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Home Office, Branch, & Agency Accounting

In pursuit of increased sales, companies extend their businesses into more distant areas.
Selling activities are being conducted at various locations under one and the same home
office. The establishment of an outlying selling unit may take the form of an agency or a
branch office.

Learning Objectives
1. Define Agency and Branch Office
2. Determine accounting procedures for Agencies
3. Determine accounting procedures for Branches
4. Prepare Individual Financial Statements
5. Prepare Combined Financial Statements
6. Reconcile Home Office and Branch Accounts
7. Identify Billing Methods for Merchandise shipped to Branches
8. Account for Inter Branch Transactions

Agency and Branch Office Defined

An agency is an organization in which:

1. No Merchandise Inventory. It is established to display merchandise called samples. It
does not stock merchandise to fill orders. All orders are to be approved by the home
office.
2. No Separate Accounting Entity. It has no separate accounting or business entity. Thus,
all transactions are recorded in the books of the home office.
3. No Complete Set of Books. Although provided with a working fund under the imprest
system, it does not require a complete set of books but only a summary of working
fund receipts and disbursements, and records of sales.

A branch is an organization in which:

1. Has a Merchandise Inventory. It sells goods out of its own stocks, thus making sales
directly to customers.
2. Has a Separate Accounting Entity. It has a separate accounting system similar to the
systems of independent business and can engage in transactions as an independent
business.
 ACCT 108 Accounting for Business Combinations (Apostol, P.A.)
College of Business Studies, Don Honorio Ventura State University
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Accounting for Agencies

1. Establishment of Petty Cash Fund
Working Fund - Agency A xx
Cash xx

2. Shipment of Merchandise to Agency

Samples Inventory xx
Shipments to Agency A xx

3. Purchase of Agency Equipments

Equipment - Agency A xx
Cash xx

4. Payment of Salaries to Employees

Salaries Expense - Agency A xx
Cash xx

5. Filling-up of Orders by the Home Office

Accounts Receivable xx
Sales - Agency A xx

6. Payment of Expenses out of PCF

*No entry*

7. Adjusting Journal Entries

a. To record Cost of Goods Sold

Cost of Goods Sold - Agency A xx
Shipments to Agency A xx

b. To record Depreciation
Depreciation Expense - Agency A xx
Accumulated Depreciation xx

c. To replenish the working fund (PCF)

Expenses - Agency A xx
Cash Shortage/Overage xx
Cash xx

d. To adjust the Net Realizable Value of the samples

Advertising Expense xx
Samples Inventory - Agency A xx
 ACCT 108 Accounting for Business Combinations (Apostol, P.A.)
College of Business Studies, Don Honorio Ventura State University
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8. Closing Entries

a. To close the revenue account

Sales - Agency A xx
Income Summary - Agency A xx

b. To close the CGS account

Income Summary Account - Agency A xx
Cost of Goods Sold - Agency A xx

c. To close expense accounts

Income Summary Account - Agency A xx
Various Expense Accounts - Agency A xx

d. To close Agency Income Summary

Income Summary - Agency A xx
Income Summary xx

NOTE: Shipments to Agency account is deducted from the Merchandise Inventory of the
Home Office.

HO Beginning Inventory xx
Purchases xx
Shipments to Agency (xx)
HO Ending Inventory (xx)
HO Cost of Goods Sold xxx

Determining the Net Income of Agency

Filled-up Sales xx
Cost of Goods Sold (xx)
Gross Profit xxx
Expenses (xx)
Samples USED (xx)
Net Income xxx

NOTE: Samples are only expensed if used.

 ACCT 108 Accounting for Business Combinations (Apostol, P.A.)
College of Business Studies, Don Honorio Ventura State University
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Problem I
Baguio as a Friend (BAAF) Company established several agencies located in different
locations within the city. In September 2021, samples amounting to 75,000 were sent by the
home office to Baguio Agency. The net realizable value of the samples amounted to 70,000.
The agency uses a small office for which the annual rent amounting to 600,000 is payable at
the beginning of the year. Goods costing 500,000 were sold during the month with a gross
profit based on sales of 20%. How much is the net income for the month of September?

