Home office, Branch and Agency accounting

Branch and Agency distinguished

A sales agency is not a self-contained business but rather acts only on
behalf of the home office. On other hand, a branch is a self-contained
business which acts independently, but within the bounds of company policy
and subject to the control of the home office.
The further differentiate these two:

Displays merchandise and takes customers' orders but does not carry stock of merchandise to
Customers' orders are sent to the home office for approval of credit. Customers remit payment
Holds revolving cash fund provided by the home office that is replenished when depleted. No o
Not a separate accounting entity. The only accounting records maintained are cash receipts an

Accounting for an agency

Since an agency does not maintain its own separate accounting books, all of
its transactions are recorded in the books of the home office. The agency
maintains a simple record to records its cash receipts and cash
disbursements, similarly to a petty cash system.
Illustration: Accounting for agency

Jan. 1
Receipt of revolving fund from home office
J

Accounting for branch operations

A branch is accounted for as a separate business unit, but subject to the
control of the home office. The home office determines the degree of selfmanagement exercised by the branch.
For internal reporting purposes, transactions between a home office and
its branch are recorded in reciprocal accounts namely:
1. "Investment in branch" account (or 'Branch current' account)

- The home office maintains this account in its books to account for its
investment in the branch.
2. "Home office" account (or 'Home office current ' account)
- The branch maintians this account in its books to account for investment
received from the home office.
The "Investment in branch" is an assets account in the home office's
individual financial statements; while the "Home office" is an equity
account in the branch's individual financial statement. These accounts are
eliminated when combined financial statement are prepared.
The reciprocal accounts are debited(credited) for the following:
Home Office's books:
Branch's books:
Illustration: Accounting for branch operations
Initial investment
1. Home office establishes a branch for an initial investment of P1,000,000 in
cash.

Property carried in branch books-Branch acquisition

2. Branchacquires equipment for P400,000 to be carried in the branch
books.

No entry is made in the home office books. The entry for a subsequent
depreciation of P40,000 on the equipment acquired by branch and
maintained in the branch books is as follows:

Property carried in home office books-Branch acquisition

3. Branch acquires equipment for P200,000 to be carried in the home

office books.

When the branch acquires property to be carried in the home office

books, the acquisition is treated as a reduction to both the "investment in
branch" and "home office" accounts.
The entry for a subsequent depreciation of P20,000 on the equipment
acquired by branch and maintained in the home office books is as
follows:

Property carried in branch books-Home office acquisition

4. Home office acquires furniture for P50,000 to be carried in the branch
books.

Subsequent depreciation of P5,000 on the above furniture is recorded as

follows:

Property carried in home office books-Home office acquisition

5. Home office acquires furniture for P30,000 to be carried in the home
office books, but possesion and use of the equipment is transferred to the
branch.

Subsequent depreciation of P3,000 on the above furniture is recorded as

follows:

Transfer of investment- freight paid by home office

6. Home office transfer inventory worth P150,000 to the branch. Freight paid
by the home office is P10,000

The "Shipments from home office" account is similar to the "Purchases"

account and is used under a periodic inventory system.
The freight is debited to the "Investment in branch" account and credited to
the "Home office" account.
Transfer of inventories- freight paid by branch
7. Home office transfer inventory worth P80,000 to the branch. Freight paid
by the branch is P6,000.

Purchase of inventories- acquisition from outside parties

8. Branch purchases inventory worth P40,000 on account from outside party.
Freight paid by the branch is P2,000.

Revenue
9. Branch makes total sales of P500,000 on account.

Collection
10. Branch collects P400,000 from account receivable.

Remittance to home office

11. Branch remits P300,000 cash collections to home office.

Allocation of expense
Expenses incurred and paid by the branch are recorded in the normal way
Examples of costs which may be allocated to the branch:
a. Cost of maintaining information system.
b. Cost of contracts signed on a company level, e.g., security, pest control,
insurance, advertising, and the like.
c. Depreciation computed under the group or composite method of
depreciation.
d. Other general overhead costs.
12. Branch incurs various operating expenses amounting to P100,000, onefourth of which remains unpaid.

13. Home office allocates P10,000 utilities expense and P4,000 general
overhead costs to the branch.

Individual financial statements

The trial balance of the branch as of this points is shown below:
Dr. Cr.
Cash

Accounts receivable
Shipments from home office
Purchases
Freight-in
Equipment
Accum. Dep. - equipment
Furnature
Accum. Dep. - furniture
Accounts payable
Accrued expenses
Home office
Sales
Depreciation expense
Utilities expense
General overhead expense
Various operating expenses
Totals
Assuming the branch has an ending inventory of P150,000, the branch's
individual statement of profit or loss for the period is shown below:
Sales
COGS:
Inv., beg.
Shipments from H.O.
Purchases
Freight-in
Total goods available for sale
Inv., end.

