PrE7 MODULE 4

COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY
MODULE 4 PACKET
PrE 7 – ACCOUNTING FOR BUSINESS COMBINATIONS
MODULE 4 HOME OFFICE AND BRANCH ACCOUNTING
Welcome to Module 4
In this module, we will discuss the accounting procedures for a business in its home office and in
its branches.
CONSULTATION HOURS:
Virtual time: During your class schedule
Phone or Messenger: Weekdays from 1pm to 130pm
MODULE 4 LEARNING OBJECTIVES:

By the end of this module, the students will be able to:
1. Distinguish between an agency and branch office
2. Know the procedures in accounting for home office and its branches
3. Prepare financial statements for the home office, the branch and consolidation thereof
COURSE CONTENT FOR MODULE 4:
ACTIVITY DESCRIPTION TIME TO

COMPLETE
Lecture discussion Accounting for Home Office and its Branches 3 hours
Activity Problem Solving 2 hours
Summative quiz for module 4 (to be

Quiz 1 hour
announced)
2020-2021 Module Packets for PrE 7 (Accounting for Business Combinations) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
Page 1 of 16
COLLEGE OF COMMERCE
4.1 ACCOUNTING FOR AGENCY
Agency Branch
displays merchandise or samples thereof as sells goods out of the inventory it maintains
provided by the home office (HO)
does not stock merchandise to fill customer’s authority to engage in transactions as an
orders since it is the HO that fills the ordersindependent business and makes sales to
it is provided with a working fund used for customers and performs other functions
payment of expenses associated with the operations of a separate
business enterprise
has no separate accounting or business entity has a separate branch accounting system like
and its transactions are recorded in the books an independent business except in accounting
of the HO either as separate records or not for ownership equities
A typical agency does not require a complete set of books. The home office considers as sufficient
the submission of the agency of a record of sales to customers and summaries of working fund
receipts and disbursements.
Sample accounting entries prepared by a home office for its Junior Agency using the period
inventory method:
The home
office sends a
check in
replenishment
of the fund as
requested by
the agency;
and debits
expense or
other accounts
for which the
disbursements
from the funds
were reported
and credits
cash
Page 2 of 16
COLLEGE OF COMMERCE
Taken from Advanced Financial Accounting by Dayag, 2021
To close the revenue and expense accounts

Sales – Junior 100,000
COGS – Junior 60,000
Various exp – Junior 19,000
Income Summary – Junior 21,000
To close the Agency Income Summary to Income Summary – Junior 21,000
General Income Summary Income Summary 21,000
The above entries are used if the agency’s accounting records are separate from the home office.
However if no separate records are made, the home office uses its own accounts to record
transactions of the agency. The income summary account reports the results of combined
operations.
Agency sales revenue and expense accounts are closed into an income summary account for each
agency, which are thereafter closed to the general income summary.
Merchandise available for HO sales = HO beginning inventory + purchases - shipments to agency

Less: Ending inventory
Cost of goods identified with home office sales
4.2 ACCOUNTING FOR BRANCHES
A branch exercises a degree of self-management determined by the home office. Even if the
branch manager may be given complete authority, with effectiveness of management and control
judged on the basis of the branch financial reports, it follows the general policies and standards
adopted by the business. A branch’s cash, merchandise and other assets needed are supplied by
the home office. The branch may purchase merchandise from outsiders to satisfy certain local
needs for goods not available from the affiliated unit. The branch ships merchandise, bills
customers, makes collections on account and deposits them in its own bank account. It makes
withdrawals to pay for purchases of goods and services..
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COLLEGE OF COMMERCE
RECIPROCAL ACCOUNTS
When complete self-balancing books are kept by the branch, an account called Home Office
Current takes the place of capital accounts. The home office account is a quasi-ownership account
equity that shows the net investment by the home office in the branch. It indicates the extent of
the accountability of the branch to the home office. The reciprocal account on the books of the
home office is called Investment in Branch or Branch Current. Separate investment account,
reported as an asset, is maintained by the home office for each branch.
When the books of both the home office and branch are completely up-to-date, the balance in a
reciprocal account on the home office books will be equal to the related reciprocal account on the
branch books; but one is debit and the other credit.
Home Office Current (books of branch)

Remittances made by the branch to HO Cash, goods or services received from HO
Losses from operations Profits from operations
Branch Current (books of HO)

