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 companys 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 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 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 customers
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 systemNetfor
Agencies
Income not determined
Net 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

separately

Transactions of the sales

agency are recorded
in the HOs 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
Pxx
Add: Purchases
xx
Total
xx
Less: Shipment of Mdse. Tarlac
Cost of Gds available for sale by
HO for its own operations.
Pxx
==

xx

A working fund
established.

Working Fund-Cebu xx
Cash xx

Shipped mdse. to
agency for use
as samples

Samples Invty Cebu xx

Shipments to Agency

Fill sales orders from

Cebu Agency
Cost of Goods sold
identified with Cebu
sales

xx

Accounts Recble xx
Sales - Cebu 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

Sales Cebu
expenses a/c

xx

Close Cebu agency

Cebu Agency Income
Income to Income
Summary a/c
Income Summary

xx

Cost of Sales Cebu

Various Exp a/c Cebu

xx
xx

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
Branch
Asset transfer Asset
transfers
to Branch
from
branch
Branch profit
Loss

Branch

Branch Books
Home Office
Asset transfer Asset
transfers from
Branch
to branch
Branch loss
profit

Branch

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
Office Equipment
20,000
(Branch)
Cash
P100,000
Office Equipment20,000
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

Shipment to Cebu Branch

P80,000
P80,000

(Cebu Branch)

Shipment from Home Office

Home Office P80,000

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
offices 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 branchs costs of goods
sold as an addition to purchases; it
increases the branchs total goods
available for sale.
The home offices Shipment to Branch a/c
and the branchs 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 P80,000
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:

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
Branch
Cash
No entry for depreciation

(Branch)

Office Equipment
Home Office
Depreciation Expense
Accum Depreciation

Branch Plant Assets

Recorded in HO Books
HO purchased branch plant
asset
(HO)

Office Equipt CebuBr

Cash
Depreciation Expense
Off Eqpt,Cebu Branch
Accum. DepreciationOff Eqpt,Cebu Branch
(Branch)

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 EquipmentCebu
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 Expense
Depreciation Exp
Advtng Expense
Home Office

Investment in Cebu
Branch
Debit:
Credit:
Cash sent to branch
Mdse shipped to
Cebu Branch
Operating
expenses
charged to Cebu
branch
Cebu branch
income

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

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 Branch

Income Statement

Sales
P 150,000
Cost of Sales:
Shipment from H O P100,000
Inventory, Dec 31 40,000
60,000
Gross income
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 saleP380,000
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 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 (P1,540P1,450) The HO entry is assumed to
be correct.

Adjusting entries:

1. Shipments from HO In transit

P20K
Home Office
P20K
2. Home Office
P5K
Accounts 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
to Branch still in
transit
4) Recble of HO
collected
by branch
Total
Deductions:
2) Receivable of
branch
collected by home
office
3) Office
equipment
purchased by
branch
5) Error made by
branch in recording
expenses

(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)
=========