Gross profit
Dep. Exp.
Utilities expense
General overhead expense
Various operating expenses
Profit for the period
The closing entries are as follows:
14. To close the branch's nominal accounts to the income summary accounts:

15. To close the branch's profit to the reciprocal accounts:

Reconciliation of reciprocal accounts

The "Investment in branch" and the "Home office" accounts must have equal
balances. If these accounts do not balance, reconciliation procedures must
be performed.
Reconciliation items can be broadly classified into the following:
a. Transfers in-transit - at the time financial statements are perpared,
there may be asset transfers between the home office and the branch which
were not yet recorded by the supposedly recipient.
The adjusting entry would be simply a debit to "Shipments from home office,"
and probably to "Freight-in" also, a corresponding credit to "Home office"
account.
b. Unrecorded Debit and Credit memos
A debit memo sent by the home office to the branch means that the home
office has debited(increased) the "Investment in branch" account.
Therefore,the corresponding entry to be made in the branch books is a
credit(increase) to the "Home office" account. The opposite applies to a
credit memo.

***
***
A debit memo sent by the branch to the home office means that the
branch has debited(decreased) the "Home office" account. Therefore, the
corresponding entry to be made in the home office books is a
credit(decrease) to the "Investment in branch" account. The opposite
applies to a credit memo.
***
***
c. Errors
Errors such as omissions in recording, double recording, mathematical
mistakes, and the like can result to imbalance in the reciprocal accounts.
Illustration1. Reconciliation-Adjusted balance
ABC Co. Is currently preparing its combined financial statement. At December
31, 20x1, the home office shows a P156,000 balance in its "Investment in
branch" account while the branch shows a P70,200 balance in its "Home
office" account. The following information has been gathered:
a. The home office shipped merchandise worth P20,000 to the branch during
December 20x1 which the latter has received and recorded only in January
20x2.
b. The home office collected P10,000 accounts receivable on behalf of the
branch. The branch did not yet receive the credit memo sent by the home
office.
c. The bramch returned damaged merchandise worth P30,000 to the home
office. The home office did not yet receive the debit memo sent by the
branch.
d. A remittance of cash collections amounting to P40,000 was not yet
recorded by the home office.
e. The home office allocated overhead cost of P5,000 to the branch which the
latter has recorded twise.
f. Freight charge of P12,000 paid by the home office for shipments of
merchandise to the branch was recorded by the latter as P1,200.
Requirement: Compute for the adjusted balances of the reciprocal accounts.

Unadjusted balances
(a) Shipment in-transit
(b) Collection of receivable
(c) Return of damaged merchandise
(d) Unrecorded remittance
(e) Allocation of cost recorded twice
(f) Mathematical mistake in recording
Adjusted balances
The compound adjusting entries are as follows:

Illustration: Reconciliation- Unadjusted balance

ABC Co., is currently preparing its combined financial statements December
31, 20x1, the home office shows a P182,000 balance in its "Investment in
branch" account. The following information has been gathered during the
reconciliation process:
a. A credit memo sent by the home office to the branch amounting to
P12,000 was not recorded by the branch.
b. A debit memo sent by the home office to the branch amounting to P9,000
was not recorded.
c. A credit memo sent by the branch to the home office amounting to
P20,000 was recordedby the home office twice
d. A debit memo sent by the branch to the home office amounting to P30,000
was recorded by the home office as P3,000
e. The branch sent by mistake a credit memo amounting to P7,000 to the
home office. The home office did not record it.
Requirement: Compute for the unadjusted balance of the "Home office"
account.
Solutions:
***

Home office with several branches

When an entity has more than one branch, separate investment accounts for
each of the branches shall be maintianed in the home office books.
Illustration: Several branches- Unadjusted balance
ABC Co. Has several branches. On December 31, 20x1, the "Home office"
account maintianed by Alpha Branch shows a balance of P145,000. The
following information was determined:
a. The home office charged Alpha Branch for a P15,000 shipment which was
actually sent to Beta Branch and retained by the latter Alpha Branch was not
notified of the intended shipment.
b. The home office charged Charlie Branch for a P16,000 shipment which was
actually sent to Alpha Branch. alpha Branch retained the shipment.
c. The home office erroneously recorded a remittance for P5,000 from its
Delta Branch as coming from Alpha Branch
d. Utilities expense of P4,000 that is allocable to Echo Branch was recorded
by the home office in Alpha Branch's account. Alpha Branch has
inapptopriately recorded to related debit memo from the home office.
Requirement: Compute for the unadjusted balance of the "Investment in
Alpha Branch" account in the home office books.
Solution:

***
Special problems in Accounting for branch operations
In addition to the general procedures discussed earlier, the home office and
branch may enter into some transaction that would create special accounting
problems. Such transactions are the following:
1. Merchardise shipments to branch billed at a price above cost.

