CHAPTER TWO

2. AGENCY AND PRINCIPAL; HEAD OFFICE AND BRANCH

Distinguishing Agency and Branch
An agency relationship refers a contract under which one or more persons (the principals) engage
another person (the agents) to carry out some service on their behalf that involves delegating
some decision making authority to the agent.
Branch is a business unit located at some distance from the home office. This unit carries
merchandise, makes sales, and makes collections from its customers.
4.2 Accounting for Sales Agency
The term sales agency sometimes is applied to a business unit that performs only a small portion
of the functions traditionally associated with a branch.
 A sales agency usually carries samples of products but does not have inventory of
merchandise
 Orders are taken from customers and transmitted to the home office, which approves
customers’ credit and ships the merchandise directly to the customers
 Accounts receivables are managed by the home office
 An imprest cash fund is maintained at the sales agency for payment of operating
expenses
 Hence, no need for complete accounting records at a sales agency other than a record of
sales to customers and a summary of cash payments supported by vouchers
 Separate revenue and expense accounts may be opened by the home office for each sales
agency so as to measure its profitability
 Subsidiary ledger accounts may be used to control fixed assets and cost of goods sold by
sales agencies
Illustration: Journal Entries for a Sales Agency
Journal entries required at the home office in connection with a sales agency (Shashemene
Agency), assuming the perpetual inventory system is used:
PRINCIPAL
JOURNAL ENTRIES FOR SHASHEMENE AGENCY TRANSACTIONS
Inventory Samples: Shashemene Agency 1,500
Inventories 1,500
To record merchandise shipped to sales agency for use as samples

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 Imprest Cash Fund: Shashemene Agency 1,000
Cash 1,000
(To establish imprest cash fund for sales agency)

Trade Accounts Receivable 50,000

Sales: Shashemene Agency 50,000
(To record sales made by sales agency)

Cost of Goods Sold: Shashemene Agency 35,000

Inventories 35,000
(To record cost of merchandise sold by sales agency)

Operating Expenses: Shashemene Agency 10,000

Cash 10,000
(To replenish imprest cash fund (several checks during the period)

Sales: Shashemene Agency 50,000

Cost of Goods Sold: Shashemene Agency 35,000
Operating Expenses: Shashemene Agency 10,000
Income Summary: Shashemene Agency 5,000
(To close revenue and expense accounts to a separate income summary ledger account for a
sales agency)

Income Summary: Shashemene Agency 5,000

Income Summary 5,000
(To close net income of sales agency to Income Summary ledger account)

Branches and Divisions

Branches and divisions are separate economic and accounting entities from their home office.
However, they are not separate legal entities from their home office.
Branch: a business unit located at some distance from the home office. This unit carries
merchandise obtained from the home office, makes sales, approves customers’ credit, makes
collections from its customers, and remits cash received.
Divisions: a segment of a business entity which generally has more autonomy than a branch.
Accounting for a division not operated as a separate corporation (i.e., subsidiary company) is
similar to that of branches. Accounting for a division operated as a separate corporation is
different from that of branches and consolidated financial statements are required for these
business organizations.

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Start-up Costs of Opening New Branches
Based on Statement of Position 98-5 (SOP 98-5) “Reporting on the Costs of Start-up
Activities”, 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.
1.2. Types of Branches
Branches may be classified as under from the accounting point of view:
1. Inland Branches
2. Foreign Branches

1. Inland Branches
The branches opened in the different parts of the nation, where the original undertaking being
registered are called inland branches. These types of branches are also called home branches or
national branches. There are two types of inland branches, which are:
A. Dependent branch
B. Independent branch

A). Dependent Branch

Dependent branches are the branches that do not keep their records but all the records are
maintained by head office. They are not authorized to act solely without the prior permission of
the head office. All the plans, policies, rules and regulations of these branches are totally
formulated and executed by the head office. In other words, all the functions of dependent
branch are totally controlled by head office.
Under dependent branch, two types of branches are included, which is termed as service branch
and retail branch.
* Service Branch: All the branches which are booking or executing orders on behalf of head
office are called service branches. These are the branches which are busy in execution all the
orders for the sake of head office.
* Retail Branch: Retail branches are also dependent branches, but they are concerned with the
head office for selling goods, produced by the head office itself or purchased from outside in a
bulky position and are sent to the retail selling branches for selling them out as like.
b). Independent Branch
The branches that can keep their accounts themselves and sell goods that are sent by the head
office as well as those purchased by them are known as independent branches. These are the
branches which can sell the goods to head office too. They can pay their own expenses and can
deposit their collection in their own name in the bank. These branches record separately
And independently all the transactions which are even recorded by the head office.
2. Foreign Branches
Because of the rapid development of trade, commerce and industries and with the growing tough
competition, the business enterprises are opening their branches abroad in order to capture the
potential market and accelerate their business globally. Therefore, the branches established