Problem II
In March 01, 2021, Register to Vote (RTV) Company established an agency in Villa de Bacolor,
sending its merchandise samples costing 930,000 and a working fund of 1,000,000 to be
maintained on the imprest basis. The agency transmitted to the home office sales orders that
cost 8,250,000. However, the home office was able to fill up only 80% of the orders. Total cash
of 4,050,000 was collected from the customers. A home office disbursement chargeable to
the sales agency includes the acquisition of furniture and fixtures for Villa de Bacolor,
1,550,000 to be depreciated at 18% per annum. The agency paid expenses of 420,000 and
received replenishment thereof from the home office. The agency samples are good for
fifteen months. It was estimated that the gross profit in goods shipped to bill agency sales
orders averages 25%. How much is the net income of the agency in 2021?

Accounting for Branches

The branch account system is maintained at the branch. The branch keeps the books of
original entry and posts to ledger accounts. Financial statements are prepared by the branch
periodically and are submitted to the home office.

Reciprocal Accounts
1. General Accounts
a. Investment in Branch or Branch Current
This is an asset account that is maintained by the Home Office. It is debited for
cash, goods, and services transferred to the branch and to record branch
income. It is credited for remittances from the branch and to record branch
losses.

b. Home Office Current

 This is an equity account that is maintained by branch offices. It is credited for
cash, goods, and services received from the home office and for profits
resulting from branch operations. It is debited for remittances made by the
branch and for losses from branch’s operations.

2. Specific Accounts
a. Shipments to Branch
This account is recorded in the books of the home office with a credit normal
balance. It is a reduction from Cost of Goods Available for Sale (COGAS).

ACCT 108 Accounting for Business Combinations (Apostol, P.A.)

College of Business Studies, Don Honorio Ventura State University
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b. Shipments from Home Office

This account is recorded in the books of the branch office with a debit normal
balance. It increases the Cost of Goods Available for Sale (COGAS).

Pro-Forma Journal Entries

Home Office Books Branch Books

1. To record transfer of Merchandise to Branch
Investment in Branch Shipments from Home Office Shipments to
Branch Home Office Current

2. To record transfer of Cash to Branch

Investment in Branch Cash
Cash Home Office Current

3. To record sales of Branch

No Entry Accounts Receivable
Sales

4. To record collection from Branch’s Sales

Cash Home Office Current
Investment in Branch Accounts Receivable

5. To record payment of Branch’s Expenses

Investment in Branch Expense
Cash Home Office Current

Depreciable branch assets are normally carried in the books of the home office.

6. To record purchase of depreciable asset by the home office for the branch
Depreciable Asset - Branch No Entry
Cash
 7. To record purchase of equipment by the branch office
Depreciable Asset - Branch Home Office Current
Investment in Branch Cash

8. To record closing entries

Investment in Branch Income Summary
Income Summary Home Office Current

ACCT 108 Accounting for Business Combinations (Apostol, P.A.)

College of Business Studies, Don Honorio Ventura State University
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Problem III
Sinoback Company established its first branch in Pampanga on January 01, 2021. The
following transactions in the branch office during 2021 are as follows:
● Received cash of 100,000 from the home office.
● Purchased equipment with a five-year life for 20,000 cash. A company policy states that
all fixed assets are to be maintained in the books of the home office. ● Received
merchandise shipments from home office amounting to 32,000. ● Purchased
merchandise from outside suppliers for 8,000.
● Sold merchandise for 60,000 on account.
● Half of the receivable were collected by the home office
● Returned 2,000 of the merchandise acquired from the home office. ● Paid 12,000
salaries; 2,000 utilities; 6,000 rentals; and 4,000 miscellaneous. ● The remaining receivable
was collected and remitted 30,000 to the home office. ● Salaries still payable at year-end
were 2,000 and depreciation expense for equipment was 4,000.
● Inventory at year-end consisted of 2,000 acquired from outside suppliers and 10,000
acquired from home office.

