50189376 Home Office Branch and Agency Accounting

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Home Office - Branch and AgencyAccounting



• 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 efficientcontact 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 combinedwith those of the controlling unit to come up with financial

statements of the economic entity as a whole.



Sales Agency vs. Branch

Sales Agency

▪ Usually carries a line ofsamples or displaysmerchandise but does notcarry stocks of it.

▪Orders are taken fromcustomers and sent to thehome office for approval

of credit. Home officethen ships themerchandise directly tocustomers. Customersremit payments to HO

directly.

Branch

▪ Carries stocks ofmerchandise which maybe obtained solely fromthe home office or a

portion may be obtainedfrom outside suppliers.

▪ Makes the usual

warranties with respect toquality and makescollections of accountsreceivable.



Sales Agency

▪ A working fund for sales

agency is provided by thehome office andreplenished whenexhausted. No other cashis handled by the agency.

▪ Neither keeps a completeset of books nor uses adouble-entry system ofaccounts.

Branch

▪ Approves customer’s

credit.▪ Cash receipts are often

deposited in a bankaccount and branch

expenses are paid froman imprest cash fund.

▪ Maintains a full set ofbooks with a completeself-balancing set ofaccounts.



Accounting system for AgenciesNet Income determinedseparately

Net Income not determinedseparately

If HO wants to determine the netincome of its sales agencyseparately, it must maintain inthe general ledger distinctrevenue and expenses

accounts in the name of thesales agency.

Example:

Sales – Tarlac,

Rent Expense- Tarlac

Transactions of the sales agencyare recorded in the HO’s own

revenue and expenseaccounts. Upon closing thebooks, the Income Summary

account shows the results ofboth operations.



At the end of accounting period:

Beginning Inventory P xx

Add: Purchases xx

Total xx

Less: Shipment of Mdse. – Tarlac xx

Cost of Gds available for sale byHO for its own operations. P xx



A working fund

established.

Shipped mdse. toagency for use

as samples

Fill sales orders fromCebu Agency

Cost of Goods sold

identified with Cebu

sales

Working Fund-Cebu xx

Cash xx

Samples Invty –

Cebu xxShipments to Agency

xx

Accounts Rec. xx

Sales - Cebuxx

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 accts –Cebu xx

Cashxx

Sales – Cebu xx

Cost of Sales –

Cebu xxVarious Exp accts – 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 notresult 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

Investment in Cebu Branch

Asset transfer Asset transfers

to Branch from branch

Branch profit Branch Loss

Branch Books

Home Office

Asset transfer Asset

transfers from Branchto branch

Branch loss Branchprofit



1.HO transfers to Cebu branch Cash P100,000 and new OfficeEquipment P20,000, to establish Cebu Branch.

(HO)

Investment in Cebu Branch P120,000

Cash P100,000

Office 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 some amount in excess of cost.

HO transferred to Cebu Branch merchandise with cost of P80,000.(periodic system)

(HO)

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

(Cebu Branch)

Shipment from Home Office P80,000

Home Office P80,000



The balance of the Shipments to Branch account is subtracted from thetotal of Beg Inventory and purchases in the computation of the homeoffice’s cost of goods sold for the period. This reduces the total

goods available for sale and avoids an overstatement of cost ofgoods sold.

The Shipments from Home Office account on the branch books isincluded 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 andtherefore closed at the end of the period to Income Summary a/ctogether with the other revenue and expense accounts.



Home Office pays P5,000 to transport of P80,000 Merchandise atcost to Cebu Branch.

(HO)Investment in Cebu Branch P85,000

Shipment to Branch80,000

Cash 5,000(Branch)

Shipments from Home Office P80,000

Freight –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:

A. Purchase of Plant Assets by Home Office

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.

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 inBranch books.

B. Purchase of Plant Assets by Branch

► Plant assets are recorded in the books of the both books



Purchase of Plant Assets by Home OfficeA. Branch Plant assets are recorded in the books of theBranch.

(Home)

To record the purchase:

Inv in Cebu Branch xx

Cashxx

To record Depn: No entry

(Branch)


Plant Asset xxHO xx

To record Depn:

Depnxx

Accum Depn xx



Purchase of Plant Assets by Home OfficeB. Branch Plant assets are recorded in the books of the HO.

(Home)


Office Equipt – Cebu Branch

xx

Cashxx

To record Depn: Depn. Exp – Off Equipt,Cebu Branch xx

Accum. Depn. – OffEquipt,Cebu Branch

xx

(Branch)

No entries



Purchase of Plant Assets by Branch

(Home)


Office Equipt – Cebu Branch

xx

Inv in Cebu Branchxx

To record Depn: Depn. Exp – Off Equipt,Cebu Branch xx

Accum. Depn. - OffEquipt,Cebu Branch

xx

(Branch)


HO xxCashxx



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 Expense

Depreciation Exp

Advertising Expense

Home Office



Collection of Accounts receivable

HO Books Branch Books(Investment) (HO acct)

• Receivable of HO

Collected by Branch xx

• Receivable of BranchCollected by HO

(xx)

• Apportionment of Expenses xx

xx



In the preparation of combined financial statements for thecompany, the reciprocal or intracompany account balances areeliminated. All eliminations are only made in the working

paper, not on the separate books of the units beingcombined.

E (1) Home Office P85,000

Investment in Cebu BranchP85,000

E(2) Shipment to Branch P100,000

Shipments from Home Office P100,000



ZYD Co. – Cebu BranchIncome Statement

Sales 150,000Cost of Sales:

Shipment from H O P100,000

Inventory, Dec 31 40,00060,000

Gross income P 90,000



ZYD Co. - Home OfficeIncome 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 - 100,000Mdse available for own sale P380,000

Inventory, December 31 50,000330,000

Gross income P120,000



Combined financial statements do not show the intracompanyaccounts, since they have already been eliminated.

The Investment in Branch account and the Home Office account

are reciprocal accounts and theoretically should have thesame balances at the end of the accounting period.

However, these two accounts need to be reconciled because of thefollowing:

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, thereforeno entry was made for the shipments.

2. On December 29, accounts receivable of the branch was collected bythe HO from a branch customer,P5,000. The entry was made by the HObut 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 entrymade 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 accountsreceivable amounting to P6,000 from a home office customer. Thecollection was recorded by the branch as Debit to Cash and Credit toHO. No entry has been made by the HO.

5. A debit of P1,450 in the Investment in Cebu branch was erroneouslyrecorded b the branch in the Home Office account as 1,540, resultin



Adjusting entries:

1. Shipments from HO – In transit P20K

Home Office P20K

2. Home Office P5KAccounts 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

Expenses P90



Bal before Adjustments

Additions:1) Mdse shipped toBranch still in transit4) Recble of HO

collectedby branch

TotalDeductions:2) Receivable of

branchcollected by homeoffice

3) Office equipmentpurchased by branch

5) Error made bybranch in recordingexpenses

Adjusted balances

(Home Office Books)Investment in Cebu

BranchP 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)=========

50189376 Home Office Branch and Agency Accounting

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