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abroad is called foreign branch. The accounting procedure of foreign branch is just like an
independent branch except in the following cases:
- Exchange rate and conversion of foreign currency into home currency
- Effects of foreign exchange rate are to be incorporated in the books of head office.
Where a company organizes its sales by establishing a branch or branches in the country, its head
office either run it as a selling agency branch and or autonomous branch. The characteristics or
features of these two types of branches are tabulated as follows:
Dependent Branch Autonomous Branch
Goods for resale-branch
Goods for resale are supplied
outlets may make some local
by the head office
purchase
Branch outlets may have
Activities are strictly controlled
some local control over its
by the head office.
activities
Accounting records are Branch maintains its own
maintained by the head office accounting record
The branch managers are given Branch managers are able to
very little autonomy to make make considerable decision
decisions for the branch. making on the management
Normally all instructions are and business policies at the
from the head office. branches

1.3. Accounting System for a Branch

Two alternative systems:

1. The branch does not maintain a complete set of accounting records. The home
office serves only as an accounting and control center for the branches.
2. The branch maintains a complete set of accounting records consisting of
journal entries and ledger accounts. Financial statements are prepared by the
branch account and forwarded to the home office.
Financial statements are prepared at regular intervals by the branch and forwarded to the H.O.
(we are dealing with a branch with full autonomous).
All the above are generally prescribed by the H.O.
 Transactions recorded by the branch should include all controllable expenses and revenue
for which the branch manager is responsible. If the branch manager has responsibility
over all branch assets, liabilities, receipts, and expenditures then the branch accounting
system should reflect this responsibility.

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  Expenses such as depreciation are not subject to control by a branch manager. Therefore
both the branch plant assets and the related depreciation ledger accounts generally are
maintained by the H.O.
Reciprocal Ledger Accounts:
 Home Office Ledger Account:
This account is used by the branch to account for all transactions with the home office.
a. It is credited for all cash, merchandise or other assets provided by the home office to
the branch.
b. It is debited for all cash, merchandise, or other assets sent by the branch to the home
office or to other branches.

The H.O account (which is maintained in the branch records) is like an ownership equity account
in that it represents the equity of the H.O in the net assets of the branch (i.e. net investment by
the H.O in the branch)
At the end of the accounting period when the branch closes its accounting records, the income
summary account (showing net income or net loss) is closed to the H.O account
 Investment in Branch Ledger Account
This account is a reciprocal ledger account (to Home Office account) used by the home office
to account for any transactions with the branches.
a. It is debited for cash, merchandise and services provided to the branch by the home
office and for the net income reported by the branch.
b. It is credited for cash, or other assets received from the branch, and for net losses
reported by the branch

Note:
 The “H.O” account and the “investment in branch” account are reciprocal accounts which
mean that they display the same numerical balances, although one balance is a debit and
the other is a credit.
 When combined financial statements are prepared for the H.O and its branch, the H.O
account and the investment in branch account are offset against one another and there by
eliminated from the combined statements.
Acquisition of Plant Assets Used in Branch
 If a plant asset is acquired by the home office for a branch’s usage and the
accounting record for the plant asset is maintained by the home office, the
accounting treatments are:

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  For the home office: debit a plant asset account: branch, credit cash or a
liability account
 For the branch: no entry.
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:
For the branch: debit Home Office and credit cash or a liability
account.
 For the home office: debit a plant asset account: branch,
and credit Investment in Branch account.
Expense Incurred by Home Office and Allocated to Branches
The home office may acquire plant assets and insurance for these assets. These plant
assets are carried in the home office accounting record but used by branches.
The home office may pay some taxes on behalf of branches, and arrange for advertising that
benefits all branches
accounting treatments are:
A. For the home office: debit Investment in Branch account, credit expense account.
B. For the branch: debit expense account, credit Home Office account

Accounting entries for transactions between branch and head office branch account.

