Home Office - Branch and Agency Accounting

• In their effort to generate more sales, business firms usually open sales outlets.

• The creation of sales outlets develops business in distant areas or improves the company’s share of existing markets through more effective and efficient contact 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 statements of each separate unit are combined with those of the controlling unit to come up with financial statements of the economic entity as a whole.

Sales Agency vs BranchSales 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 office for approval of credit. Home office then ships the merchandise directly to customers. Customers remit payments to HO directly.

Branch▪ Carries stocks of

merchandise which may be obtained solely from the home office or a portion may be obtained from outside suppliers.

▪ Makes the usual warranties with respect to quality and makes collections of accounts receivable.

Agency▪ A working fund for sales

agency is provided by the home office and replenished when exhausted. No other cash is handled by the agency.

▪ Neither keeps a complete set of books nor uses a double-entry system of accounts.

Branch▪ Approves customer’s

credit.

▪ Cash receipts are often deposited in a bank account and branch expenses are paid from an imprest cash fund.

▪ Maintains a full set of books with a complete self-balancing set of accounts.

Accounting system for AgenciesNet Income 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 name of the sales agency.

Sales – Tarlac, Rent Expense- Tarlac

Net Income not determined separately

Transactions of the sales agency are recorded in the HO’s own revenue and expense accounts. Upon closing the books, the Income Summary account shows the results of both operations.

At the end of accounting period:

Beginning Inventory PxxAdd: Purchases xxTotal xxLess: Shipment of Mdse. – Tarlac xxCost of Gds available for sale by HO for its own operations. Pxx

= =

A working fund established.

Shipped mdse. to agency for use as samples

Fill sales orders fromCebu Agency

Cost of Goods soldidentified with Cebusales

Working Fund-Cebu xxCash xx

Samples Invty – Cebu xx Shipments to Agency xx

Accounts Recble xxSales - Cebu xx

Cost of Sales-Cebu xx Shipments to Agency xx

Replenishment of working fund of agency

Close revenues and expenses a/c

Close Cebu agency Income to IncomeSummary a/c

Various exp a/c –Cebu xx Cash xx

Sales – Cebu xx Cost of Sales –Cebu xx Various Exp a/c – Cebu xx Cebu Agency Income xx Income Summary 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 entity, 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 BranchAsset transfer Asset transfers to Branch from branch

Branch profit Branch Loss

Branch Books

Home OfficeAsset 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 P100,000Office Equipment 20,000

(Branch)Cash P100,000Office Equipment 20,000

Home Office P120,000

When merchandise is transferred from the HO to branch it may be at cost or at some amount in excess of cost.

HO transferred to Cebu Branch merchandise with cost of P80,000. Periodic Invty System

(HO)

Investment in Cebu Branch P80,000 Shipment to Cebu Branch P80,000

(Cebu Branch)

Shipment from Home Office P80,000Home 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 computation of the branch’s costs of goods sold as an addition to purchases; it increases 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 accounts 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 Branch.

(HO)Investment in Cebu Branch P85,000

Shipment to Branch P80,000Cash 5,000

(Branch)Shipments from Home Office P80,000Freight –In 5,000

Home Office P85,000

Freight costs incurred in shipping merchandise from the HO to a branch become part of the cost of the branch inventory

Accounting for Branch Plant Assets:1. Branch Plant assets are recorded in the books 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 record asset in the usual manner.

2. Branch Plant assets are recorded in the books of the Home Office.►If purchased by the HO for the branch, no entry is made in Branch books.

►If purchased by branch, entries are made by both.

Branch Plant Assets Recorded in Branch Books

HO purchased branch plant asset.(HO)

Investment in Cebu BranchCash

No entry for depreciation

(Branch)Office Equipment

Home Office

Depreciation ExpenseAccum Depreciation

Branch Plant AssetsRecorded in HO Books

HO purchased branch plant asset(HO)Office Equipt – CebuBr Cash

Depreciation Expense – Off Eqpt,Cebu Branch

Accum. Depreciation-Off Eqpt,Cebu Branch

(Branch)

No entry

No entry

Branch Office Equipt purchased by the branch P30,000.

Recorded in Branch Books

Office EquipmentCash

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 Exp

(Branch)Utilities ExpenseDepreciation ExpAdvtng Expense

Home Office

Investment in Cebu BranchDebit: Cash sent to branch

Mdse shipped to Cebu Branch

Operating expenses charged to Cebu

branch Cebu branch income

Credit:

Equipment purchased by branch recorded on home office books.

Cash received from Cebu Branch

Home OfficeDebit: Equipment purchased,

recorded in HO books.

Cash sent to Home Office

Credit: Cash received from

Home Office Merchandise received

from HO Operating expenses

charged by HO Net income

In the preparation of combined financial statements for the company, the reciprocal or intracompany account balances are eliminated. All eliminations are only made 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 P100,000 Shipments from Home Office P100,000

ZYD Co. – Cebu BranchIncome Statement

Sales P 150,000

Cost of Sales:Shipment from H O P100,000Inventory, Dec 31 40,000

60,000Gross income P

90,000

ZYD Co. - Home OfficeIncome Statement

Sales P450,000Cost of Sales:

Inventory, Jan 1 P 80,000Purchases 400,000Goods available for sale P480,000Shipments to Branch - 100,000 Mdse available for own saleP380,000Inventory, 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 Office account are reciprocal accounts and theoretically should have the same balances at the end of the accounting period.

However, these two accounts need to be reconciled because of the following:1. Goods in transit (HO to Branch)2. Cash in 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 the 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 entry was made by the branch.

3. On December 29, the branch purchased Office equipment for P8,000. Since assets 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 as 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 by the branch in the Home Office account as p1,540, resulting to a difference of P90 (P1,540- P1,450) The HO entry is assumed to be correct.

Adjusting entries:1. Shipments from HO – In transit P20K Home Office P20K2. Home Office P5K

Accounts Receivable P5K3. Office Equipment – Cebu Branch P 8K

Investment in Cebu Branch P8K4. Investment in Branch P6K

Accounts Receivable P6K5. Home Office P90

Expenses P90

Bal before AdjustmentsAdditions: 1) Mdse shipped to Branch still in transit 4) Recble of HO collectedby branchTotalDeductions: 2) Receivable of branchcollected by home office 3) Office equipment purchased by branch 5) Error made by branch in recording expenses

Adjusted balances

(Home Office Books)Investment in Cebu Branch

P 36,450 (Dr)

6,000__P 42,450

(8,000)

_______P34,450 (Dr)

=========

(Branch Books)Home Office Account

P 19,540 (Cr)

20,000

_________P39,540

(5,000)

__(90)P34,450 (Cr)=========