Home ofce, Branch and Agency accounting Branch and Agency distinguished A sales agency is not a self-contained business but rather acts only on behalf of the home oce. On other hand, a branch is a self-contained business which acts independently, but within the bounds of company policy and subject to the control of the home oce. The further dierentiat dierentiate e these two:
Displays merchandise and taes customers! orders but does not carry carry stoc of merchandise t #ustomers! orders are sent to the home oce for appro$al of credit. #ustomers remit paymen %olds re$ol$in& cash fund pro$ided by the home oce that is replenished when depleted. 'o Not a separate accountin& entity. The only accountin& records maintained are cash receipts a
Accounting or an agency )ince an a&ency does not maintain its own separate accountin& boos, all of its transactions are recorded in the boos of the home oce. The a&ency maintains a simple record to records its cash receipts and cash disbursements, disbursements, similarly to a petty cash system.
Illustration: Accounting or agency
*an. + eceipt of re$ol$in& fund from home oce *
Accounting or branch operations A branch is accounted for as a separate business unit, but subject to the control of the home oce. The home oce determines the de&ree of selfmana&ement e(ercised by the branch.
purposes, transactions or internal reporting purposes, transactions between a home oce and its branch are recorded in reciprocal accounts namely: +. "Investment in branch" account ( or !ranch current! account/
The home ofce maintains this account in its boos to account for its in$estment in the branch. 0. "Home ofce" account ( or !%ome oce current ! account/
The branch maintians this account in its boos to account for in$estment recei$ed from the home oce. The 12n$estment in branch1 is an an assets account in the home oce!s individual "nancial statements3 while the 1%ome oce1 is an e!uity account in the branch!s individual "nancial statement. These accounts are eliminated when combined "nancial statement are prepared. The reciprocal reciprocal accounts are debited4credit debited4credited/ ed/ for the followin&: followin&:
Home fce#s boo$s: Branch#s boo$s: Illustration: Accounting or branch operations Initial investment +. %ome oce establishes establishes a branch for an initial in$estment of 5+,666,666 in cash.
%roperty carried in branch boo$sBranch ac!uisition 0. ranchac7uires e7uipment for 5866,666 to be carried in the branch boo$s&
'o entry is made in the home oce boos. The entry for a subse7uent depreciation depreciation of 586,666 on the e7uipment ac7uired ac7uired by branch and maintained in the branch boo$s is as follows:
%roperty carried in home ofce boo$sBranch boo$sBranch ac!uisition
9. ranch ac7uires e7uipment for 5066,666 to be carried in the home ofce boo$s&
hen the branch ac7uires property to be carried in the home ofce boo$s, the ac7uisition is treated as a reduction to both the 1in$estment in branch1 and 1home oce1 accounts. The entry for a subse7uent subse7uent depreciati depreciation on of 506,666 on on the e7uipment e7uipment ac7uired by branch and maintained in the home ofce boo$s is as follows:
%roperty carried in branch boo$sHome ofce ac!uisition 8. %ome oce ac7uires furniture for 5;6,666 to be carried in the branch boo$s&
)ubse7uent depreciation of 5;,666 on the abo$e furniture is recorded as follows:
%roperty carried in home ofce boo$sHome ofce ac!uisition ;. %ome oce ac7uires furniture for 596,666 to be carried in the home ofce boo$s, but possesion and use of the e7uipment is transferred to the branch.
)ubse7uent depreciation of 59,666 on the abo$e furniture is recorded as follows:
'ranser o investment reight paid by home ofce <. %ome oce transfer in$entory worth 5+;6,666 to the branch. rei&ht paid by the home oce is 5+6,666
The 1)hipments from from home oce1 account account is similar similar to the 15urchases 15urchases11 account and is used under a periodic inventory inventory system. The frei&ht frei&ht is debited to debited to the 12n$estment 12n$estment in branch1 account account and credited to the 1%ome oce1 account.
'ranser o inventories reight paid by branch =. %ome oce transfer in$entory worth 5>6,666 to the branch. rei&ht paid by the branch is 5<,666.
%urchase o inventories ac!uisition rom outside parties >. ranch purchases in$entory worth 586,666 on account from outside party. rei&ht paid by the branch is 50,666.
evenue ?. ranch maes total sales of 5;66,666 on account.
)ollection +6. ranch collects 5866,666 from account recei$able.
emittance to home ofce ++. ranch remits 5966,666 cash collections to home oce.
Allocation o e*pense @(penses incurred and paid by the branch are recorded in the normal way @(amples of costs which may be allocated to the branch: a. #ost of maintainin& information information system. b. #ost of contracts si&ned on a company le$el, e.&., security, pest control, insurance, ad$ertisin&, and the lie. c. Depreciation computed under the &roup or composite method of depreciation. d. Other &eneral o$erhead costs. +0. ranch incurs $arious operatin& e(penses amountin& to 5+66,666, onefourth of which remains unpaid.