Cash, goods or services transferred to Branch Remittances from the branch
Branch income Branch Losses
Accounting Procedures between the Home Office and its Branch
Transaction Home Office Books Branch books

Purchase of equipment Equipment – BR xxx No entry required
by the HO for the branch Cash xxx
Purchase of equipment Equipment – BR xxx HO Current xxx
by the branch Branch Current xxx Cash or AP xxx
Branches are notified by the home office of expenses incurred and paid in their behalf and should
be recorded on the branch books. The following guidelines should be strictly followed:
a. Items that can be directly identified with individual branches are immediately charged to
the branches. (taxes, insurance)
b. Other charges resulting in benefits not directly identified with certain branches are
summarized on the HO books and charged periodically to the branches using equitable
basis. (advertising)
c. HO performing solely in a supervisory capacity may charge all of its expenses to the
branches. Those that cannot be directly identified may be combined and distributed in total
as an indirect charge. When charges reported on HO books are taken up on the branch
books, HO account should be reduced by the amounts transferred.
d. Interest and rent on working capital and PPE transferred to the branches may be charged
to the branch who recognizes it as expense items and the HO reports a revenue.
Page 4 of 16
COLLEGE OF COMMERCE
MERCHANDISE SHIPMENTS TO A BRANCH
Merchandise sold by the branch may be obtained entirely from the home office or may be acquired
from outside parties if allowed.
Merchandise Billed at Cost:

Both the home office in the branch Street the transfer of merchandise in the same way as the
transfer of any other asset.
Beginning inventory This reduces the total goods available for sale
Add: Purchases thereby reducing also the COGS and avoids an
Less: Shipments to Branch overstatement of COGS
Goods Available for Sale – Home Office
Beginning inventory This will increase the branch’s total goods
Add: Purchases available for sale.
Add: Shipments from Home Office
Goods Available for Sale – Branch
Shipments to Branch and Shipments from Home Office are nominal accounts closed at the end
of the period to Income Summary Account.
Freight charges on Merchandise Shipments

Home Office Books Branch Books
The HO pays P500 to Branch Current 9,500 Shipments from HO 9,000
transport P9,000 of Shipments to Branch 9,000 Freight In 500
merchandise to its Cash 500 Home Office 9,500
branch

Illustration:
On January 1, the Manila company establishes its first branch in Bulacan. Separate books are kept
by the branch and financial statements are submitted to the home office at the end of each
month. Merchandise is billed at cost. Depreciable assets are carried on the books of the home
office. Both home office and the branch books use the periodic inventory method. The
transactions are:
Page 5 of 16
COLLEGE OF COMMERCE
No entry
No entry
No entry
No entry
Branch books:
76,000 52,000 52,000 76,000

24,000 24,000
Page 6 of 16
COLLEGE OF COMMERCE
- HO - Branch
Assumed
figures
Balance in Income Summary is transferred to HO Current.
Home Office also records the same

by debiting Branch Current Account
Financial statements are prepared for the home office and the branch. Balance sheet and Income
Statement are the usual statements prepared by the branch for internal use only. A branch’s
financial statements enable the management of the home office to review and evaluate the
operating results in financial position of the branch.
Combined financial statements of the home office and the branch are prepared to show the effects
of business transactions of the business entity with outsiders. This done by eliminating
intercompany transactions – home office account and branch account as well as the shipments to
branch and shipments from HO accounts. A worksheet or working paper is prepared showing the
adjusted trial balances and the elimination entries to come up with the combined statements.
Page 7 of 16
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Page 8 of 16
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debits
credits
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Page 10 of 16
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RECONCILIATION OF RECIPROCAL ACCOUNTS
In reconciling the two accounts the following are to be considered:
a. Debits in the branch account without responding credits in the home office account.
b. Credits in the branch account without responding debits in the home office account.
c. Debits in the home office account without corresponding credits in the branch account.
d. Credits in the home office account without corresponding debits in the branch account.
Page 11 of 16
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Page 12 of 16
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A credit of P500 in the Branch Current account without a related debit in The Home Office Current
account. On December 18, trade accounts receivables of the branch were collected by the home office.
The collection was recorded by the home office with a debit to Cash and credit to Branch Current. No
journal entry was made by the branch, therefore the following journal entry is required in the accounting
records of the branch on December 31:
Page 13 of 16
COLLEGE OF COMMERCE
Key in your answers in PEARDECK during our online class

