HOME OFFICE, BRANCH AND 2. Transferred cash to agency for 7.

Replenished sales agency petty

AGENCY ACCOUNTING working fund of P8, 750. cash; office expenses, P3, 750; Agency Income 19,5
8,7 travel expenses, 2,000 -Agency 00
Petty Cash – Agency
SALES AGENCY 50 Office Expense – 3,75 Income 19,5
[] Referred to simply as an 8,7 Agency 0 Summary 00
Cash
“agency” usually is not an 50 Travel Expense – 2,00 To close agency income to
autonomous operation but acts Agency 0 Income Summary.
on behalf of the home office. 5,75
Cash
[] The agency may display and 0
[] The Home Office specifically
demonstrate sample 3. Transferred inventory to be used
designates all assets, revenues
merchandise, take orders, and as samples, P12, 500. 8. End-of-period adjusting and and expenses as relating to the
arrange for delivery. 12,5 closing entries.
Inventory – Agency agency. At the end of the period,
[] The orders are typically filled 00 Rent Expense – 25,0 the home office computes the
by the Home Office because Shipment of Agency 00 income of the agency to evaluate
sales agency usually does not Mdse. – 12,5 Dep’n. Exp. – 1,25 operation.
stock inventory. Sales Agency 00 Agency 0 [] The Cost of Goods Sold:
[] A working fund for sales Prepaid Rent – 25,0 -Perpetual-
agency expenses is provided by 4. Paid bills received by home Agency 00 Dr: Cost of Goods Sold –Sales
the Home Office and replenished office for expenses of the sales Accum. Dep’n. – 1,25 Agency (shipments to customers
when exhausted. agency: utilities, P2, 750; Agency 0 of the
[] Merchandise selection, advertising expenses, P2, 000. To record year-end sales agencies)
advertising, granting of credit, Utilities Expense – 2,7 adjustments. Cr: Merchandise Inventory
collection on accounts and other Agency 50 -Periodic-
aspects of operating the business Advertising Exp. - 2,0 Dr: Cost of Goods Sold- Sales
usually are conducted by the Agency 00 Agency (shipments to sales
Home Office. 4,7 agency
[] All transactions involving the Cash 50 customers)
agency are recorded by the
Cr: Shipments of Merchandise –
Home Office. For example, the 137,5
5. Filled sales orders from sales Sales – Agency Sales Agency
Home Office may record agency 00
agency, P137, 500. Cost of sale
transactions based on sales COGS – 62,5
identified with these sales is [] At the end of the accounting
invoices, payroll records and Agency 00
P62, 500.
documented petty cash vouchers period, the account Shipments of
Accounts 137,5 Utilities Exp. – 2,75
provided by a sales agency. Merchandise –Sales Agency is
Receivable 00 Agency 0
[] Other transactions may be deducted from the total
Sales – 137,5 Advertising
recorded based on source beginning inventory and
Agency 00 Exp. – 2,00
documents provided by external purchases to determine the cost
62,50 Agency 0
parties directly to the home COGS – Agency of goods sold available for sale
0 Salaries Exp. – 18,7
office. For example, electricity, by the Home Office for its own
Shipment of Agency 50
water and phone service to the operations.
Mdse. Office Exp. – 3,75
agency might bill the home office Agency 0
– 62,50
directly Travel Exp. – 2,00
Agency 0
Agency 0
Example: Rent Exp. – 25,0
1. Rented space for sales facility, 6. Disbursed payroll for sales
agency, P18, 750. Agency 00
P75, 000. Dep’n. Exp. – 1,25
Prepaid Rent 75,0 Salaries Exp. – 18,7
Agency 50 Agency 0
-Agency 00 Agency Inc.- 19,5
75,0 18,7
Cash Cash Agency 00
00 50
To close agency revenue
and expenses.

BRANCH
[] Used to describe a business
unit located at some distance
from the home office.
[] This unit carries merchandise
obtained from the home office,
generates sales, approve
customer’s credit and make
collections from its customers.
They may also obtain
merchandise from outside
suppliers.
[] The branch makes the usual
warranties with respect to
quality, makes collections of
accounts receivable, and
functions in most respect as an
independent business unit.
[] The cash receipts of the branch
are often deposited in a bank
account and branches expenses
are paid from the imprest cash
fund.
[] Some manufacturing
companies also conduct business
through a comparable system of
operating locations, usually
referred to as “plants”.
Accounting Systems and the
Accounting Entity
[] A Sales Agency usually does
not maintain a financial
accounting system but only
keeps sufficient records to
conduct its business.
