Chapter 2

Accounting for Branches

Combined Financial Statements
 Branches & Divisions
 Branch is a business unit located at some
distance from Home Office.
 Unit carries merchandise obtained from the
home office,
 makes sales, approves customers’ credit, and
makes collections from it’s customers.
 A branch may obtain merchandise solely
(Partly) from the home office.
Branches & Divisions
 Cash receipts of the branch may be
deposited in a bank account belonging to the
home office.
 Branch expenses are paid from an imprest
cash fund or bank account provided by home
office.
 Branch must submit a list of cash payments
supported with vouchers in order to get
replenishment from home office.
Branches & Divisions
 Use of imprest cash fund gives the H.O
considerable control over the cash
transactions of the branch.

 Common practice for a large branch to

maintain its own bank accounts.

 Extent of autonomy and responsibility of a

branch varies, even among different branches
of the same business enterprise.
Branches & Divisions
 A segment of a business enterprise may
be operated as a division, which
generally has more autonomy than a
branch.
 Accounting procedures for a division (not
organized as a subsidiary company) are
similar to those used for branches.
 Subsidiaries are operated as a sep.
corporation
 Consolidated FS are required.
Start-up Costs of Opening New
Branches
 Some businesses would capitalize &
amortize such start-up costs on the
grounds that such costs are necessary
to successful operation at a new
location. However, it is not allowed in
IFRS.
 In IFRS (IAS 38) start-up cost in
connection with the opening of a br. Is
recognized as expenses of the acct
period in which the costs are incurred.
Accounting System For A Branch
 Business enterprise with branches may provide for a
complete set of accounting records at each branch.

 Branch may maintain a complete set of accounting

records consisting of:
 Journals
 Ledgers
 Chart of accounts

Similar to those of an independent business enterprise.

 Reciprocal Ledger Accounts
 Accounting records maintained by a branch include a
Home Office ledger account
 H.O reflects all activity b/n the branch and home office
 It is Cr. for all merchandise, cash or other assets provided
by the home office;
 H.O is Dr. for all cash, merchandise, or other assets sent
by the branch to the home office or the other branches.
 Reciprocal Ledger Accounts
 H.O A/c is a quasi-ownership equity a/c that shows the
net investment by the Home Office in the branch.

 End of an accounting period when the branch closes its

accounting records, the I/Summary account is closed to the
H.O account.
 Net income increases the credit balance of the Home
Office account; a net loss decreases (debit) this balance.
Reciprocal Ledger Accounts
 In the home office accounting records, a reciprocal
ledger account with a title such as Investment in
Branch is maintained.
 It is non-current asset account
 Dr. for cash merchandise, and services provided to the
branch, and for the NI reported by the branch.
 Cr. for the cash or other assets received from the
branch, and for net losses reported by the branch.
Reciprocal Ledger Accounts
 Thus the Investment in Branch account
reflects the equity method of accounting.
 A separate investment account generally is
maintained by the H.O for each branch.
Accounting System For A Branch
 Branches may keep all accounting records in the
home office and have the branch submit daily reports
and business documents to the home office,
 H.O would then enter all transactions by branches in
computerized accounting records.
 In this case, H.O may not even conduct operations of
its own; it may serve only as an accounting and
control center for the branches.
Accounting System For A Branch
 FS are prepared by branch accountant &
forwarded to H.O.
 The H.O usually establish policy such as
- Number and types of ledger accounts
- The internal control structure
- Form and content of the FS
- Accounting policies
 Accounting System For A Branch
 Transactions recorded by a branch should
include all controllable expenses &
revenue initiated by the branch
 If the branch manager has responsibility
over all branch assets, liabilities, revenue
and expenses, the branch accounting
records should reflect this responsibility.
Accounting System For A Branch
 Expenses such as depreciation often
are not subject to control by a branch
manager.
 Branch PPE & the related deprn ledger
accounts generally are maintained by
the H.O.
Accounting System For A Branch
 Reciprocal Ledger Accounts /(H.O/Inv’t in Branch)
 Expenses Incurred By Home Office And Allocated To
Branches
 Alternative Method Of Billing Merchandise Shipments
To Branches
 @ Cost @ SP @COST + Marigin
 Separate FS For Branch & For Home Office
 Combined FS For Home Office and Branch
EXAMPLE:
 Transactions and events during the first year of operations of Bahir Dar
Branch (for the year 2000) are summarized below

