Advanced Financial Accounting II

Chapter Three
Accounting For Sales Agencies and Branch
Operations
3.1 Characteristics and Principles
3.2. Distinction between Sales Agency and Branch
The difference between a sales agency and a
branch most often has to do with the degree of
autonomy (self-government).
A sales agency, sometimes referred to simply as an
“agency,” usually is not an autonomous operation
but acts on behalf of the home office. The agency
may display and demonstrate sample merchandise,
take orders, and arrange for delivery. The orders
typically are filled by the home office because a
sales agency usually does not stock inventory.
Merchandise selection, advertising, granting of
credit, collection on accounts, and other aspects of
operating the business usually are conducted by
the home office.
By contrast, a branch office usually has more
autonomy and provides a greater range of services
than a sales agency does, although the degree
differs with the individual company. A branch
typically stocks merchandise, 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.
Accounting for Sales Agencies
From an accounting standpoint, the sales agency’s
accounts are carried on the books of the home
office. Transactions are recorded in accounts that
identify the particular sales agency, for example,
Sales-Ambo Agency; Rent Expense-Ambo Agency.
For some types of transactions, the entries
recorded by the home office are based on source
documents generated by the agency.
Example:
As an example of home office accounting for a
sales agency, assume that ABC Enterprise, a
manufacturer of modular structures and partitions
based in Addis Ababa, establishes a sales agency at
Ambo. The journal entries to record typical sales
agency transactions for the month of March on the
home office books are shown below. Note that the
entries are recorded in the same way as if the
home office had engaged in the transactions
except that the assets, revenues, and expenses are
specifically designated as relating to the Ambo
Agency.
March1.Receipt of petty cash fund from home
office
Petty cash-Ambo Agency………..1,000
Cash……………………………………….1,000
Home Office, Branch and Agency Accounting
For our fifth entry, we discussed all about Home
Office, Branch and Agency Accounting.
As business grows, it is bound to have more
customers than your business can handle.
The business may need to establish or open new
sales outlet that would furthermore let his business
expand to wider territories.
It may take the form of an agency or branch, the
illustration below will help you differentiate the two
forms:
 AGENCY ACCOUNTING
1. Establishment of Petty Cash Fund
2. Shipped merchandise to agency for use as
samples
3. Purchase of agency equipment & Payment of
salaries to employees of the agency
4. Sales orders from agency are filled,
customers are billed and goods are delivered
and payment collected by the home office
5. Disbursements from the working fund (NO
ENTRY)
6. Replenishment of working fund
7. Closing Entries (Sales Revenue, COGS, Expenses,
Agency Income summary to General Income
Summary)
Transactions between Home Office and Branch
For internal reporting, transactions between home
office and branch are recorded using two reciprocal
accounts, branch current account and home office
current account.
Branch current account (Investment in branch
account) is maintained in the Home Office’s books
as an ASSET, while home office current account is
maintained in the Branch’s books as EQUITY.
These two reciprocal accounts must be equal an any
given point in time.
• In cases the two does not balance, reconciliation
is prepared and adjusting entries are made
before the combined financial statements are
prepared.
• Combined Financial Statements are prepared
by adding together the similar items of assets,
liabilities, income and expenses
and eliminating the reciprocal (mutual)
accounts and other inter-office accounts.
ACCOUNTING FOR BRANCH OPERATIONS
RECONCILIATION OF RECIPROCAL AMOUNTS
• As said in the beginning, the Investment in
Branch Account and the Home Office Current
Account has some instances when they are not
equal. Instances such as transfers in-transit,
unrecorded Debit and Credit
Memos, and Errors.
• The key points to remember in reconciling the
two accounts may be classified as follows:
1. DEBITS in the BRANCH account without
corresponding CREDITS in the HOME OFFICE
ACCOUNT.
2. CREDITS in the BRANCH account without
corresponding DEBITS in the HOME OFFICE
ACCOUNT.
3. DEBITS in the HOME OFFICE account without
corresponding CREDITS in the BRANCH ACCOUNT.

4. CREDITS in the HOME OFFICE account without

corresponding DEBITS in the BRANCH ACCOUNT.
TRANSFERS IN-TRANSIT – These instances arise
when some asset transfers between the Home
Office and the Branch has not yet been recorded by
the intended recipient of the asset.
Example: Branch has not yet received shipment of
Inventory from the Home Office. The reconciling
entry in the Branch’s book is:
UNRECORDED DEBIT MEMO – Debit memos
records and notifies either the Home Office or the
Branch of debit adjustments made.
Example: The Branch returns damaged inventory
to the Home Office so the Branch will send a debit
memo to notify the Home Office of the
transaction.
UNRECORDED CREDIT MEMO – Credit memos
records and notifies either the Home Office or the
Branch of credit adjustments made.
Example: The Home Office collects accounts
receivable on behalf of the Branch so the Home
Office will send a credit memo to notify the Branch
of the transaction.
SPECIAL PROBLEMS IN ACCOUNTING FOR BRANCH
OPERATIONS
1. Shipments to branch billed at a price above
cost (Cost plus Mark-up based on Cost)
• The Home Office may bill the Branch for
inventory shipments at prices above cost since
information on actual cost is withheld from the
Branch.
• Thus, the Branch records the shipment at billed
price rather than the cost.
• When shipments are billed at cost, the
Branch’s profit is attributed solely to the Branch.
On the other hand, when shipments are
billed above cost, a portion of the Branch’s gross
profit is attributed to the Home Office.
• The Mark-up is initially recorded in an Allowance
Account and recognized in Profit or Loss
only when realized.
Individual Profit – True Profit = Realized Mark-up
2. Inter-branch Transactions
Inter-branch transactions are accounted for as if the
asset transferred went through the office and as if
the Branches were transacting with the Home
Office rather than with each other.
Excess Freight on inter-branch transfers of
merchandise is charged as expense in the Home
Office’s Book. Savings on Freight are not accounted
for.
Branch Accounting
What Is Branch Accounting?
Branch accounting is a bookkeeping system in
which separate accounts are maintained for each
branch or operating location of an organization.
Typically found in geographically dispersed
corporations, multinationals, and chain operators,
it allows for greater transparency in the
transactions, cash flows, and overall financial
position and performance of each branch.
Branch accounts can also refer to records
individually produced to show the performance of
different locations, with the accounting records
actually maintained at the corporate headquarters.
However, branch accounting usually refers to
branches keeping their own books and later
sending them into the head office to be combined
with those of other units.
KEY TAKEAWAYS
• Branch accounting is a bookkeeping system in
which separate accounts are kept for each branch
or operating location of an organization.
• Technically, the branch account is a temporary or
nominal ledger account, lasting for a designated
accounting period.
• Branch accounting provides better accountability
and control since profitability and efficiency can
be closely tracked for each location.
• Branch accounting has a long history, going back
to the Venetian banks of the 14th century.