[] When separate branch
accounting records are
maintained for internal purposes,
such as responsibility accounting
and performance evaluation, the
accounts of the branches and the
home office must be combined in
preparing external accounting
reports in such a way that the
external financial statements
represent the company as a
single economic enterprise.
[] In preparation of consolidated
financial statements, certain
elimination entries are necessary
to eliminate the effect of inter-
office transactions.
Accounting for Branch
Operations
[] Home Office and Branch are
separate accounting entity, they
maintain separate accounting
systems but they are not
separate legal entity.
[] Each maintains a full set of Note:
books with a complete self- [] INCREASE in Account balance
balancing set of accounts. Each = transfer of asset from the
records its transactions with Home Office to the Branch.
external parties in its own = Branch Profits
accounting system. These [] DECREASE in Account balance
transactions are recorded in the = transfer of asset from the
normal manner and no special Branch to the Home Office.
treatment is needed. = Branch Losses
[] The Home Office and the [] Balance of the Investment in
Branch both must record inter Branch account in the home
office transactions in their office book should be EQUAL to
respective accounting systems. the Home Office Current account
in the branch book, if not,
Reciprocal (Intracompany) reconciliation statement should
Accounts be prepared.
-Intracompany Accounts are [] Reasons for Difference in
reciprocal accounts between the Amounts:
Home Office and the Branch. = (a) time lags regarding
information in the two sets of
- Investment in Branch (books books.
of the Home Office)
Investment in
o Indicates the extent of Baguio 182,5
the home office’s
Branch 00
investment in a particular Shipment
branch through
to
contributions of cash and Baguio 175,0
the transfer of assets to
Branch 00
the branch. Cash 7,500
o Accounting method:
= (b) errors
Equity Method – same
method when accounting Shipment
for Investment in from Home 175,0
Subsidiary. Office 00
o Debit (increase in Freight-in 7,500
account) ; Credit Home
(decrease in account) Office 182,5
- Home Office Current (books Current 00
of the Branch)
o Represents the home
office’s equity in the
branch, and the balance
is shown in place of
owner’s equity in the
separate financial
statements of the branch
prepared for internal
reporting purposes.
o Use to represent the Net
Assets of the Branch.
 - Shipments to Account Where Financial Dayle Company, except that the
Illustrative Entries: Branch/Shipments from Home Title Reporte Statement home office bills merchandise
Dayle Company of Ortigas Office Account d Presentation shipments to the branch at 20%
City established a branch in = nominal accounts; closed Investmen Home Asset on the above cost or 120% of cost.
t in Office SFP of the H.O.
Baguio City. The following are at the end of the period to the Assume further that from the
Branch Books
transactions of the Company and Income Summary account Home Branch Equity on the Ending Inventory of the branch,
its Branch. together with other revenue and Office Books SFP of the P69, 000 came from the home
expenses accounts. Current Branch office. The shipment worth P279,
1. Establishment of a Branch - Freight Costs incurred in Shipment Home Deduction 000 (P232, 500 + 20% mark-up)
“Home Office transfers to the shipping merchandise from the to Branch Office from the goods is recorded as follows:
Baguio Branch P50,000 in cash, home office to a branch become Books available for
new office equipment that costs part of the cost of the branch sale on the I/S Home Office books:
of the H.O.
P25,000 and new store inventory. Investment in
-Account
equipment with a cost of Affected: COS Baguio Branch 279,0
P125,000”. Shipment Branch Addition to the (billed price) 00
Home Office: from books goods Shipment to
Investment in 200,0 Home available for Branch 232,5
Baguio Branch 00 Office sale on the I/S (cost) 00
50,00 of the Branch. Allowance
Cash -Account
0 for
Affected: COS
Office 25,00 Merchandise Shipment to
as they were valued based on the
Equipment 0 Branch- Billed at a Price in Overvaluation of
billed price, not at their cost.
Store 125,0 Excess of Cost branch 46,50
Equipment 00 = The Home Office may prefer inventory 0
Accounting for Shipment of
Shipment from 279,0 To record Shipments to
Home Office 00 Merchandise at Billed Price
Branch: branch at 20% above cost.
Home Office 279,0 [] The Shipment to Branch
50,00
Cash Current 00 Account is credited by the Home
0 Branch books:
To record shipments from Office at COST.
Office 25,00 home office. [] The Shipment from Home
Equipment 0 to bill merchandise to branches NOTE:
Office Account is debited by the
Store 125,0 at cost plus any arbitrary - The Branch does not maintain
branch at BILLED PRICE.
Equipment 00 percentage known as Billed Price. any allowance account.
