Chapter 11 - Home Office, Branch, & Agency Accounting.A

ACCOUNTING FOR SPECIAL
TRANSACTIONS
(Advanced Accounting 1)
LECTURE AID
2021
ZEUS VERNON B. MILLAN

Chapter 11
Home office, Branch and Agency
Accounting
Learning Competencies
• Account for transactions between a home
office and its branch.
• Reconcile interoffice accounts.
• Prepare combined financial statements of a
home office and its branch.
ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:

MILLAN)
Home office, Branch and Agency
• Sales Agency
o -not a self-contained business but rather acts on behalf of the
home office.
• Branch
o -self-contained business that acts independently but within the
bounds of the company policies set by the home office.

TRANSACTIONS (Advanced
Accounting 1) - (by: MILLAN)
Branch and Agency distinguished

Branch and Agency distinguished (Continuation)

Accounting for an agency
• Since an agency does not maintain its own separate

accounting books, all of its transactions are recorded in the books
of the home office (101-103: Cash-Agency #1).
• The agency maintains a simple record (e.g., a log book) to record its
cash receipts and cash disbursements, similarly to a petty cash
system.

• ILLUSTRATION – ACCOUNTING FOR AGENCY
(EXCEL FILE)

Accounting for branch operations
• A branch is accounted for as a separate business unit. The

branch maintains its own records and prepares its own
financial statements.
• Peculiar accounting procedure in branch accounting
-recording transactions between the home office and the branch;
and
-preparing combined financial statements of the home office
and the branch.

Reciprocal accounts
1. “Investment in branch” account (or ‘Branch current’

account) - The home office maintains this account in its books to
account for its investments in the branch.
2. “Home office” account (or ‘Home office current’ account) - The

branch maintains this account in its books to account for
investments received from the home office.

Home office’s books

Branch’s books

• ILLUSTRATION – ACCOUNTING FOR BRANCH OPERATIONS
(EXCEL FILE)

Combined financial statements
• The home office and its branch are viewed as a single reporting
entity for external reporting. Thus, the individual financial
statements of the home office and the branch need to be combined
when preparing general purpose financial statements.
• Combined financial statements are prepared by:

1. Adding together similar items of assets, liabilities, income
and expenses, and
2. Eliminating reciprocal accounts.
• ILLUSTRATION – COMBINED FINANCIAL STATEMENT
(EXCEL FILE)

Reconciliation of Reciprocal Accounts
• Reconciliation shall be made if the balances of the “Investment in

branch” and “Home Office” accounts are not equal.
• Reconciling items can be broadly classified into the following
 Transfers in-transit
 Unrecorded debit or credit memos
 Errors

Requirement: Compute the adjusted balance of the reciprocal accounts.

Home Office with Several Branches
• Home office will maintain a separate ‘investment’ account for

each branch
• Each branch maintains its own ‘home office’ account and
records only its own transactions with the home office
• Transactions between one branch and the home office should not
affect the records of the other branches.

Special Problems in Accounting for Branch
Operations
• Merchandise shipments to branch billed at prices above cost

• Inter-branch transactions

Shipments to branch billed at a price above cost
• Billings to the branch may be made at amounts above cost, or cost

plus an arbitrary percentage, also known as the “billed price.”
Information on actual costs is withheld from the branch. Thus, upon
receipt of shipments, the branch records the merchandise
received at the billed price, rather than at cost.
• When combined financial statements are prepared, the markup on
shipments are eliminated. This is necessary to restate the cost of
goods sold and ending inventory of the branch to their original
costs.
• ILLUSTRATION – SHIPMENTS BILLED ABOVE COST
(EXCEL FILE)

Inter-branch transactions
“as if” the asset transferred went through the home office and “as if”
the branches were transacting with the home office rather than with
each other.

Illustration: Transfer of Cash
• The home office instructs Branch #1 to transfer P10,000 cash to

Branch #2.
Home Offi ce Books Branch # 1 Books Branch # 2 Books
Investment in Br. #2 10,000 Home Offi ce 10,000 Cash 10,000
Investment in Br. #1 10,000 Cash 10,000 Home Offi ce 10,000
• Branch #2 subsequently repays P8,000 to Branch #1.
Home Offi ce Books Branch # 1 Books Branch # 2 Books

Investment in Br. #1 8,000 Cash 8,000 Home Offi ce 8,000
Investment in Br. #2 8,000 Home Offi ce 8,000 Cash 8,000

