred.

31

Expenses Incurred By Home

Office And Allocated To Branches
Types of expenses allocated by the
home office to the branch:
1. Expenses incurred by the branch but
paid by the home office
2. Expenses incurred by the home office
in behalf of the branch (i.e.
depreciation of branch equipment
carried in HO books)
3. Allocations of expenses incurred by
the home office (i.e. advertising)

32

Expenses Incurred By Home

Office And Allocated To
Branches
The home office usually acquires
insurance, pays property and other
taxes, and does advertising that
benefits all branches.
Home Office Journal
Entries
Investment in Branch
Expense Account

Branch Journal Entries

Expense Account
Home Office
33

Expenses Incurred By Home Office

And Allocated To Branches
Home office may charge each branch
interest on the capital invested in that
branch
Interest expense recognized by the
branches would be offset by interest
revenue recognized by the home office
Amounts would be netted and would
not be displayed in the combined
income statement
34

Illustration
Payments for operating expenses
by Mason Branch totaled $20,000.
Home Office Journal
Entries

Mason Branch Journal Entries

None

Operating
Expenses
Cash

1st Semester 2013-2014

Prepared by: Rona Corda-Prado

20,000
20,000

35

Illustration
Cash of $37,500 was remitted by
Mason Branch to the home office.
Home Office Journal
Entries

Mason Branch Journal

Entries

Cash
37,500
Home Office
Investment in
Cash
Mason Branch
37,500

37,500
37,500

36

Illustration
Operating expenses incurred by the home
office and charged to Mason Branch
totaled $3,000.
Home Office Journal
Entries
Investment in Mason
Branch
3,000
Operating
Expenses
3,000

Mason Branch Journal

Entries
Operating
Expenses
3,000
Home Office

3,000
37

Recognition of Branch
Income or Loss

Income for each branch is computed periodically in the

normal manner.
Branch revenue and expense accounts are closed to its
Income Summary in the usual manner.
Income Summary account is closed to the Home Office
account which serves as the capital account in the
branch books.

38

Recognition of Branch
Income or Loss
Home Office Journal
Entries
Investment in Branch
Branch Income

Branch Journal Entries

Income Summary
Home Office

39

Comprehensive Illustration
Problem 2, page 19.

Separate Financial
Statements

A separate income statement and balance sheet helps

management of the enterprise to review the operating
results and financial position of the branch.
The separate financial statements prepared by branch
will be revised by home office to include reconciling
items (if any) and to show the results of branch
operations after elimination of any intra-company profits
on merchandise shipments.
The branch balance sheet will have Home Office Ledger
Account instead of Ownership Equity Account.

41

Separate Financial Statements

for Branch & Home Office
Separate financial statements also
may be prepared for the home office
so that the results of its operations and
its financial position can be
appraised.

42

Combined Financial Statements

Combined FS of the home office and the branch are

needed to show the effects of company transactions of
the business entity with outsiders.
HOBA eliminations: Use trial balance working paper
A starting point in preparation of a combined balance
sheet would be the adjusted trial balances of the home
office and of the branch.
Similar accounts are combined to produce a single total
amount for cash, trade accounts receivable and other
assets and liabilities of the enterprise.
43

Combined Financial Statements

The reciprocal ledger accounts are
eliminated because they have no
significance when the branch and home
office report as a single entity.
The balance of the Home Office account is
offset against the balance of the Investment
in Branch account;
Shipments to Branch account is eliminated
against the Shipments from Home Office
(periodic).
In addition, any receivables and payables
between the home office and the branch (or
between branches) are eliminated.
44

Combined Financial
Statements
Operating results of the enterprise are
shown by an income statement in
which the revenue and expenses of the
branches are combined with
corresponding revenue and expenses
for the home office.
Intra-company profits of losses are
eliminated (in the case of inventory sold
with mark-up).
45

Working Paper for

Combined Financial Statements
Any elimination or offsetting the
balances is done only on working
paper. No entry is to be made in the
accounting record of either Home
office or branch because its only
purpose is to facilitate the preparation
of combined financial statements

46

1st Semester 2013-2014

Prepared by: Rona Corda-Prado

47

Reconciliation of
Reciprocal Ledger Accounts
Balance of the Investment in Branch
ledger account on the accounting
records of the home office may not
agree with the balance of the Home
Office on the branch books
Main reason certain transactions may
have been recorded by one set of books
office but not by the other due to timing
differences (i.e. inventory in transit or
cash remittances in transit); or
48

Reconciliation of Reciprocal
Accounts

Reconciling items exist because of bookkeeping and

mechanical errors such as duplication of entries, slides
and transpositions on either set of books.
If the problem is silent, assume that the record in the
originating books is correct.
At the end of each period the reciprocal account
balances must be brought into agreement before
combined financial statements are prepared.

49

The End

50