Home Office - Branch and Agency Accounting

In their effort to generate more sales, business firms usually open sales outlet
s. The creation of sales outlets develops business in distant areas or improves
the companys share of existing markets through more effective and efficient conta
ct with the customers.
The new sales outlets may be organized as sales agencies
or branches. Regardless of which form of operation is used, the financial statem
ents of each separate unit are combined with those of the controlling unit to co
me up with financial statements of the economic entity as a whole.

Sales Agency vs Branch

Sales Agency Usually carries a line of samples or displays merchandise but does
not carry stocks of it. Orders are taken from customers and sent to the home off
ice for approval of credit. Home office then ships the merchandise directly to c
ustomers. Customers remit payments to HO directly. Branch Carries stocks of merc
handise which may be obtained solely from the home office or a portion may be ob
tained from outside suppliers. Makes the usual warranties with respect to qualit
y and makes collections of accounts receivable.

Agency A working fund for sales agency is provided by the home office and replen
ished when exhausted. No other cash is handled by the agency. Neither keeps a co
mplete set of books nor uses a double-entry system of accounts.
Branch Approves customers credit. Cash receipts are often deposited in a bank acc
ount and branch expenses are paid from an imprest cash fund. Maintains a full se
t of books with a complete self-balancing set of accounts.

Accounting system for Agencies

Net Income determined separately
Net Income not determined separately
If HO wants to determine the net income of its sales agency separately, it must
maintain in the general ledger distinct revenue and expenses accounts in the nam
e of the sales agency. Sales Tarlac, Rent Expense- Tarlac
Transactions of the sales agency are recorded in the HO s own revenue and expens
e accounts. Upon closing the books, the Income Summary account shows the results
of both operations.

Income determined separately Cost of Goods Sold: Perpetual System Shipments to c

ustomers Cost of Gds sold Tarlac xx Merchandise Invty xx Periodic System Cost of
Gds Sold-Tarlac xx Shipmnts of Mdse-Tarlac xx
When HO transfers fixed assets to the sales agencies: Frnitre & Fxtures-Tarlac x
x Furniture and Fixtures xx

At the end of accounting period: Beginning Inventory Add: Purchases Total Less:
Shipment of Mdse. Tarlac Cost of Gds available for sale by HO for its own operat
ions. Pxx xx xx xx Pxx ==

A working fund established. Shipped mdse. to agency for use as samples Fill sale
s orders from Cebu Agency Cost of Goods sold identified with Cebu sales
Working Fund-Cebu xx Cash Samples Invty Cebu xx Shipments to Agency
xx
xx
Accounts Recble Sales - Cebu
xx xx
Cost of Sales-Cebu xx Shipments to Agency
xx

Replenishment of working fund of agency

Various exp a/c Cebu xx Cash
xx
Close revenues and expenses a/c
Sales Cebu xx Cost of Sales Cebu Various Exp a/c Cebu Cebu Agency Income xx Incom
e Summary
xx xx
Close Cebu agency Income to Income Summary a/c
xx

Accounting for Branch Operations

Even though the HO and branch maintain
separate books, all accounts are combined for external reporting.
As to the preparation of combined financial statements, just adding together the
balances of accounts will not result in the presentation of a single economic e
ntity, certain elimination is necessary.
Transactions between HO and branch are
recorded in reciprocal accounts.

The reciprocal nature of Investment in Branch a/c and Home Office a/c
Home Office Books Investmnt in Cebu Branch
Asset transfer Asset transfers to Branch from branch Branch profit Branch Loss
Branch Books Home Office
Asset transfer Asset transfers from Branch to branch Branch loss Branch profit

1.HO transfers to Cebu branch Cash P100,000 and new Office Equipment P20,000, to
establish Cebu Branch. (HO) Investment in Cebu Branch P120,000 Cash P100,000 Of
fice Equipment 20,000 (Branch) Cash P100,000 Office Equipment 20,000 Home Office
P120,000

When merchandise is transferred from the HO to branch it may be at cost or at so

me amount in excess of cost.
HO transferred to Cebu Branch merchandise with cost of P80,000. Periodic Invty S
ystem
(HO)
Investment in Cebu Branch Shipment to Cebu Branch
(Cebu Branch)
P80,000 P80,000
Shipment from Home Office P80,000 Home Office P80,000

HO Books: The balance of the Shipments to Branch account is subtracted from the
total of Beg Invty and purchases in the computation of the home office s cost of
goods sold for the period. This reduces the total goods available for sale and
avoids an overstatement of cost of goods sold.

The Shipments from Home Office account on the branch books is included in the co
mputation of the branch s costs of goods sold as an addition to purchases; it in
creases the branch s total goods available for sale. The home office s Shipment
to Branch a/c and the branch s Shipments from Home Office a/c are nominal accoun
ts and therefore closed at the end of the period to Income Summary a/c together
with the other revenue and expense accounts.