TRANSACTIONS Branch book H.office book

Goods supplied to Inventories dr investment in branch dr
branch by head office HO cr Inventories cr
Cash received from HO Cash dr investment in branch dr
HO cr Cash cr
Goods returned to HO HO dr Inventories D
by branch r
Inventories cr investment in branch cr
Cash sent to HO by HO dr Cash dr
branch cash cr investment in branch cr
When asset purchased HO dr CASH dr

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 by branch and asset cash cr investment in branch cr
account is kept by HO
Depreciation for the Depreciation exp dr investment in branch dr
above Head office cr Branch asset account
HO expenses Expense account dr investment in branch t D
chargeable to branch r
Head office cr Expense account cr

Billing of Merchandise Shipments or Transfers to Branch

The H.O may bill merchandise shipped to the branch.
a) at cost b) at a certain percentage above cost
c) At retailing selling price
Billed at the home office cost:
Strength: widely used because of its simplicity
Weakness: attributes all gross profits of the business to the branches.
Billed at a percentage above home office cost:
Strength: is able to allocate a reasonable gross profit to the home office.
Weakness: the net income reported by the branch may be understated and the ending
inventories at branch are overstated for the enterprise as a whole
Billed at branch retail selling prices:
Strength: to increase the internal control over inventories at branches.
Weakness: no gross profit assigned to the branches and the branch’s net loss will equal its
operating expenses.
 a gross profit equal to zero and
 a net loss equal to its own operating expense
Illustration: Assume that Guan Trading House (GTH), whose H.O is located in Mekelle, has
several branches in the country. One of its branches is called Axum branch located in Axum.
The H.O bills merchandise to Axum branch at cost and the branch maintains complete
accounting records and prepares financial statement.
Both the H.O and the branch use perpetual inventory system. Equipment used at the branch is
carried in the H.O accounting records (branch does not maintain fixed asset accounts.) Certain
expenses, such as advertising and insurance are incurred by the H.O on the behalf of the branch
and are billed to the branch. Transactions and events during the 1st year of operations of Axum
branch (for the year 1999) are summarized below.
1. Cash of $1000 was forwarded to Axum branch by the H.O.
2. Merchandise with a cost of $60,000 was shipped to Axum branch.
3. Equipment was acquired by Axum branch for $500 to be carried in the H.O accounting
records (other plant assets for Axum branch generally are acquired by the H.O)

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 4. Credit sales by Axum branch amounted to $80,000, the cost of the merchandise sold was
$45,000.
5. Axum branch collected $62,000 on account.
6. Axum branch paid operating expenses totaled $20,000
7. Axum branch remitted (transferred) cash of $37,500 to the H.O
8. Operating expenses incurred by the H.O and charged (allocated) to Axum branch total
$3000.
Required: Recorder the above transactions in the H.O and branch accounting records.

Solution
Home office Records: 1. Cash 1000
1. Investment in Axum branch 1000( DR) H.O 1000
Cash 1000(CR) 2. Inventories 6, 0000
2. Investment in Axum branch Home office 60,000
60,000( DR) 3. H.O 500
Inventories 60,000( CR)
3. Equipment: Axum 500( DR) Cash 500
Investment in Axum branch 4. A/R 80,000
500(DR) Sales 80,000
4. No entry at the H.O Cost of gods sold 45,000
5. No entry Inventories 45,000
6. No entry 5. Cash 62,000
7. Cash 37,500( DR) A/R 62,000
InvestmentinAxum branch37,500(CR) 6. Operating expense20,000
8. Investment in Axum branch 3000( DR) Cash 20,000
Operating expenses 3000(CR) 7. H.O 37,500
Cash 37,500
Branch Records:
8. Operating expense 3000

HO 3000
Since the operating expenses paid by the H.O are not its own operating expense the expenses of
the H.O must be deducted. Hence total operating expense of the branch is this 3000 + 20,000
(entry 6 of the branch) = 23,000.

Note: If a branch obtains merchandise from outsiders as well as from the H.O, the merchandise
acquired from the H.O should be recorded in separate inventories from H.O ledger accounts.
Inventories xxx
H.O xxx
Inventories xxx
Cash/ A/P xxx

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In the Home office accounting records, an investment in Axum Branch ledger account has a
debit balance of $26,000 before.
(a) The accounting records are closed, and
(b) The branch net income is transferred to the Investment in Axum Branch ledger account.

