ACC132 Home Office and Branch Accounting

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

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 HO’s 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

Inventory Accounting for

Sales Agency in HO books

Perpetual System:

COGS - Sales Agency xxx

Merchandise Inventory xxx

Periodic System:

COGS - Sales Agency

Shipments of Merchandise – Sales Agency

Under the periodic system, the Shipments of

Merchandise - Sales Agency is deducted from HO’s

Inventory Accounting for

Sales Agency in HO books

Fixed Asset Transfers:

Appropriate Asset Account - Sales Agency 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.

Sales Agency: Illustration

Transactions

Working Fund - Bacolod Agency 18,000

Cash 18,000

Samples Inventory - Bacolod Agency 3,800

Shipments to Agency 3,800 Accounts Receivable 162,000

Sales - Bacolod Agency 162,000 COGS - Bacolod Agency 108,000

Shipments to Agency 108,000 Rent Expense - Bacolod Agency 5,000

Office Supplies Expense - Bacolod Agency 3,000 Salaries Expense - Bacolod Agency 6,400

Cash 14,400

Sales - Bacolod Agency 162,000

COGS - Bacolod Agency 108,000 Rent Expense - Bacolod Agency 5,000 Office Supplies Expense - Bacolod Agency 3,000

COGS identified with agency sales, P108,000 (periodic system)

Replenishment of working fund with agency for the following expenses: Rent, P5,000; Office Supplies, P3,000; Salaries, P6,400

Close revenue and expense accounts of the agency

Home Office Books

Shipped merchandise to Bacolod Agency for use as samples - P3,800 Working fund of P18,000 is established

Fill sales orders from Bacolod Agency, P162,000

Branch Accounting

•  Reciprocal Accounts

•  Journal entries on the books of Branch

and Home Office

•  Combined Financial Statements

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

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

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

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);

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

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.

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.

Reciprocal Ledger Accounts

Investment in Branch (Home Office books)

Home Office (Branch books) •  Asset transfers to branch •  Branch profit •  Asset transfers to branch •  Branch profit •  Asset transfers from branch •  Branch loss •  Asset transfers from branch •  Branch loss

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.

Illustration

Home Office Journal

Entries Mason Branch Journal Entries

Investment in Mason Branch 1,000

Cash 1,000

Cash 1,000

Home Office 1,000

• Cash of $1,000 was forwarded by the

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 branch’s 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

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 Branch 60,000

Inventories 60,000

Inventories 60,000

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.

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

Acquisition of Fixed Assets

Used in Branch

If a fixed asset is acquired by the home office for a branch’s usage and the accounting

record for the fixed asset is maintained by the home office, the accounting treatments are:

Home Office Journal Entries Branch Journal Entries

Fixed Asset – Branch

Cash or Liability Account

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 Branch Journal Entries

Fixed Asset – Branch

Investment in Branch

Home Office

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 Branch Journal Entries

Investment in Branch

Cash/Liability Account

Fixed Asset Account

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 Mason Branch Journal Entries

Equipment - Mason Branch 500 Investment in Mason Branch 500 Home Office 500 Cash 500

•  Credit sales by Mason Branch amounted to $80,000; the branch’s cost of the merchandise sold was $45,000

Home Office Journal Entries Mason Branch Journal Entries

None Accounts Receivable 80,000 Sales 80,000 Cost of Goods Sold 45,000 Inventories 45,000

Illustration

Illustration

› Collections of trade accounts receivable

by Mason Branch amounted to $62,000.

Home Office

Journal Entries Mason Branch Journal Entries

None Cash 62,000

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.

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)

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 Branch Journal Entries

Investment in Branch Expense Account

Expense Account Home Office

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

Illustration

• 

Payments for operating expenses

by Mason Branch totaled $20,000.

Home Office Journal

Entries Mason Branch Journal Entries

None Operating

Expenses 20,000

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

Investment in

Mason Branch 37,500

Home Office 37,500

Illustration

› 

Operating expenses incurred by the home

office and charged to Mason Branch

totaled $3,000.

Home Office Journal

Entries Mason Branch Journal Entries

Investment in Mason Branch 3,000 Operating Expenses 3,000 Operating Expenses 3,000 Home Office 3,000

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.

Recognition of Branch

Income or Loss

Home Office Journal

Entries Branch Journal Entries

Investment in Branch Branch Income

Income Summary Home Office

Comprehensive Illustration

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

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

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.

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.

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

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

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

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.