BSA 26C

I. Chapter 13 – Home Office

and Branch Accounting:
General Procedures

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 Agency vs Branch
AGENCY
• Established to display merchandise;
• Does not stock merchandise to fill
customer’s orders;
• Merchandise orders obtained are
sent to the HO for approval;
• Normally provided with a working
fund;
• Has no separate accounting or
business entity
• Transactions are recorded in the
books of the HO
BRANCH
• Sells goods out of stock that it
maintains;
• Possesses the authority to engage in
transactions as an independent
business;
• Makes sales to customers, passes on
customer credit, collects
receivables, incurs expenses and
performs other functions normally
associated with the operations of a
separate business enterprise;
• Has a separate branch of accounting
system similar to the systems of
independent businesses.
 Agency vs Branch
AGENCY
• Imprest fund system
• Transactions are recorded in the books
of the HO:
• Accounting records not separate from the
HO
• Accounting records separate from the HO
• If not separate:
• The I/S reports the results of combined
operations.
• If separate:
• There is a separate sales revenue and
expense accounts
• Supplementary record of the CGS by each
sales unit
• Shipment to Agency account balance are
subtracted from the sum of the HO
beginning inventory and purchases in
determining the merchandise available for
HO sales – to determine CGS identified with
HO sales.
• BI + P – STA = MAFHOS – EI = CGSHOS
BRANCH
• Subject to control by the HO;
• All the branches shall apply the
general policies and standards by the
business;
• A branch’s cash and merchandise and
such other assets as maybe needed
are supplied by the HO;
• The branch may purchase
merchandise from outsiders for goods
not available from the affiliated unit;
• Generally the branch accounting
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 HO.
 Branch Accounting: Reciprocal Account
Home Office Current (maintained by Branch Current/Investment in Branch
the branch): (maintained by the HO):
• Takes the place of the customary • The reciprocal account which is
capital accounts. maintained by the HO.
• It is a quasi-ownership account • A noncurrent asset
equity that shows the net investment
by the HO in the branch.
• Indicates the extent of the
accountability of the branch to the
HO
• The Branch Income Summary
account is closed to Income
Summary account which will
eventually be disposed to the HO
Current Account
 Branch Accounting: Reciprocal Account
Branch keeps: Home Office keeps:

 Home Office Current Account  Branch Current or Investment in

Branch
 Home Office Current Account (maintained by the
branch)
Debited when: Credited when:

• For remittances made by the branch • Cash, goods or services are received
to the HO; and from the HO; and
• For losses from operation. • For profits resulting from branch
operations.
 Branch Current/Investment in Branch Account
(maintained by HO)
Debited when: Credited when:

• Cash, goods or services transferred • For remittances from the branch or

to the branch; and other assets received from the
• For branch income. branch; and
• For branch losses.

 Reflects the equity method of accounting;

 A separate Investment account is generally maintained by the
HO for each branch;
 Property, Plant and Equipment Used by the Branch
• Depreciable branch assets are normally carried on the HO books (for
uniform application of depreciation and for insurance purposes)

HO Books Branch Books

If HO purchased equipment for the Branch:
Equipment -Branch XXX No entry.
Cash/AP XXX
If the branch will purchase the equipment:
Equipment-Branch XXX Home Office Current XXX
Branch Current (or Cash/AP XXX
Investment in Branch) XXX
 Expenses Incurred by the HO but Charged to Branch
• Branches are notified;
• Such charges are recorded in the branch books; the branch income
statement should provide complete summaries of the operations;
• Immediately chargeable to the branches: taxes and insurance paid by the HO
on branch assets;
• Other charges resulting in benefits that are not directly identified with
certain branches (advertising), charged periodically to the branches using
equitable basis;
• The HO may charge the individual branches for interest on the WC and rent
on the properties and equipment transferred to the branches.
- the branch will charge these as expense items; the HO will report
corresponding revenue.
 Billing Methods for Merchandise Shipped to Branch
• Three (3) methods:

1st method: At HO cost (at original cost);

2nd method: At billed price or a percentage above HO cost

(original cost plus mark-up based on cost), or

3rd method: At the branch’s retail selling price (mark-up based

on billed price)
 Preparation of Branch and HO Statements

• Separate FS may be prepared (for internal use only);

• The branch prepares a balance sheet and an income statement;
Shipments from HO is added to the BI and Purchases to show
the MAFS by the branch.
• The HO also prepares statements. The Shipments to Branch will
appear as a deduction from MAFS.
• The Income Statement – HO will show the Net Income/Loss
from own operations. Add/(deduct) Branch Net Income/(loss),
then the result is the Net Income.
 Preparation of Combined Statements

• Stockholders, creditors and taxing authorities require combined

statements;
• In combining of data, elimination of certain reciprocal interoffice
items is necessary;
• Combined Balance Sheet – eliminate HO account and the
Branch Current/Investment in Branch account
• Combined Income Statement – eliminate Shipments from
HO and Shipments to Branch accounts
• Other interoffice revenue and expense items are also
eliminated
 Reconciliation of Reciprocal Accounts

• The balances of the reciprocal accounts should always be equal;

• The lack of agreement between the reciprocal ledger account

balances causes no difficulty during an accounting period, but at
the end of each period the reciprocal account balances must be
brought into agreement before combined FS will be prepared.
Thank you