Investment in Axum Branch

Balance 0 (3) 500

(1) 1,000 (7) 37,500
(2) 60,000
(8) 3,000
Balance 26,000

In Axum Branch accounting records, the ‘Home Office’’ ledger account has a credit balance of $
26,000 before,
(a) The accounting records are closed, and
(b) The net income of the branch is transferred to the Home Office Ledger account.
Home
(3) 500 Balance 0
(7) 37,500
(1) 1,000
(2) 60,000
(8) 3,000
Balance 26,000
Assume that the perpetual inventories at the end of the year 1999 for Axum Branch had been
verified by a physical count. That is,

Inventories
(2) 60,000 (4) 45,000

Balance (ending inventory) 15,000

Note: the physical count made at the end of 1999 at Axum Branch had verified that the inventory
that is actually on hand is what is indicated by the perpetual inventory record.

The end-of-period Reporting by Axum Branch to the Home Office and closing entries are shown
below. (These are adjusting and closing entries that relate to the branch operations during 1999).
Home Office Records Branch Records
No Entry Sales 80,000
Cost of Goods Sold 45,000
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 Operating Expenses 23,000
Income Summary 12,000
Investment in Axum Branch 12,000 Income Summary 12,000
Income: Axum Branch 12,000 Home office 12,000
Income: Axum Branch 12,000
Income Summary 12,000
End-of- period Reporting by Branch and closing Procedures
At the end of the accounting period, the branch reports the results of its operations to the home
office. On the basis of this report, the home office records the branch income.
 BRANCH REPORTING AND CLOSING PROCEDURES
The report by the branch to its home office may take the form of branch Financial Statements
or simply a trial balance of branch accounts.
 WORKING PAPER FOR COMBINED FINANCIAL STATEMENTS
The working paper illustrated on this page for Gung Trading House is based on the
transactions and events illustrated for the home office (Guna. Trading House) and the branch
(Axum Branch) for the year 1999.
 The adjusted (pre closing) trial balance at December 31, 1999 for Axum Branch reflects
the 1999 operating transactions. On the basis of this information, Axum Branch
prepares Financial Statements for its home office:
 The adjusted (pre closing) trial balance of Guna Trading House, the home office, is also
shown. Note that additional data is assumed for the home office trial balance that is not
presented in the 1999 transactions and events.
 The trial balances are assumed to incorporate all the routine year-end adjusting entries
by both the home office and branch except those related to items in transit between the
home office and branch or those related to errors.

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 Guna Trading House
Working paper for combined Financial Statements of H.O and Axum Branch
For year ended December 31, 1999
(Perpetual Inventory system: Billing at cost)
Adjusted Trial Balance Elimination Combined
Home office Brach
Debit Credit Debit Credi Debit Credit Debit Credit
t
Cash $25,000 5,000 $30,000
Accounts Receivable 39,000 18,000 57,000
Inventories 45,000 15,000 60,000
Investment in Axum 26,000 (a)
Branch 26000
Equipment 150,000 150,000
Accumulated Depreciation 10,000 10,000
Accounts payable 20,000 20,000
Common Stock 150,00 150,000
0
Retained earnings 70,000 70,000
Home office 26,00 (A)
0 26000
Sales 400,00 80,00 480,000
0 0
Cost of Goods Sold 235,000 45,000 280,000
Operating Expenses 90,000 23,000 113,000
Dividends 40,000 40,000
Totals 650,000 650,00 106,00 106,0 26,000 26,000 730,000 730,000
0 0 00
Not that the $26,000 debit balance of the Investment in Axum Branch ledger account and the
$26,000 credit balance of the Home Office Account are the balances before the respective
accounting records are closed (i.e. they are pre closing balances). That is, before the $12000 net
income of Axum Branch is entered in these two reciprocal accounts. In the Elimination column,
Elimination (a) offsets the balance of the Investment in Axum Branch account against the
balance of the Home office Account. This elimination appears in the working paper only; it
is not recorded in the accounting records of either the home office or Axum branch, because its
purpose is only to facilitate the preparations of combined Financial Statements.

Elimination (a) eliminates the pre closing home office account balance from Axum Branch’s
home office account and the home office’s investment in Axum branch account as follows:

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Home office -----------------------------------26,000
Investment in Axum Branch ------------------------26,000

The above entry is recorded as elimination only on the working paper but not recorded on either
the Home Office or the branch accounting records. If the foregoing elimination were not made,
the combined balance sheet would show an investment represented by its own equity, which is
contrary to fundamental accounting measurement rules.

