ACC5116 Accounting for Special Transactions

Home Office and Branch Accounting

Introduction

The branches of an enterprises are not separate legal entities, they are separate
economic and accounting entities whose special features necessitate accounting procedures
tailored for those features, such as the reciprocal accounts. On the other hand, the sales
agency is also not a separate business entity.

In this type of business set-up, one location referred to as the home office is usually
the base of operations wherein branches and agencies are maintained on different business
locations depending on the function and mode of operation.

Sales Agency vs Branch

Sales Agency
 Usually carries a line of samples or displays merchandise but does not carry stocks of
it.
 Orders are taken from customers and sent to the home office for approval of credit. 
 Home office then ships the merchandise directly to customers. Customers remit
payments to HO directly
 A working fund of sales agency expenses is provided by the HO and replenished when
exhausted.
 No other cash is handled by the sales agency

Branch
 Carries stocks of merchandise which maybe obtained solely from the home office or a
portion may be obtained from outside suppliers.
 Makes the usual warranties with respect to quality and makes collections of accounts
receivable, and function in most respect as an independent business unit.
 Restricted until it is more than a sales agency

Accounting for Agency Operations

An agency is an unincorporated entity in which orders are received and then

transmitted to the home office for processing, shipping and billing of merchandise. They do
not have merchandise available for sale, but they maintain samples inventory, they rarely
collect cash from customers, since collections are remitted by customers directly to the home
office.

Ordinarily, the only accounting records required for sales agencies are for cash
receipts and disbursements, which are handled in essentially the same manner as a petty cash
fund system.

Use of Imprest System

 Usually adopted by the home office for the working fund of the sales agency.
 Entries made by the home office depend on whether sales agency net income is
determined separately or not separately.
 If HO wants to determine the net income of each of its sales agencies separately, it
must maintain in the general ledger distinct revenue and expense accounts in the
name of the sales agency.

Examples:
1. Sales –Sales Agency
2. Rent Expense –Sales Agency

The cost of goods sold of each agency must also be determined.

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Journal Entry to Record Shipments to Agency Customers:

Perpetual Inventory System

COGS – Sales Agency xx

Merchandise Inventory xx

Periodic Inventory System

COGS – Sales Agency xx

Shipment of Merchandise – Sales Agency xx

At the end of accounting period, the account Shipment of Merchandise – Sales Agency is
deducted from the total of beginning inventory and purchases to determine the cost of goods
available for sale by the home office for its own operation

Illustrative Entries:

Assume that Manila Trader, Inc. established a sales agency in Cebu. The revenues and
expenses of the home office are recorded separately from those of the sales agency.
Moreover, operating results of the sales agency and the home office are determined
separately at the end of each accounting period.

The accounting entries prepared by Manila Trader, Inc. as a result of the establishment of
Cebu Agency and the subsequent activities are shown below: (Assume that the home office
uses the periodic inventory system).

1. A working fund of P10,000 is established.

2. Shipped merchandise to Cebu Agency for use as samples, P2,000.
3. Fill sales orders from Cebu Agency, P90,000.
4. Cost of goods sold identified with sales agency sales, P60,000.
5. Replenishment of working fund of the agency, P8,000.
6. Closing of revenues and expenses of the agency.
7. Closing of Cebu Agency Income to Income Summary account.

Accounting for Branch Operations

Branch is used to describe a business unit located at some distance from the home
office. This unit carries merchandise obtained from the home office, generates sales, approve
customer's credit, and makes collections from its customers. They may also obtain
merchandise from outside suppliers. The cash receipts of the branch are often deposited in a
bank account and branch expenses are paid from an imprest cash fund.

o Normally, the home office and the branch maintain separate accounting systems.
o Each maintains a full set of books with a complete self-balancing set of accounts.
o Both home office and branch must record transactions with one another (inter-office
transactions) in their respective accounting systems.
o All accounts are combines for external reporting so that the external financial
statements will represent the company as a single economic enterprise.
o Certain elimination is necessary.

Reciprocal Accounts

In recording inter-office transactions, two reciprocal accounts are used, namely, the
Investment in Branch (Branch Current) account used by the home office which is classified as
an asset (receivable and investment); and the Home Office (HO Current account) used by the
branch which is classified as a liability and equity.

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The reciprocal nature of the Investment in Branch and the Home Office accounts and the way
in which they are affected by various inter-office transactions are shown below:

(Home Office Books) (Branch Books)

Investment in Branch Home Office
xx Transfer of assets to branch xx
xx Transfer of assets from branch xx
xx Branch profit xx
xx Branch loss xx

Establishment of Branch

When a company establishes a branch, the transfer of assets to the branch is recorded by the
home office in the Investment in Branch account. Likewise, the branch records the transfer
with an entry to the Home Office account.

Sample entries:

Home Office books:

Investment in Branch XX
Cash XX
Office Equipment XX

Branch books:

Cash XX
Office Equipment XX
Home Office XX

Recognition of Branch Income or Loss

• Income for each branch is computed periodically in the normal manner.

• All of the branch’s revenue and expense accounts are closed to its Income Summary
account in the usual manner.
• The balance of the Income Summary account represents the branch’s income or loss,
and is closed to the Home Office account.
• The Home Office account serves in place of retained earnings and other owner’s
equity accounts on the book of the branch.
• When the branch income and loss is reported to the home office, an entry is made on
the home office books to recognize the income or loss of the branch.