2. Inter-ranch transactions.
Shipments to branch billed at a price above cost
Billing to the branch may be made at amounts above cost, or cost plus an
arbitrary percentage, also known as the "billed price." Upon receipt of
shipments, the branch records the merchandise received at the billed price,
rather than at cost.
On the other hand, when shipments are billed at above cost, a portiin of the
gross profit earned by the branch is attributed to the home office.
Illustration:
Shipment at billed price
1. Home office transfer inventory worth P100,000 to the branch. Shipment to
the branch are billed at 120% above cost.

*(100k x 120%)
Shipment at billed price- Freight paid by home office
2. Home office transfer inventory worth P200,000 to the branch. Shipment to
the branch are billed at 120% above cost. Freight paid by the home office is
P10,000.

Shipment at billed price - Freight paid by branch

3. Home office transfers inventory worth P80,000 to the branch. Shipment to
the branch are billed at 120% above cost. Freight paid by the branch is
P6,000.

*(80k x 120%)
Purchase from outside parties
4. Branch purchases inventory worth P40,000 on account from outside party.
Freight paid by the branch is P2,000

Revenue
5. Branch makes total sales od P500,000 on account.

Expenses
6. Branch incurs total expenses of P100,000, P20,000 of which were allocated
by the home office to the branch.

Individual profit of the branch

Assume the branch reports ending inventory of P250,000, inclusive of
capitalized freight-in. The profit in the branch's individual statement of profit
or loss is computed as follows:
Sales
Cost of sales:
Inventory, beg.
Shipment from home office
(120K+240K+96K)
Freight-in(10K+6K+2K)
Purchases
Total goods available for sale
Inventory, end.
Individual gross profit of branch
Operating expenses
Individual profit of branch
Combined financial statement-Shipment at billed price

When combined financial statements are prepared, the markups on

shipments are eliminated in order to restate cost of goods sold and ending
inventory to their original costs. This is performed by eliminating the
"shipment to branch (from home office)" accounts, together with the related
"allowance" account. The "Investment in branch" and "Home office" accounts
are also eliminated.
Illustration: Comprehensive problem
The following information was taken from the records of a branch:
Sales of branch
Billing to branch by home office
Operating expense
Ending inventory at billed price
The following information was taken from the records of the home office:
Branch current account
Shipments to branch
Allowance for markup-Unadjusted
Requirements:Compute for the following:
a. Billing rate based on cost or Markup percentage based on cost.
b. Sales of branch to be included in the combined financial statements.
c. Realized markup.
d. Cost of goods sold of branch to be included in the combined financial
statements.
e. Ending inventory of branch to be included in the combined financial
statement.
f. Unrealuzed markup in ending inventory.
g. Ending balance of the "allowance for markup" account before combining
the financial statement.
h. Individual profit of the branch
i. True profit of the branch

j. Adjusted balance of the branch current account immediately prior to

combining the financial statements.
***
Illustration: Allowance account
The home office consistently bills its branch for shipments at 130% of cost.
During the period, the home office made total shipments of P750,000, at
billed price, to the branch. The "allowance for markup" account had a net
increase of P45,000 after year-end adjustments but before elimination
entries. The individual financial statements of the branch reported gross
profit of P15,000.
Requirements: Compute for the following:
a. True gross profit of the branch.
b. Sales of branch to be included in the combined financial statements.
c. COGS of branch to be included in the combined financial statements.
**
Inter-branch transaction
Inter-branch transfers of assets are accounted for "as if" the asset
transferred went through the home office. The transacting branches
account for the transaction "as if" they are dealing with the home office
rather than with each other.
Inter-branch transfer of cash
The home office instructs Branch #1 to transfer P10,000 cash to Branch #2.
The entries on the respective books of the home office and the transacting
branches are as follows:

Inter-branch transfer of merchandise

Accounted for similarly with inter-branch transfer of cash. However, special
problems may arise on the accounting for freight.

A branch should not be charged for excessive freight caused by indirict

routing. The branch should be charged onlyvfor the normal freight. The
excess freight is charged as an expense in the home office books.