[] The difference represents the
Home - The Home Office uses special - The result is an
MARK-UP that is credited by the
Office 200,0 account called “Allowance for overstatement in the balance of
Home Office in an account called
Current 00 overvaluation of branch Branch shipment account and
“Allowance for mark-up in branch
inventory” every time inventory”. “Allowance for 2. Shipment to Baguio 232,5
2. Merchandise Shipments to intercompany shipments are sent overvaluation of branch Branch 00
a Branch at Cost to branch at above cost. inventory”, “Deferred Profit”, Allowance for
“Home Office transfers - Reasons for internal transfers of Overvaluation of Branch 46,50
“Unrealized branch inventory
merchandise at cost of P175, 000 merchandise above cost: Inventory 0
profit” or “Unrealized
to its Baguio Branch paying >> Equitable allocation of Shipment from Home 279,0
intercompany inventory profit”.
freight cost of P7, 500. Home income between the various Office 00
[] This allows the Home Office To eliminate Shipments to Branch and
Office uses Periodic Inventory units of the enterprise and to defer recognition of profits on Shipments
System”. efficiency in pricing inventories. intercompany sales until the from Home Office accounts.
- When billings to the branch inventory is sold to external overstatement in the cost of
exceed cost, the profits parties by the branch. Ending Inventory and Beginning
Home Office: determined by the branch will be Inventories.
LESS than the actual profits. Example: -- It will also result to
Branch: - The inventories reported by the Assume the same overstatement in the Branch Cost
branch are overstated in as much transactions during 2011 of of Sales and an understatement
NOTE:
in the reported Branch Net from home office, the Cost. & following the traditional
Income. computation of the realized profit formula.
-- At the end of the period, the may be computed using Two -- On the first year of operations,
Home Office prepares an Approaches: the elimination of the Adjustment Approach:
adjusting entry to correct the Net intercompany shipments requires Branch Net Income XX
Income reported by the Branch Cost of Mark up- the complete elimination of the Add: Realized profit in the beginning
Realiz Goods Sold
and to adjust the Allowance for ed = by Branch X
Rate Allowance for Overvaluation of inventory XX
Overvaluation of Branch Profit (at billed Billed Price Branch Inventory account Realized profit on shipments XX
Rate
Inventory. price) because there is no Beginning Less: Unrealized profit in the ending
Inventory. inventory XX
Home Office Books: Cost of True Branch Net Income XX
Goods
-- The Branch Ending Inventory,
Allowance for Sold by Allowance which is carried at billed price in
Overvaluation of 35,0 Realiz [] Under the Adjustment
ed =
Branch
X
for the Statement of Financial
Branch Inventory 00 Goods Overvaluat Position and in the Income Approach, Net Income is
Profit ion of
Branch Net 35,0 Availab determined by adjusting the
le for Branch Statement, is reduced by P11,
Income 00 Sale Inventory 500 to bring to its actual cost. Branch Net Income for the effect
To record the realization of the of overvaluation of Branch
20% mark-up on merchandise The Realized Profit can also be **Computation of the Net Income inventory due to unrealized
sold by branch. computed using the following of the Branch as far as the Home inventory profits.
method: Office is concerned (True Branch
[=] The adjustment to correct Net Income) may be effected by
Balance of Allow. For
the understatement on the Working Paper when Billings using either the following Overvaluation of Branch
reported Branch Net Income is to Branch are in Excess of approach: Inventory 46,500
called Realized Mark-up. Cost- FIRST YEAR Less: Overvaluation of Branch Ending
Transaction Approach: Inventory
[=] After the entries have been -- The working papers to facilitate Sales XX 69,00
recorded, the Allowance will have Billed Price 0
the preparation of combined Less: Cost and Expenses:
an ending balance of P11, 500 Cost (69,000/ 57,00
financial statements when Beginning Inventory, at Cost XX 120%) 0 11,500
representing unrealized profit in
billings to the branch are in Purchases from outsiders, if any XX Realized Profit 35,000
the ending inventory of the
excess of cost differs from the Shipments from Home Office, at Working Paper when Billings
branch.