1. Cash of Br 10,000 was forwarded to branch by the H.O.

2. Merchandise with a H.O cost of Birr 300,000, was shipped to

Branch

3. Equipment was acquired by branch for Birr 4,000 to be carried

in the H.O acct records (other PPEs for branches are acquired by the H.O).

4. The H.O shipped Equipments of Br 5,000 to B-Dar Branch.

5. Cr. sales by branch amtd to Br250,000 to various orgns; the

CGS was Br 175,000
6. Cash sales by branch amtd to Br 100,000; (CGS Br 70,000).
 EXAMPLE:
7. Branch collected Br 200,000 from sales made on A/c

8. Branch paid operating expenses totaled Br 30,000

9. Branch remitted or transferred cash of Br 270,000 to the H.O.

10. Op. exp. incurred by the H.O & charged to branch total Br
4,000
11. The H.O collected A/R of Br 10,000 of Branch.

12. Bahir Dar Branch paid A/P of Br 5,000 of the Home Office.

 Required: Record the above transactions in the books of the home

office and the branch.
Home Office Bahir Dar Branch
1. Investment in Bahir Dar branch. 10,000 1.Cash…………………….10,000
Cash……………..…………..10,000 Home Office…………….10,000
2. Investment in Bahir Dar branch… 300,000 2.Merchandise inventory……300,000
Merchandise Inventory………..300,000 Home office……………..300,000
4. Equipment: Bahir Dar branch….5,000
Cash……………………..5,000 3. No entry
3. Equipment :Bahir Dar Branch……4,000 4.Home office…………….4,000
Investment In Bahir Dar Branch….4,000 Cash……………………4,000
5.Trade A/R……………250,000
Sales………………………250,000
Cost of Goods Sold…..175,000
5.None Merchandise Inventory……..175,000
6. Cash…………….100,000
Sales……………..100,000
Cost of Goods Sold……70,000
6. None Merchandise inventory……70,000
7. Cash…………..200,000
7. None
  Trade A/R………….200,000
8.Operating expenses………30,000
 8. None
  Cash………………………..30,000
9. Cash……………..…270,000 9. Home office………..270,000
 CLOSING ENTRIES
BRANCH

Sales 350,000
CGS 245,000
OP. Expenses 34,000
Income Summary 71,000

Income summ. 71,000

H.O71,000
H.O

1) Inv’t In B.D Branch 71,000

Income- BD Branch 71,000

2) Income: BD Branch 71,000

RE 71,000
Accounting System For A Branch
 Journal Entries For Operations Of A Branch
 Working Paper For Combined FS
 Treatment of Beg. Inventories Priced Above
Cost
 Reconciliation Of Reciprocal Ledger A/cs
 Transaction B/n Branches
Expenses Incurred By Home
Office And Allocated To Branches
 If PPE is acquired by the H.O for a branch,
the entry for the acquisition is a Dr. to an
asset a/c such as Equipment: Branch & a Cr. to
Cash/ Liab Account.

 The H.O also usually acquires insurance,

pays property & other taxes, and does
advertising that benefits all branches.
Expenses Incurred By Home
Office And Allocated To Branches
 An expense incurred by H.O for a branch is
recorded by H.O by a Dr. to Inv’t in Branch &
a Cr. to an appropriate expense account;

 Branch debits an expense account and

credits Home Office.
Expenses Incurred By Home
Office And Allocated To Branches
 If the H.O does not make sales and serves
only as accounting center then most or all of
its expenses may be allocated to branches.
Expenses Incurred By Home
Office And Allocated To Branches
 H.O may charge each branch interest on the
capital invested in that branch
 Interest expense recognized by the branches
would be offset by interest revenue recognized
by the H.O
 Amounts would be netted and would not be
displayed in the combined income statement
Alternative Methods Of Billing
Merchandise Shipments To Branches
 Three alternative methods.
 Billing at home office cost – simplest of all.
 Billing at a percentage above H.O cost.
 Billing at the branch’s retail selling price.
 Shipment of merchandise to a branch does
not constitute a sale b/c ownership title has
not changed
Separate Financial Statements for
Branch & Home Office
 A separate income st. & b/sheet helps mgt of
the enterprise to review the operating
results & financial position of the branch.