+9. %ome oce allocates 5+6,666 utilities e(pense and 58,666 &eneral o$erhead costs to the branch.
Individual +nancial statements The trial balance balance of the branch branch as of this points is shown shown below: below:
r& )r& #ash
Accounts recei$able )hipments from home oce 5urchases rei&ht-in @7uipment Accum. Dep. - e7uipment urnature Accum. Dep. - furniture Accounts payable Accrued e(penses %ome oce )ales Depreciation e(pense tilities e(pense Beneral o$erhead e(pense Carious operatin& e(penses Totals Totals Assumin& the branch has an endin& in$entory of 5+;6,666, the branch!s individual statement of prot or loss for the period is shown below: )ales #OB): 2n$., be&. )hipments from %.O. 5urchases rei&ht-in Total goods available for sale 2n$., end.
Gross prot Dep. @(p. tilities e(pense Beneral o$erhead e(pense Carious operatin& e(penses Proft or the period The closin& entries entries are are as follows: follows: +8. To close the branch!s nominal accounts to the income summary accounts:
+;. To close the branch!s pro"t to the reciprocal accounts:
econciliation econciliation o reciprocal accounts The 1Investment 1Investment in branch" and the 1Home 1Home oce" accounts oce" accounts must ha$e e!ual balances& 2f these accounts do not balance, reconciliation procedures must be performed. econciliation econciliation items can be broadly classi"ed into the followin&: a. 'ransers intransit - at the time "nancial statements are perpared, perpared, there may be asset transfers transfers between the home oce oce and the branch which which were not yet recorded by the supposedly recipient. The adjustin& adjustin& entry would be be simply a debit to 1)hipments from from home oce,1 oce,1 and probably to 1rei&ht-in1 also, a correspondin& credit to 1%ome oce1 account. b. -nrecorded ebit and )redit memos A debit memo sent by the home ofce to the branch means that the home oce has debited(increased. the "Investment in branch" account. Therefore,the Therefore,the correspondin& correspondin& entry to be made in the branch boos is a credit(increase. to the "Home oce" account. The opposite applies to a credit memo.
A debit memo sent by the branch to the home oce means that the branch has debited(decreased. the "Home oce" account. Therefore, the correspondin& entry to be made in the home oce boos is a credit(decrease. to the "Investment in branch" account. branch" account. The opposite applies to a credit memo. c. /rrors @rrors such as omissions in recordin&, double recordin&, mathematical mistaes, and the lie can result to imbalance in the reciprocal accounts.
Illustration0& econciliationAd1usted econciliationAd1usted balance A# #o. 2s currently preparin& its combined "nancial statement. At December 9+, 06(+, the home oce shows a 5+;<,666 balance in its 1 Investment in branch" account while the branch shows a 5=6,066 balance in its "Home oce1 oce1 account. The followin& information has been &athered: a. The home oce shipped merchandise merchandise worth 506,666 to the branch durin& December 06(+ which the latter has recei$ed and recorded only in *anuary 06(0. b. The home oce collected 5+6,666 accounts recei$able recei$able on behalf of the branch. The branch did not yet recei$e the credit memo sent by the home oce. c. The bramch returned dama&ed merchandise worth 596,666 to the home oce. The home oce did not yet recei$e the debit memo sent by the branch. d. A remittance of cash collections amountin& to 586,666 was not yet recorded by the home oce. e. The home oce allocated o$erhead cost of 5;,666 to the branch which the latter has recorded twise. f. rei&ht char&e of 5+0,666 paid by the home oce for shipments of merchandise to the branch was recorded by the latter as 5+,066. Requirement #ompute Requirement #ompute for the adjusted balances of the reciprocal reciprocal accounts.
nadjusted balances 4a/ )hipment in-transit 4b/ #ollection of recei$able 4c/ eturn of dama&ed merchandise 4d/ nrecorded remittance 4e/ Allocation of cost recorded twice 4f/ Eathematical mistae in recordin& Ad1usted balances
The compound adjustin& entries entries are as as follows:
Illustration: econciliation -nad1usted balance A# #o., is currently preparin& its combined "nancial statements December 9+, 06(+, the home oce shows a 5+>0,666 balance in its "Investment in branch" account. branch" account. The followin& information has been &athered durin& the reconciliation process: a. A credit memo sent by the home oce to the branch amountin& to 5+0,666 was not recorded by the branch. b. A debit memo sent by the home oce to the branch amountin& to 5?,666 was not recorded. c. A credit memo sent by the branch to the home oce amountin& to 506,666 was recordedby the home oce twice d. A debit memo sent by the branch to the home oce amountin& to 596,666 was recorded by the home oce as 59,666 e. The branch sent by mistae a credit memo amountin& to 5=,666 to the home oce. The home oce did not record it. Requirement #ompute for the unad1usted balance of the "Home oce" account. )olutions:
Home ofce 2ith several branches hen an entity has more than one branch, separate in$estment accounts accounts for each of the branches shall be maintianed in the home oce boos.