previously illustrate working Cost XX to Branch are in Excess of
[=] The Allowance for mark-up in papers because of the inclusion Ending Inventory, at Cost XX Cost- SUCCEEDING YEAR
branch inventory is considered of elimination entries to bring the True Branch Net Income XX -- Since the working papers are
realized upon sale by the Branch Ending Inventory of the Branch to prepared for the first year of
of the merchandise shipment its Cost. [] Under the Transaction operations, no Beginning
from the Home Office. Approach, Net Income is Inventory of the Branch is
Working Paper Elimination determined using the cost of involved. In the succeeding years
[=] The balance of the Allowance Journal Entries inventories and shipments from however, the Beginning
for Overvaluation of branch Home Office after eliminating 1. Home Office 230,0
inventory account is DEDUCTED Current 00
inter-company inventory profits Investment in Baguio 230,00
from the Investment in Branch
Branch 0
account in the Home Office To eliminate Home Office account
statement of financial position & Allowance for Overvaluation of Branch
3. Merchandise Inventory against Investment in Branch account.
and it is eliminated in the Inventory, December 11,5 Realizatio Inventory will exist; thus, it has
Combined statement of financial 31 (I/S) 00 n of 20% Mark -up to be dealt with accordingly.
position. Mdse. Inventory, mark-up on -- To illustrate the treatment of
December 31 11,5 on merchand
merchand ise Beginning Inventory carried by
** With the assumption that the (B/.S) 00
To adjust Branch Ending ise sold 35,0 46,5 shipped the Branch a t the value in
Branch Inventory consists by branch 00 00 to branch excess of Cost, assume that
Inventory from  
entirely of merchandise acquired the Home Office to its actual Adjusted
Balance 11,5
(Ending) 00  
46,5 46,5
00 00
Dayle Company is in its Second
Year of operations (2012).
= In the year 2011, the Ending
Inventory of the Branch that
came from the Home Office is
carried by the Branch at P69,
000, 120% of the cost of P57,
500. This will be the Beginning
Inventory of the Branch for the
current year.
+ During the current year, the
Home Office ships to the Branch
goods billed at P390, 000 and
which cost P325, 000.
= The Branch Inventory at the
end of 2012 amounts P94, 800 at
billed prices, representing cost of
P79, 000 plus 20% mark-up by
the Home Office at the time of
Shipment to Branch.
= On December 31, 2012, the
balance of the Home Office
Current account and Investment
in Branch account is P370, 000.
Billed
Price Cost
Beginning
Inventory 69,000 57,500
Add:
Shipments
from Home 390,00
Office 0 325,000
Available for 459,00
Sale 0 382,500
Less: Ending
Inventory 94,800 79,000
Cost of 364,20
Goods Sold 0 303,500
-- The Allowance included in the
Total Good Available for Sale is
the balance of the Allowance for
Overvaluation account before
adjustment at the end of the
year.
--- The Allowance included in
the Ending Inventory of the
Branch should be the balance of
the Allowance at the end of the
period after adjustment for the Modification of Entries – through its Home Office Current
realized profit. Perpetual account.
>> If the Home Office & Branch = The branches involved in an
Working Paper Elimination maintain the perpetual inventory inter-branch transfer usually
Journal Entries system, the use of the accounts account for the transfer as if they
Shipments to Branch and are dealing with the Home Office
1. Allowance for Shipments from Home Office is rather than with another branch.
Overvaluation of Branch UNNECESSARY.
Inventory 11,500 >> The Shipment of
Merchandise Inventory 11,500 Merchandise to Branch is
To eliminate the mark-up on the branch recorded by the Home Office by
beginning inventory.
DEBITING the Investment in
Branch account at Billed Price, Illustrative Entries:
370,00
and CREDITING Merchandise Dayle Company has two
2. Home Office Current 0
Investment in Inventory account for the Actual branches, one in Baguio City and
Baguio 370,00 Cost & for the DIFFERENCE, the another in Pampanga. Due to
Branch 0 Allowance for Overvaluation of cash shortage in Pampanga
To eliminate Home Office account Branch Inventory account. branch, the Home Office
against Investment in Branch account. >>Upon Receipt of the instructed Baguio branch to send
Merchandise, the Branch DEBITS cash of P250, 000 to Pampanga
3. Shipment to Baguio the Merchandise Inventory branch.
Branch 325,000 account and CREDITS the Home
Allowance for Office account at Billed Price. Home Office Books:
Overvaluation of Branch >> When a Sale is made by the Investment in
Inventory 65,000 Branch, the Cost of Goods Sold Pampanga Branch 250,000
Over- Shipment from Home account is DEBITED & the Investment in Baguio
Office 390,000 Branch 250,000
valuatio Merchandise Inventory account is
To eliminate Shipments to Branch and To record transfer of cash.
n CREDITED.
Shipments from Home Office accounts.
>> At the end of the accounting
11,500 period, the Home Office reduces Baguio Branch books:
4. Merchandise Inventory, 15,80 Home Office Current 250,000
December 31 (I/S) 0 its Allowance for
Cash 250,000
Merchandise Inventory, 15,80 Overvaluation to bring the
To record transfer of cash to Pampanga
65,000 December 31 (B/S) 0 amount of Overvaluation to
branch.