Home Office pays P5,000 to transport of P80,000 Merchandise at cost to Cebu Bran
ch. (HO) Investment in Cebu Branch P85,000 Shipment to Branch P80,000 Cash 5,000
(Branch) Shipments from Home OfficeP80,000 Freight In 5,000 Home Office P85,000
Freight costs incurred in shipping merchandise from the HO to a branch become pa
rt of the cost of the branch inventory

Accounting for Branch Plant Assets: 1. Branch Plant assets are recorded in the b
ooks of the branch. If branch plant assets are purchased by the HO
for the branch, entries are made by both HO and branch. If purchased by branch r
ecord asset in the usual manner.
2. Branch Plant assets are recorded in the books of the Home Office. If purchase
d by the HO for the branch, no entry is made in Branch books. If purchased by br
anch, entries are made by
both.

Branch Plant Assets Recorded in Branch Books

HO purchased branch plant asset. (HO)
Branch Plant Assets Recorded in HO Books
HO purchased branch plant asset (HO)
Investment in Cebu Branch Cash No entry for depreciation
Office Equipt CebuBr Cash Depreciation Expense Off Eqpt,Cebu Branch Accum. Depre
ciation-Off Eqpt,Cebu Branch
(Branch)
(Branch)
Office Equipment Home Office Depreciation Expense Accum Depreciation
No entry No entry

Branch Office Equipt purchased by the branch P30,000.

Recorded in Branch Books Office Equipment Cash Recorded in Home Office Books (HO
) Office Equipment-Cebu Investment in Branch (Branch) Home Office Cash

Some expenses are paid by the HO and these are allocated to Cebu Branch.
(HO) Investment in Cebu Branch Utilities Expense Depreciation Exp Advertising Ex
p (Branch) Utilities Expense Depreciation Exp Advtng Expense Home Office

Investment in Cebu Branch

Debit: Cash sent to branch Mdse shipped to Cebu Branch Operating expenses charge
d to Cebu branch Cebu branch income
Credit:
Equipment purchased by branch recorded on home office books. Cash received from
Cebu Branch

Home Office
Debit: Equipment purchased, recorded in HO books. Cash sent to Home Office Credi
t: Cash received from Home Office Merchandise received from HO Operating expense
s charged by HO Net income

In the preparation of combined financial statements for the company, the recipro
cal or intracompany account balances are eliminated. All eliminations are only m
ade in the
working paper, not on the separate books of the units being combined. E (1) Home
Office P85,000 Investment in Cebu Branch P85,000 E(2) Shipment to Branch P100,0
00 Shipments from Home Office
P100,000

ZYD Co. Cebu Branch Income Statement

Sales Cost of Sales: Shipment from H O P100,000 Inventory, Dec 31 40,000 Gross i
ncome
P 150,000
60,000 P 90,000

ZYD Co. - Home Office Income Statement

Sales P450,000 Cost of Sales: Inventory, Jan 1 P 80,000 Purchases 400,000 Goods
available for sale P480,000 Shipments to Branch 100,000 Mdse available for own s
aleP380,000 Inventory, December 31 50,000 330,000 Gross income P120,000

Combined financial statements do not show the intracompany accounts, since they
have already been eliminated. The Investment in Branch account and the Home Offi
ce account are reciprocal accounts and theoretically should have the same balanc
es at the end of the accounting period. However, these two accounts need to be r
econciled because of the following: 1. Goods in transit (HO to Branch) 2. Cash i
n transit (Branch to HO) 3. Bookkeeping or mechanical errors

Illustration: Investment in Cebu Branch P36,450 (Dr) Home Office 19,540 (Cr) 1.
On December 30, the HO shipped merchandise to the branch, P20,000. The shipment
has not reached the branch as of December 31, therefore no entry was made for th
e shipments. 2. On December 29, accounts receivable of the branch was collected
by the HO from a branch customer,P5,000. The entry was made by the HO but no ent
ry was made by the branch.

3. On December 29, the branch purchased Office equipment for P8,000. Since asset
s used by the branch are carried in the HO records, the entry made by the branch
was: Dr. Home Office Cr. Cash No entry has been made by the home office. 4. On
December 28, the branch collected for the HO an accounts receivable amounting to
P6,000 from a home office customer. The collection was recorded by the branch a
s Debit to Cash and Credit to HO. No entry has been made by the HO.

5. A debit of P1,450 in the Investment in Cebu branch was erroneously recorded b

y the branch in the Home Office account as p1,540, resulting to a difference of
P90 (P1,540P1,450) The HO entry is assumed to be correct.

Adjusting entries:
1. Shipments from HO In transit P20K Home Office P20K 2. Home Office P5K Account
s Receivable P5K 3. Office Equipment Cebu Branch P 8K Investment in Cebu Branch
P8K 4. Investment in Branch P6K Accounts Receivable P6K 5. Home Office P90 Expen
ses P90

Bal before Adjustments Additions: 1) Mdse shipped to Branch still in transit 4)

Recble of HO collected by branch Total Deductions: 2) Receivable of branch colle
cted by home office 3) Office equipment purchased by branch 5) Error made by bra
nch in recording expenses Adjusted balances
(Home Office Books) Investment in Cebu Branch P 36,450 (Dr)
(Branch Books) Home Office Account P 19,540 (Cr)
20,000 6,000__ P 42,450 _________ P39,540
(5,000) (8,000)
_______ P34,450 (Dr) =========
__(90) P34,450 (Cr) =========