A working paper for combined Financial Statements has three purposes:

(a) To combine ledger account balances for like assets and liabilities
(b) To eliminate any inter-company profits or losses, and
(c) To eliminate the reciprocal accounts.
 Combined financial statements of Guna general trading Corporation Prepared on
the basis of the above working paper are:

Guna general trading Corporation

Combined Income Statement
For the Year Ended Dec 31, Year 1

Sales 480,000
Cost of goods sold 280,000
Gross profit 200,000
Operating expenses 113,000
Net income 87,000

Earning per share of common stock 5.80

Guna general trading Corporation

Statement of Retained Earnings
For the Year Ended Dec 31, Year 1

Retained earnings, beginning of year 70,000

Add: Net income 87,000
Subtotal 157,000
Less: Dividends (2.67 per share) 40,000
Retained earnings, end of year 117,000

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 Guna general trading Corporation
Combined Balance Sheet
Dec 31, Year 1

Assets
Cash 30,000
Trade A/R (net) 57,000
Inventories 60,000
Equipment 150,000
Less: Accumulated Depreciation 10,000 140,000
Total assets 287,000

Liabilities and Stockholders’ Equity

Liabilities
Trade A/P 20,000

Stockholders’ equity
Common stock (10 par) 150,000
Retained earnings 117,000 267,000
Total liabilities and stockholders’ equity 287,000

Closing entries by the branch transfer the balances of all revenue and expense accounts to an
income summary account and transfer the income summary account balance to the home office
account. After closing, the home office account appears as follows:
Home Office

(3) 500 Balance 0

(7) 1 37,500 (1) 1000
(2) 60,000
(8) 3,000
Balance 26,000
Closing 12,000
Balance 38,000
The year-end Balance of the home office account ($38000) represents the equity of the home
office in Axum branch at year end. Note that, in our example the home office account is the only
equity account on the branch balance sheet. If a branch is, however, authorized to incur liabilities
then the year-end branch balance sheet may also reflect accounts payable as well as the home-
office Equity.

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Upon receipt of the financial statement or trial balance from its branch, a home office records the
branch income by crediting a single income account and debiting the investment in branch
account. Thus, the detailed revenues and expenses of the branch are not recorded on the records
of the home office. In addition, as part of its closing entries, the home office must close its
income from branch account to its income summary. Immediately after closing, the investment
in branch account appears as follows:

Investment in Axum Branch

Balance 0 (3) 500
(1) 1,000 (7) 37500
(2) 60,000
(8) 3,000
Balance 26,000
Closing 12,000
Balance 38,000
The investment in branch account is a control account for the net assets of the branch. The
investment in Axum branch account balance of $38,000, in our example, represents the cash,
accounts receivable, and inventory balances ($5000+$18,000+$15000) reported on the branch’s
balance sheet at year-end.
TRANSACTIONS BETWEEN BRANCHES
Efficient operation may on occasion require that assets be transferred from one branch to
another. Generally a branch does not carry a reciprocal ledger account with another branch but
records the transfer in the H.O account.
E.g. Branch – A shipped merchandise to branch B. The branches and their H.O maintain
perpetual inventory system. Make necessary journal entries.
Branch A
H.O xx H.O xx
Inventories xx H.O
Branch B Investment in Branch B xx
Inventories xx Invest in branch A xx
Note: The transfer of Merchandise from one branch to another branch does not justify increasing
the carrying amount of inventories by the freight costs incurred because of indirect routing. The
amount of freight costs properly included in inventories at a branch is limited to the cost of
shipping the merchandise directly from the H.O to its present location. Excess freight costs
should be recorded as expenses of the H.O.

Branch A Freight cost = 600

Freight cost = 800

Home office Direct rout Branch B

Freight cost = 1000

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The excess amount (800 + 600 – 1000) = 400 which is resulted from management error is
sometimes called penalty to management and is treated as operating expense for the H.O.
Illustration: Excess freight costs on inter branch transfers of Merchandise.
The H.O shipped merchandise costing $6,000 to branch D and paid freight costs of $400.
Subsequently, the H.O instructed branch ‘D’ to transfer this merchandise to branch E freight
costs of $300 were paid by branch D to carry out this order. If the merchandise had been shipped
directly from the H.O to branch E; the freight costs would have been $500. Assuming the H.O
and its branches use perpetual inventory system makes all the necessary journal entries in the
three sets of accounting records.
A. In accounting records of the H.O
* To record shipment of merchandise and payment of freight costs.
Investment in branch D (6000 + 400) = 6400
Inventories 6000
Cash (freight charge) 400
To record transfer of merchandise from branch D to branch E under the instruction of the H.O.
Inter-branch freight of $300 paid by branch D caused total freight costs on this merchandise to
exceed direct shipment cost by $200 i.e. 200(excess freight cost) = total freight cost – Direct
freight cost. This excess (200) is expense of the H.O and shows management error or
miscalculation.