To adjust Branch Ending Inventory relate only to the Ending
from the Home Office to its actual cost. Inventory. The corresponding
76,500 Pampanga Branch books:
CREDIT is to Branch Income Cash 250,000
15,800 -- The working papers for 2012 account. Home Office Current 250,000
are similar to that of working To record receipt of cash from Baguio branch.
60,700 papers in 2011, except for one TRANSACTION BETWEEN
additional elimination entry for BRANCHES [] This procedures does not
the Beginning Inventory. require settlement between the
-- This entry reduces the Inter-Branch Transfers of branches; extent of the
Beginning Inventory of the Cash accountability of a branch insofar
Branch by P11, 500, the amount -- There may be occasions as affiliate units are concerned is
of unrealized profit contained wherein the Home Office may summarized in one account, the
therein. instruct the transfer of Cash from Home Office Current account.
-- The Beginning Merchandise one branch to another branch.
Inventory on January 1 of the = Instead of using special Inter-branch Transfers of
Branch is brought to its Cost. accounts with other branches, a Merchandise
branch will clear such transfer -- Like inter-branch transfers of
cash, branches should not carry
an account with another branch
but should clear the transfer
through its Home Office Current
account.
>> Upon receipt, the branch
receiving the merchandise
DEBITS Shipment from Home
Office and CREDITS Home Office
Current account.
-- In the case of inter-branch
transfers of merchandise, the
handling of freight charges poses
a special problem.
>> Freight on goods received
by the Branch directly from
Home Office are properly
included in the Cost of Branch
Inventory BUT the transfer of
merchandise from one branch to
another does NOT justify
increasing the inventory value by
the additional freight costs
incurred because of indirect
routing.
>> The amount of Freight Cost
properly included in Inventories
at a Branch is LIMITED to the
Cost of Shipping the merchandise
directly from the Home Office to
its present location.
>> EXCESS Freight Cost are
recognized as EXPENSES of the
Home Office. On the other hand,
any reduction in freight is treated
as SAVINGS by the Home Office.
** In preparing the Income
Statement for the Home Office,
the Excess Freight Charge may
be reported as a Subtraction
from the Summary of Branch
Earnings in the lower section of
the statement.
= Excessive freight charges
represent management mistakes
or inefficiencies. Therefore, they
are not considered normal
operating or freight expenses.
** On the Combined Income
Statement, the excess freight
may be reported in the Cost of
Goods Sold, Selling Expense,
General & Administrative Shipment to Pampanga
Expenses section, depending on Branch 18,000
the division of the company that Shipment to Baguio
is responsible for such transfers. Branch 18,000
To record transfer of merchandise.
>> If the Excess Freight results
from a mistake in an order for Investment in Baguio
Branch 19,000
goods by a branch for some other
Excess Freight on Inter-
branch failure, the charge should branch transfer of
be borne by the branch and merchandise. 500
reported on its books. Investment in Pampanga
>> In some cases, if branch Branch 19,500
managers are given authority to To record transfer of merchandise.
order transfers of merchandise
between branches, the excess Pampanga Branch books:
freight costs are recognized as Shipment from Home
expense attributable to the Office 18,000
branches. Freight-in 900
Home Office Current 18,900
To record receipt of merchandise.
Home Office Current 19,500
Shipment from Home
Office 18,000
Freight-in 900
Cash 600
Illustrative Entries: To record transfer of merchandise.
The Home Office of Dayle
Company shipped merchandise Baguio Branch books:
costing P18, 000 to Pampanga Shipment from Home 18,00
Office 0
Branch and paid freight of P900.
Shortly afterward, the Home Freight-in 1,000
Office instructed Pampanga 19,00
Home Office Current 0
Branch to transfer this
To record receipt of merchandise.
merchandise to Baguio Branch.
Freight costs of P600 were paid
**As manifestation of the
by Pampanga Branch to carry out
accounting principle that losses
the order. If the Merchandise had
should be given prompt
been shipped directly from the
recognition, the excess freight
Home Office to Baguio Branch,
cost on merchandise transferred
the Freight Cost could have been
from one branch to another is
P1, 000.
recorded as an EXPENSE.
**The Excess freight cost arising
Home Office books:
from such shipments generally is
Investment in Pampanga
a result of inefficient planning of
Branch 18,900
original shipments and therefore,
Shipment to Pampanga
Branch 18,000 should not be included in the
Cash 900 inventories.
To record shipment of merchandise.