 If the merchandise is billed @ retail selling

price then Branch’s income statement will
show loss approximating the op.expenses.
Separate Financial Statements for
Branch & Home Office
 The branch b/sheet will have H.O Ledger Account
instead of Ownership Equity Account.

 The separate F/st. prepared by branch will be revised

by H.O to include expenses incurred by the H.O for
branch & to show the results of branch operations after
elimination of any intra-co. profits on merchandise
shipments.

 Sep. FS also may be prepared for the H.O so that the

results of its operations and its financial position can be
appraised.
Combined Financial Statements
For Home Office And Branches
 A SoFP for distribution to creditors, stockholders,
and government agencies.

 A starting point : adjusted TBs of H.O & of the

branch.

 Eliminate reciprocal ledger accounts

 Inv’t/ H.O Accounts
 Intra-company profits/losses are eliminated.
 Intra-Co. receivables and payables b/n branches
 Sum-up all other similar accounts
Working Paper for Combined FS
 To combine ledger a/c balances for like
revenue, expenses, assets and liabilities
 To eliminate any intra-co. profits/losses & Inter
Co. Receivables/payables
 To eliminate the reciprocal accounts
 Any ellimn here is not journalized
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 Illustration of Billing above Cost
 As an illustration, use the previous example for S Company with the assumption
that it bills merchandises to Bahir Dar branch at cost plus 50% mark up.
Required:
 Record the journal entries both by home office and branch for shipment of Br
60,000 inventory
 Prepare a working paper and financial statements.

The journal entries are the same as presented when the home office bills BD
branch at home office cost except for the journal entries for shipments of
merchandise from home office to BD branch.

Home office Dire branch

Investment in BD branch…90,000 Inventories………90,000

Inventories…….………………...60,000 Home office….…..90,000
Allow. for over valuations of
Inventories: M branch.…... 30,000
 The account entitled ‘Allowance for
Overvaluation of Inventories is a contra asset
account against investment account.

 Assume further that M branch sold merchandise

of Br 67,500 (at billed amount).
 S COMPANY
Working Paper for Combined Financial Statements of Home Office and Branch
For Year Ended December 31, 2005
(Perpetual Inventory System: Billings above Cost)

Adjusted Trial Balances

Home Office Branch Eliminations Combined
Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)
Income Statement
Sales (400,000) (80,000) (480,000)
Cost of goods sold 235,000 67,500 (22,500) 280,000
Operating expenses 90,000 23,000 113,000
Net Income (loss) (to statement of retained
earnings below) 75,000 (10,500) 22,500 87,000
Totals 0 0 0

Statement of Retained Earnings

Retained earnings, beginning of year (70,000) (70,000)
Net (Income) loss (from income statement
above) (75,000) 10,500 (22,500) (87,000)
Dividends declared 40,000 40,000
Retained earnings, end of year (to balance
sheet below) 117,000
Totals 0

Balance Sheet
Cash 25,000 5,000 30,000
Trade accounts receivable (net) 39,000 18,000 57,000
Inventories 45,000 22,500 (7,500) 60,000
Investment in Branch 56,000 (56,000) 0
Allowance for Overvaluation of Inventories:
Branch (30,000) 30,000
Equipment 150,000 150,000
Accumulated depreciation of equipment (10,000) (10,000)
Trade accounts payable (20,000) (20,000)
Home office (56,000) 56,000 0
Common stock, $ 10 par (150,000) (150,000)
Retained earnings (from statement of retained
earnings above) (117,000)
Totals 0 0 0 0
Treatment of Beginning
Inventories Priced Above Cost
 The beginning inventories can be treated
differently. Basically there are two systems
to treat the beginning inventories.
1. Perpetual Inventory System.
2. Periodic Inventory System.
Reconciliation of
Reciprocal Ledger Accounts
 Balance of the Investment in Branch ledger account
on the accounting records of the home office may not
agree with the balance of the H.O on the branch
books
 Main reason: Delay in recording &/or Errors