Illustration: Assume there is a credit balance of P60,000 in Manila branch’s Income Summary
account at the end of the Manila branch, the entry to record the branch income would be:

Branch books:

Income Summary 60,000

Home Office 60,000

Home Office books:

Investment in Cebu Branch 60,000

Manila Branch Income 60,000

Merchandise Shipments to a Branch

Merchandise sold by the branch may be obtained entirely from the home office or it may be
allowed to acquire some merchandise from outside parties.

Purchases of merchandise from outsiders are recorded in the normal manner.

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If for example, Cebu branch purchases P10,000 of merchandise from outside parties, and the
branch uses a periodic inventory system, the branch records the transaction as follows:

Purchases 10,000
Cash or Accounts Payable 10,000

Merchandise Billed at Cost

Both the home office and the branch treat the transfer of merchandise in the same way as
the transfer of any other asset.

Illustration: Assume that King Kong Inc.’s home office transferred merchandise with a cost of
P80,000 to its Cebu branch and the home office uses periodic inventory system.

Home Office books:

Investment in Cebu Branch 80,000

Shipments to Branch 80,000

Branch books:

Shipments from Home Office 80,000

Home Office 80,000

Freight Charges on Merchandise Shipments

Freight costs incurred in shipping merchandise from the home office to a branch become part
of the cost of the branch inventory.

Illustration: Assume that King Kong Inc.’s home office pays P5,000 to transport P80,000 of
merchandise to Cebu branch.

Home Office books:

Investments in Cebu Branch 85,000

Shipments to Branch 85,000

Branch books:

Shipments from Home Office 80,000

Freight-In 5,000
Home Office 85,000

Merchandise Billed at 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.

 Therefore, 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.

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Illustration: Assume that King Kong Inc.’s home office transferred merchandise with a cost of
P80,000 to its Cebu branch at billed price of P100,000 and the home office use periodic
inventory system.

Home Office books:

Investment in Cebu Branch 100,000

Allowance for Overvaluation 20,000
Shipments to Branch 80,000

Branch books:

Shipments from Home Office 100,000

Home Office 100,000

Preparation of Combined Financial Statements

 In the preparation of combined financial statements for the company, the accounts of
the home office and its branches are combined.

 Reciprocal and intra-company account balances must be eliminated because they

relate to activities within the company rather than activities between the company
and outside parties.

 Working paper normally is used to combine the accounts of the HO and its branched,
and to eliminate the reciprocal accounts

 All eliminations are only made in the working paper, not on the separate books of the
units being combined.

Illustration: Assume the following balances of the reciprocal accounts on December 31, 2021
after adjusting and closing entries have been prepared:

Investment in Branch P 295,000

Home Office 295,000
Shipments to Branch 85,000
Shipments from Home Office 85,000

Required: Prepare the elimination entries:

Combined Financial Statements

 Combined financial statements of the home office and the branch are prepared to
show the effects of business transactions must be eliminated.

 To facilitate the preparation of combined statements, working papers are usually

prepared.

 Two formats of working paper may be used, the trial balance working paper (normally
used in accounting for branch operations) and the three-section working paper (used in
parent-subsidiary accounting)

Inter-Office Transactions and their Journal Entries

Instruction: Prepare the necessary journal entries to record the following inter-office
transactions in the books of the home office and the branch:

1. Transfer of cash from home office to branch

2. Transfer of inventory from home office to branch at cost
3. Collection of branch’s accounts receivable by the home office

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 4. Collection of home office’s accounts receivable by the branch
5. Expenses paid by home office for the branch
6. Fixed assets bought by home office for the branch. The records of fixed assets are
maintained in the books of the branch.
7. Fixed assets bought by home office for the branch. The records of fixed assets are
maintained in the books of the home office.
8. Depreciation of the above fixed assets under assumptions in Nos. 6 and 7.
9. Fixed assets bought by branch for use of the branch. The records of fixed assets are
maintained in the books of the home office.
10. Depreciation of the above fixed assets under assumption in No. 9.
11. Closing of branch income

Illustration: Working Paper and Financial Statements

On December 31, 2021, the end of period, the following trial balances were prepared for the
SINOVAX Co. and its branch. Merchandise was billed to the branch by the home office at 120%
of cost (Amounts in 000’s).

Home Office Branch

DEBIT CREDIT DEBIT CREDIT
Cash P 30,350 P 12,650
Accounts receivable 26,200 12,850
Merchandise inventory, 1/1/21 31,500 14,400
Furniture and fixtures 8,500 3,600
Accumulated depreciation – F&F P 2,500 P 540
Allowance for overvaluation 3,700
Store supplies 940 580
Branch current 47,460
Accounts payable 35,400 4,200
Home office 47,460
Ordinary shares 65,000
Retained earnings 6,850
Sales 74,850 20,000
Shipment to branch 8,500
Purchases 37,600 9,520
Shipment from home office 10,200
Advertising expense 2,850 2,800
Salaries and commission expenses 4,250 2,350
Other selling expenses 1,850 1,050
Rent expense 2,700 1,500
General expense 2,600 . 700 .
TOTALS P 196,800 P 196,800 P 72,200 P 72,200

Mdse. inventory, 12/31/21 – H.O. P 24,200

Mdse. inventory, 12/31/21 – Branch P 14,600
From H.O. at billed price 11,700
From outsiders 2,900

Required:

1. Prepare individual statements for the branch and the home office for December,
2021.
2. Prepare a worksheet for combined financial statements.
3. Prepare combined statements for the branch and the home office.
4. Prepare the entries required to close the books of (a) the branch and (b) the home
office.