Requirement: Journalize the above transactions. Determine the balance of Home Office
Current, Branch Current, and the Net Income of the Branch.

Preparation of Separate and Combined Financial Statements

Separate Financial Statements may be prepared for the home office so that management
will be able to appraise the results of its operations and its financial position. However, it is
important to emphasize that separate financial statements of branches are prepared for
internal use only. Though separate statements offer significant information to home office
and branch officials, such statements must be complied fully stating a company’s financial
position and the results of its operations. In combining branch data with home office data,
the elimination of reciprocal accounts is necessary.

Working Paper Elimination Entries

These are not posted in the books of both home office and branch offices. They are done
merely to combine separate financial statements by eliminating reciprocal accounts. 1.
Elimination of General Accounts
Home Office Current xx
Branch Current xx
2. Elimination of Specific Accounts
Shipment to Branch xx
Shipments from Home Office xx

ACCT 108 Accounting for Business Combinations (Apostol, P.A.)

College of Business Studies, Don Honorio Ventura State University
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Problem IV
Individual Income Statement HO BR
Sales 95,000 60,000 Cost of Goods Sold 75,000 26,000 Inventory, Beg
40,000 0
Purchases 90,000 8,000 Shipments to Branch 30,000
Shipments from HO 30,000 Inventory, End 25,000 12,000 Operating
Expenses 10,000 30,000 Net Income - HO 10,000
Branch Income 4,000 4,000 Net Income 14,000

Individual Balance Sheet HO BR

Cash 105,000 18,000 Inventory 25,000 12,000 Non-current Asset 150,000
Accumulated Depreciation 10,000
Branch Current 30,000
Accounts Payable 60,000
Capital Stock 150,000
Retained Earnings 90,000
Home Office Current 30,000 Requirement: Prepare the Combined

Financial Statements

Reconciliation of Reciprocal Accounts

Ordinarily, the balances of the reciprocal accounts should always be equal. However, they may
not show identical balances on some occasions because certain interoffice data that have
been recorded by one office is not recorded in another. The possible are the factors for such
differences:
1. Due to Timing Differences
- Home Office Initiated. Adjust Branch’s Book
- Branch Office Initiated. Adjust Home Office’s Book
2. Due to Errors
- Home Office Errors. Adjust Home Office’s Book
 - Branch Office Errors. Adjust Branch Office’s Book

ACCT 108 Accounting for Business Combinations (Apostol, P.A.)

College of Business Studies, Don Honorio Ventura State University
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Problem V
Jay n Jay Company established a branch in Pampanga on April 01, 2021. Transactions of home
office and branch for the year are as follows:
● Transferred goods costing 750,000 and 60,000 cash to the branch to finance its
operations.
● On April 02, 2021, the home office purchased in cash a furniture for the use of the
branch amounting to 85,000. Records of fixed assets are kept in the books of the
home office. The branch debited the Furniture and Fixture and credited the Home
Office Current account upon receipt of the asset. The asset has a useful life of 5 years.
● Branch purchased a machine with a useful life of 3 years for 120,000 on July 01, 2021. A
debit to Office Equipment and credit to Cash was made by the branch. The home
office, on the other hand, debited Office Equipment and credited Branch Account.
● The branch recorded the depreciation of the equipment by charging Depreciation
Expense and crediting Accumulated Depreciation. Meanwhile, the home office
prepared the correct entries for the depreciation.
● Sales of the branch office, all on account, amounted to 800,000 with a gross profit
based on sales of 25%.
● 80% of the sales were collected during the year. 60% of the collection was remitted to
the head office. The home office has not recorded the cash remittance. ● Branch’s cash
expenses amount to 135,000. Of which, 50,000 was paid by the home office on behalf of
the branch.
● Closing entries were not yet prepared.