….
What will you usually be asked for?
Branch Profit from own operations Reconciling Reciprocal Accounts
Branch Current Account Home Office Current Account
Page 14 of 16
COLLEGE OF COMMERCE
ACTIVITY FOR MODULE 4 TO BE ANSWERED IN NEO LMS
1.
Items 2 to 3.
On Dec. 31, 2020, the investment in branch account on the home office books has a balance
of P100,000. The differences with the HO current account in SD Branch may be due to:
a. Home office inventory shipment to the branch on December 16 recorded by the branch in
January, 2021 at cost of P20,000
b. Inventory costing P52,000 was sent to the branch by the home office on December 27. The
billing was a cost, but the branch recorded the transaction at P48,200.
c. P8,000 branch remittance to the home office in December was recorded on the HO books
on January 2021
d. P12,500 marketing expenses incurred by the home office of which P5,000 is allocated to
the branch. The branch has not recorded this transaction.
e. A remittance of P2,000 from a different branch was recorded as a remittance from SD
Branch.
Compute the:
Unadjusted Balance of the Home Office Account
Adjusted Balance of the Reciprocal Account
Items 4 to 5.
Dyna Company has been operating a branch in General Luna. Shipments are billed at cost. At
year-end 2020, the branch books has the following balances: Cash at P13,600, Ending
Inventory at P29,600, Home Office P56,000, Shipments from Home Office P216,000, Sales at
P235,200 and Expenses at P21,600. On January 1, 2021, what are the balances of the following
accounts in the books of the Home Office
Investment in Branch
Shipments to Branch
Page 15 of 16
COLLEGE OF COMMERCE
6.
What is the reconciled amount of the Home Office and Investment in Branch Accounts?
II. Journal Entries – Write TRUE if the entry given is made by Home Office and FALSE if
made by the Branch
1. Received cash of P30,000 from HO Investment in branch 30,000

Cash 30,000
2. Received merchandise P50,000 from HO Shipments from HO 50,000

Home Office 50,000
3. The Branch incurred salaries expenses Salaries 20,000

amounting to P20,000 Cash 20,000
4. Remitted P40,000 to HO for merchandise Cash 40,000

shipment Investment in branch 40,000
5. To close the income summary accounts Investment in branch 10,000

Branch income 10,000
6. The branch purchased from a local Purchases 15,000

vendor on account for P15,000 Accounts Payable 15,000
Page 16 of 16

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PrE7 MODULE 4

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COLLEGE OF COMMERCE

BACHELOR OF SCIENCE IN ACCOUNTANCY

MODULE 4 HOME OFFICE AND BRANCH ACCOUNTING

MODULE 4 LEARNING OBJECTIVES:

COURSE CONTENT FOR MODULE 4:

ACTIVITY DESCRIPTION TIME TO

Activity Problem Solving 2 hours

Summative quiz for module 4 (to be

4.1 ACCOUNTING FOR AGENCY

Taken from Advanced Financial Accounting by Dayag, 2021

To close the revenue and expense accounts

Merchandise available for HO sales = HO beginning inventory + purchases - shipments to agency

4.2 ACCOUNTING FOR BRANCHES

Home Office Current (books of branch)

Branch Current (books of HO)

Accounting Procedures between the Home Office and its Branch

Transaction Home Office Books Branch books

MERCHANDISE SHIPMENTS TO A BRANCH

Merchandise Billed at Cost:

Freight charges on Merchandise Shipments

Taken from Advanced Financial Accounting by Dayag, 2021

76,000 52,000 52,000 76,000

Balance in Income Summary is transferred to HO Current.

Home Office also records the same

Taken from Advanced Financial Accounting by Dayag, 2021

RECONCILIATION OF RECIPROCAL ACCOUNTS

In reconciling the two accounts the following are to be considered:

Key in your answers in PEARDECK during our online class

What will you usually be asked for?

Branch Profit from own operations Reconciling Reciprocal Accounts

Branch Current Account Home Office Current Account

ACTIVITY FOR MODULE 4 TO BE ANSWERED IN NEO LMS

1. Received cash of P30,000 from HO Investment in branch 30,000

2. Received merchandise P50,000 from HO Shipments from HO 50,000

3. The Branch incurred salaries expenses Salaries 20,000

4. Remitted P40,000 to HO for merchandise Cash 40,000

5. To close the income summary accounts Investment in branch 10,000

6. The branch purchased from a local Purchases 15,000

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