Investment in Branch E 6500

Excess freight expense 200
Investment in D 67000
- 6700 = 6000 + 400 + 300 -> Freight cost from D to E paid by D on behalf of H.O.
B. In the Accounting records of Branch D;
To record the receipt of Merchandise from the H.O with freight costs paid in advance by the
H.O.
Inventories 6000
Freight in cost paid in advance by H.O 400
H.O 6400
* To Record transfer of Merchandise to Branch E under instruction of H.O and payment of fright
costs of $300.
H.O 6700
Inventories 6000
Freight in cost 400
Cash 300

C. In the Accounting records of Branch E

* To record the receipt of merchandise from Branch D transferred under the instruction of the
H.O and normal freight cost billed (direct cost that could have been incurred (500)) by the H.O
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 Inventories 6000
Freight in 500
H.O 6500
* Note:
Excess freight costs generally result from inefficient planning or management error of original
shipments should not be included in inventories. They must be treated as operating expenses.
e.g. H.O purchased goods at $60,000 cash terms FOB. Shipping point (by the buyer). Total
transportation cost of 10,000 cash was paid for the total items having the cost of 60,000
Inventories costing 30,000 (which is half of the total items) were transferred to branch F and H.O
paid $1200 freight in advance.
Record the transactions in H.O and the Branch F (Assuming perpetual inventory system)
H.O Records:
Investment in Branch F 36,200
Inventories 30,000
Cash for freight costs (10000 – 5000 + 1200) 6200
N.B the freight cost of 10,000 is paid for total inventory cost of 60,000. Divide it equally
between the 30,000 inventories shipped and 30,000 inventories remained in the H.O.
Branch F
Inventories 30,000
Freight costs (5000 +1200) 6200
H.O 36200
Reconciliation of Reciprocal Accounts
In a previous section, the nature of reciprocal accounts and the necessity for their reconciliation
before the combined financial statements are prepared was described. The situation is
comparable to that of reconciling the ledger account for Cash in Bank with the balance in the
monthly bank statement.
Illustration: Assume the home office and the branch accounting records contain the following
data and the balances of the Home Office account and Investment in Branch accounts on Dec 31
are 41,500 Cr. and 49,500 Dr. respectively. Comparison of the two reciprocal accounts discloses
four reconciling items.
1. A debit of 8,000 in Investment in Branch account without a related credit in Home Office
account
Merchandise shipped to branch on Dec 29 but not received at year end. Required journal
in branch accounting records:
Inventories in Transit 8,000
Home Office 8,000

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 To record shipment of merchandise in transit from home office
The inventories in transit must be included in inventories in hand.
2. A credit of 1,000 in the Investment in Branch account without a related debit in the Home
Office account
The home office collected trade accounts receivable of the branch. The journal entry
required in the records of the branch on Dec 31:
Home Office 1,000
Trade A/R 1,000
To record collection of accounts receivable by home office
3. A debit of 3,000 in the Home Office ledger account without a related credit in Investment
in Branch account
The branch acquired equipment for 3,000 on Dec 28 and debited Home Office as
equipment used by branch is carried in records of the home office. The journal entry
required in the records of the home office:
Equipment: Branch 3,000
Investment in Branch 3,000
To record equipment acquired by branch
4. A credit of 2,000 in the Home Office ledger account without a related debit in the
Investment in Branch account
Accounts receivable of the home office was collected on Dec 30 and recorded as credit to
Home Office. Journal entry required in the records of the home office on Dec 31
Investment in Branch 2,000
Trade A/R 2,000
To record collection of receivable by branch
The effect of the foregoing end of year journal entries is to update the reciprocal ledger accounts
as shown below:

GUNA GENERAL TRADING CORPORATION - HOME OFFICE AND AXUM BRANCH

RECONCILIATION OF RECIPROCAL LEDGER ACCOUNTS
DEC 31, 19X9
Investment in Home Office
Branch
Balance before adjustment 49,500 Dr 41,500 Cr

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Add: 1. Merchandise shipped 8,000
4. Home office A/R
collected by branch 2,000
Less: 2. Branch A/R
Colleted by H.O. (1,000)
3. Equipment acquired
By branch (3,000)
Adjusted balances 48,500 48,500

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