Requirement:
1. How much is the unadjusted balance of Branch Current?
2. How much is the unadjusted balance of Home Office Current?
3. How much is the Net Income of the branch?
4. How much is the adjusted balance of the general reciprocal accounts after closing
entries were made?

Billing Methods for Merchandise Shipped to Branch

There are three alternative methods available to the home office for billing merchandise
shipped to its branches. The shipments may be:
1. At home office cost (at original cost)
 2. At billed price (at original cost plus mark-up based on cost)
3. At branch’s retail selling price (mark-up based on billed price)

Billing at a Price in Excess of Cost, at Billed Price (Original Cost plus Mark-up based on
Cost)
● Billed at 120% of cost - Billed Price is 120% (MU is 20%)
● Billed at 120% above cost - Billed Price is 220% (MU is 120%)

ACCT 108 Accounting for Business Combinations (Apostol, P.A.)

College of Business Studies, Don Honorio Ventura State University
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Billing at above cost overstates the Cost of Goods Sold and understates the Net Income of the
branch. The pro-forma entries to record transactions for the home office and branch are the
same as when the merchandise is shipped at cost, except:

Home Office Books Branch Books

1. To record transfer of Merchandise to Branch
Investment in Branch (at BP) Shipments from Home Office Shipments to Branch (at
cost) Home Office Current Allowance for Overvaluation

2. To record closing entries

Investment in Branch Income Summary
Income Summary Home Office Current

Allowance for Overvaluation

Income Summary

3. Working Paper Elimination Entries

Home Office Current
Investment in Branch

Allowance for Overvaluation

Merchandise Inventory

Allowance for Overvaluation is a contra asset account, i.e., a contra Investment in Branch
(Branch Current) Account. Note that in this scenario, the Shipments to Branch will not be of
the same amount with the Shipments from Home Office.

Allowance for Overvaluation

Beginning Balance
 + Shipments from Current Year

= COGAS of the HO (Unadjusted Balance)

- Realized Profit (CGS Adjustments)

= Ending Balance

ACCT 108 Accounting for Business Combinations (Apostol, P.A.)

College of Business Studies, Don Honorio Ventura State University
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Billed Price Cost Allowance

Beg Bal. xx xx xx

+Shipments xx xx xx

=COGAS xxx xxx xxx ← Unadjusted Balance

- End Bal. (xx) (xx) (xx) ← Adjusted Balance

=CGS xxx xxx xxx ← Realized Profit

Problem VI
Novax Company have the following account balances on its home office books and its branch
in the year 2021:
Home Office Branch Office
Inventory, Jan 1 2,000,000 ?
Shipments 900,000 990,000
Inventory Allowance 130,000
Inventory, Dec 31 300,000 220,000
Sales 2,000,000 1,800,000
Operating Expense 400,000 150,000

Requirement: Journalize the shipment of merchandise at billed price. Determine the

mark-up, beginning inventory of the branch, net income of the branch, and the
combined net income to be presented in the published statements.

Problem VII
In the year 2021, Astra Company shipped goods to its branch with a mark-up of 120% above
cost. The reciprocal account in the income statement of the home office amounted to
237,500. The balance of the contra branch current account reports a balance of 375,000 before
adjustment. The beginning inventory of the branch from the home office at cost is 360,000
and from outsiders 93,000. The branch purchases goods from outsiders during the year
amounting 125,200. The ending inventory of the branch is reported in the combined balance
sheet as 345,000, 20% of which is purchased from outside suppliers.

Requirement: Prepare the entries when the merchandise is shipped at billed price.
Determine the COGAS and the CGS for the year ended 2021 reported in branch books .

ACCT 108 Accounting for Business Combinations (Apostol, P.A.)