Transfer of Merchandise
• Accounting for freight

Excessive Freight : a branch should be charged only for the normal
freight. Any excess freight caused by indirect routing should be
charged as an expense in the home office books.
Illustration:
Home office transfers inventory worth P150,000 to Branch #1. Home
office pays freight of P10,000.
Home Office Books Branch # 1 Books
Investment to Branch #1 160k Shipments from HO 150k
Cash 10k Freight In 10k
Shipments to Branch #1 150k Home Offi ce 160k

• Later on, the home office instructs branch #1 to transfer the
merchandise to branch #2. Branch # 1 pays freight of P3,000. If
the merchandise have been shipped directly from HO to branch # 2,
the freight cost would have been P11,000.
The excess freight is identified as follows:

Freight from home offi ce to Branch #1 10,000
Freight from Branch #1 to Branch # 2 3,000
Total freight on indirect routing 13,000
Normal Freight from HO to branch #2 11,000
Excess Freight 2,000

Branch # 1 Books Branch # 2 Books
Home Offi ce 163k Shipments from HO 150k
Shipments from HO 150k Freight In 11k
Freight In 10k Home Offi ce 161k
Cash 3k
Home Office Books

Shipments to Branch #1 150k
Investment in Branch #2 161k

Loss in excessive freight 2k
Investment in Branch # 1 163k

• Savings on freight: not accounted for. No gain is recognized.
Illustration:
Home office transfers inventory worth P150,000 to Branch #1. Home
office pays freight of P10,000
Home Office Books Branch # 1 Books

Investment to Branch #1 160k Shipments from HO 150k
Cash 10k Freight In 10k
Shipments to Branch #1 150k Home Offi ce 160k

• Later on, the home office instructs branch #1 to transfer the
merchandise to branch #2. Branch # 1 pays freight of P3,000. If
the merchandise have been shipped directly from HO to branch # 2,
the freight cost would have been P14,000.
Freight from home offi ce to Branch #1 10,000

Freight from Branch #1 to Branch # 2 3,000
Total freight on indirect routing 13,000
Normal Freight from HO to branch #2 14,000
Savings on Freight - 1,000

Branch # 1 Books Branch # 2 Books
Home Offi ce 163k Shipments from HO 150k
Shipments from HO 150k Freight In 13k
Freight In 10k Home Offi ce 163k
Cash 3k
Home Office Books

Investment in Branch #2 163k

Investment in Branch # 1 163k

END
ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:
MILLAN)

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ACCOUNTING FOR SPECIAL

ZEUS VERNON B. MILLAN

ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:

ACCOUNTING FOR SPECIAL

ACCOUNTING FOR SPECIAL

ACCOUNTING FOR SPECIAL

• Since an agency does not maintain its own separate

ACCOUNTING FOR SPECIAL

ACCOUNTING FOR SPECIAL

• A branch is accounted for as a separate business unit. The

ACCOUNTING FOR SPECIAL

1. “Investment in branch” account (or ‘Branch current’

2. “Home office” account (or ‘Home office current’ account) - The

ACCOUNTING FOR SPECIAL

ACCOUNTING FOR SPECIAL

ACCOUNTING FOR SPECIAL

ACCOUNTING FOR SPECIAL

• Combined financial statements are prepared by:

ACCOUNTING FOR SPECIAL

• Reconciliation shall be made if the balances of the “Investment in

ACCOUNTING FOR SPECIAL

ACCOUNTING FOR SPECIAL

• Home office will maintain a separate ‘investment’ account for

ACCOUNTING FOR SPECIAL

• Merchandise shipments to branch billed at prices above cost

ACCOUNTING FOR SPECIAL

• Billings to the branch may be made at amounts above cost, or cost

ACCOUNTING FOR SPECIAL

ACCOUNTING FOR SPECIAL

• The home office instructs Branch #1 to transfer P10,000 cash to

• Branch #2 subsequently repays P8,000 to Branch #1.

Home Offi ce Books Branch # 1 Books Branch # 2 Books

ACCOUNTING FOR SPECIAL

• Accounting for freight

ACCOUNTING FOR SPECIAL

The excess freight is identified as follows:

ACCOUNTING FOR SPECIAL

Home Office Books

Investment in Branch #2 161k

ACCOUNTING FOR SPECIAL

Home Office Books Branch # 1 Books

ACCOUNTING FOR SPECIAL

Freight from home offi ce to Branch #1 10,000

ACCOUNTING FOR SPECIAL

Home Office Books

Investment in Branch #2 163k

ACCOUNTING FOR SPECIAL

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