 Prepare reconciliation At the end of each period

before combined FS are prepared.
 Illustration:
Assume that the home office and branch accounting
records of Mercer co. contains the following data on
December 31,1999: Investment in Arvin branch has a bal.
of Br 49,500 while H.O A/c has a balance of Br 41,500 on
the same date.

Reconciling items as shown below:

 A debit of Br 8,000 in the Investment in Arvin branch
ledger account with out a related credit in the Home
office account
 Shipment of (Br. 8,000) On December 29 from H.O is in transit

Reconciling Entry by branch:

Dec. 31. Inventories in Transit…………………..8,000
Home office……………………………..8,000
2) A credit of Br 1,000 In the investment of
Arvin branch ledger account without a
related debit in the home office account
 Collection of A/R (Br.1,000)of branch, by H.O
on Dec. 27 was not recorded by branch

 Branch Entry:
Home office ………………1,000
Accounts receivable….1, 000
3) A debit of Br 3,000 in the Home Office ledger
account without a related credit in the Investment
in Arvin Branch account
 On December 28, branch acquired equipment (TO BE
ACCOUNTED with H.O only) for Br 3,000; NOT recorded by
H.O.

H.O ENTRY:
Equipment: Arvin Branch………………………3,000

Investment in Arvin Branch…………………3,000

4) A credit of Br 2,000 in the Home Office
ledger account without a related debit in the
investment in Arvin branch.
 On December 30, trade accounts receivables of the
home office (Br. 2,000) were collected by the Arvin
branch. NOT recorded by H.O.

H.O Entry:
Investment in Arvin branch………..2,000
Accounts receivable………………..2,000
 Instructions

a. Prepare a working paper to reconcile the

reciprocal ledger accounts of Lobo Company’s
H.O and Wade Branch to the corrected
balances on Jan. 31/05.

b. Prepare journal entries on Jan. 31/05, for the

(1) home office and (2) Wade Branch.
Both use the perpetual inventory system.
Transactions Between Branches
 Occasionally operations require that
merchandise or other assets be
transferred from one branch to another.
 Usually, a branch does not carry a reciprocal
ledger a/c with another branch.
 The transfer can be recorded in H.O ledger
a/c and H.O credits the inventories (assuming
perpetual inventory system is used).
Transactions Between Branches
 On receipt of the inventories, the branch
debits inventories and credits H.O.
 Home office records the transfer b/n branches
by a debit to Inv’t in recipient branch & credit
to Inv’t in delivering branch.
 Excess freight costs are recognized as
expenses of the H.O.
 Illustration: Excess freight costs on inter-branch
transfers of merchandise.
 The H.O shipped mdse costing Br 6,000 to Branch
D and paid freight costs of Br 400.
 Subsequently, the H.O instructed branch D to transfer these
Mdses to branch E.
 Freight costs of Br 300 were paid by branch D to carry out this
order. If the mdse had been shipped directly from the H.O to
branch E, the freight cost would have been Br 500. Assume
that the H.O & its branches use perpetual inventory system.
Make all the necessary journal entries in the three sets of
accounting records.
 Home Office
Investment in Branch D 6,400
Inventories 6,000
Cash 400
To record shipment and payment of freight costs

Investment in Branch E 6,500

Excess Freight Expense- Interbranch TTs 200
Investment in Branch D 6,700
To record TTs of merchandise from D to E under instruction of the H.O

Branch D
Inventories (6000+400) 6,400
Home Office 6,400
To record receipt of merchandise plus freight cost
Home Office 6,700
Inventories 6,400
Cash 300
To record transfer of merchandise to Branch E
 Branch E

Inventories 6,500
Home Office 6,500