College of Business Studies, Don Honorio Ventura State University
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Problem VIII
Modern Company bills its branch for merchandise shipments at 150% of cost. The following
are the account balances on the books of the home office and its branch as of December 31,
2021.
Home Office Branch Office
Inventory, Jan 1 1,850,000 612,500 Shipments from HO 3,375,000 Purchases
5,405,000 280,000 Freight-in 380,000 165,000 Shipments to Branch
2,250,000
Allowance for Overvaluation 1,300,000
Sales 6,480,000 4,295,000 Operating Expenses 1,472,500 1,345,000
Inventory, Dec 31 1,400,000 1,710,000 Inventory, Dec 31 from OS 187,500

Requirement: Prepare the entries when the merchandise is shipped at billed price.
Determine the mark-up in the previous year, net income of the branch, and the
combined net income to be presented in the published statements.

Inter Branch Transactions

These involve at least two branches transacting between one another. These are recorded as
if branches are transacting with the home office. Loss on Inter Branch Transfer of Inventory,
which arises due to freight cost, are reported as other expenses. Freight costs are to be
included in the branch inventory. Generally, the home office’s entry is just simple:

Investment in Branch - Branch A xx

Investment in Branch - Branch B xx

Formula to compute the Loss on Inter Branch Transfer of Inventory

Initial Freight xx
Additional Freight xx
Should-be Freight (xx)
Loss xxx

Journal Entry in the Home Office’s Books

Branch Current - (Receiving Branch ) xx
Loss/ Other Expense xx
Branch Current - (Transferring Branch) xx
 ACCT 108 Accounting for Business Combinations (Apostol, P.A.)
College of Business Studies, Don Honorio Ventura State University
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Problem IX
The following pertains to Sino Home Office’s transactions with its branches: ● On October 01,
2021, Sino Home Office transferred 30,000 cash to Vac Branch. ● The following day, Vac
Branch was authorized by Sino Home Office to send 10,000 of Cash to Pharm Branch.
● On November 01, 2021, the home office shipped goods costing 350,000 to Vac Branch.
Freight costs of 5,000 is paid by the home office.
● Sino instructed Vac to transfer ½ of the goods to Pharm. Vac paid freight of 3,000.
Shipping cost of 4,000 should have been incurred had the goods been shipped
directly to Pharm.

Requirement: Journalize the above transactions. How much is reported as other expenses
related to inter branch transfer of goods?

Problem X
Physer Company has the following transactions with its branches, namely Wanshat Branch
and Tushat Branch. Merchandise shipments to the branches are billed at 25% above its cost. ●
Home office shipped merchandise to Wanshat costing 250,000; and cash of 150,000 to
Tushat.
● Upon instruction from home office, Tushat effected a fund transfer of 100,000 to
Wanshat.
● Tushat collected Wanshat’s accounts receivable of 110,000 less 2% discount. ● Tushat
paid 200,000 representing the travel expenses of its CFO. Of the amount paid, 50% was
charged to the home office and 20% to Wanshat.
● Wanshat paid accounts payable of the home office and that of Tushat’s amounting to
30,000 and 20,000, respectively.
● Home office shipped merchandise to Tushat with a total billed price of 200,000. The
home office paid freight of 5,000, while the receiving branch paid an additional 500. ●
Home office subsequently instructed Tushat to reship ½ of the goods to Wanshat.
Additional 1,000 freight was paid by Tushat. Had the goods been shipped directly from
the home office to Wanshat. The freight would have been only 3,000.

Requirement: Journalize the above transactions. Determine the balances of the following
1. Branch Current - Wanshat
2. Branch Current - Tushat
3. Loss on Inter Branch Transfer of Inventory

Reference/s
● Millan, Z.V. (2021). Accounting for Special Transactions (Advanced Accounting 1). ●
Dayag, A.J. (2021). Advanced Financial Accounting. Good Dreams Publishing. ●
Guerrero, P., Peralta, J.. (2017). Volume 2 Advanced Financial Accounting.

ACCT 108 Accounting for Business Combinations (Apostol, P.A.)

College of Business Studies, Don Honorio Ventura State University