Illustration: 3everal branches -nad1usted balance A# #o. %as se$eral branches. On December 9+, 06(+, the 1%ome 1 %ome oce1 account maintianed by Alpha Branch shows a balance of 5+8;,666. The followin& information was determined: a. The home oce char&ed Alpha ranch for a 5+;,666 shipment which was actually sent to eta ranch and retained by the latter Alpha ranch was not noti"ed of the intended shipment. b. The home oce char&ed #harlie #harlie ranch for a 5+<,666 shipment which was actually sent to Alpha ranch. alpha ranch retained the shipment. c. The home oce erroneously recorded a remittance for 5;,666 from its Delta ranch as comin& from Alpha ranch d. tilities e(pense of 58,666 that is allocable to @cho ranch was recorded by the home oce in Alpha ranch!s account. Alpha ranch has inapptopriately inapptopriately recorded to related debit memo from the home oce. Requirement #ompute for the unadjusted balance of the 1 Investment in !lpha ranch" ranch" account in the home oce boos. #olution
3pecial problems in Accounting or branch operations 2n addition to the &eneral procedures discussed discussed earlier, the home oce and branch may enter into some transaction that would create special accountin& problems. )uch transactions are the followin&:
0& Eerchardise shipments to branch billed at a price above cost&
4& 2nter-ranch transactions. 3hipments to branch billed at a price above cost illin& to the branch may be made at amounts above cost, or cost plus cost plus an arbitrary percentage$ also percentage$ also nown as the 1billed 1 billed price." pon receipt of shipments, the branch records the merchandise recei$ed at the billed price, price, rather than at cost. On the other hand, when shipments are billed at above cost, a portiin of the &ross pro"t earned by the branch is attributed to the home ofce&
Illustration: 3hipment at billed price +. %ome oce transfer in$entory worth 5+66,666 to the branch. )hipment to the branch are billed at +06F abo$e cost.
4+66 ( +06F/
3hipment at billed price 5reight paid by home ofce 0. %ome oce transfer in$entory worth 5066,666 to the branch. )hipment to the branch are billed at +06F abo$e cost. rei&ht paid by the home home oce is 5+6,666.
3hipment at billed price 5reight paid by branch 9. %ome oce transfers in$entory in$entory worth 5>6,666 to the branch. )hipment to the branch are billed at +06F abo$e cost. rei&ht paid by the branch branch is 5<,666.
4>6 ( +06F/
%urchase rom outside parties 8. ranch purchases in$entory worth 586,666 on account from outside party. rei&ht paid by the branch is 50,666
evenue ;. ranch maes total sales od 5;66,666 on account.
/*penses <. ranch incurs total e(penses of 5+66,666, 506,666 of which were allocated by the home oce to the branch.
Individual pro+t o the branch Assume the branch reports endin& in$entory of 50;6,666, inclusi$e of capitaliGed frei&ht-in. The pro"t in the branch!s individual statement of pro"t or loss is computed as follows: )ales %ost of sales 2n$entory, be&. )hipment from home oce 4+06HI086HI?
Individual pro+t o branch )ombined +nancial statement3hipment at billed price
hen combined "nancial statements are prepared, the marups on shipments are eliminated in order to restate cost of goods sold and ending inventory to their original costs& This is performed performed by eliminatin& eliminatin& the 1shipment to branch 4from home oce/1 accounts, toðer with the related 1allo&ance" account. The account. The "Investment in branch" and "Home oce" accounts are also eliminated.
Illustration: )omprehensive problem The followin& information information was taen taen from the the records records of a branch: branch: )ales of branch illin& to branch by home oce Operatin& e(pense @ndin& in$entory at billed price The followin& information information was taen taen from the the records records of the home oce: ranch current account )hipments to branch Allowance for marup-nadjusted Requirements#ompute Requirements#ompute for the followin&: a. illin& rate based on cost or Earup percenta&e based on cost. b. )ales of branch to be included in the combined "nancial statements. c. ealiGed marup. d. #ost of &oods sold of branch to be included in the combined "nancial statements. e. @ndin& in$entory of branch to be included in the combined "nancial statement. f. nrealuGed marup in endin& in$entory. &. @ndin& balance of the 1allowance for marup1 account before combinin& the "nancial statement. h. 2ndi$idual pro"t of the branch i. True pro"t of the branch
j. Adjusted Adjusted balance of the the branch current current account account immediately prior prior to combinin& the "nancial statements.
Illustration: Allo2ance account The home oce consistently consistently bills bills its branch branch for shipments shipments at +96F of cost. Durin& the period, the home oce made total shipments of 5=;6,666, at billed price, to the branch. The 1 allo&ance for mar'up" account mar'up" account had a net increase of 58;,666 after year-end adjustments but before elimination entries. The indi$idual "nancial statements of the branch reported &ross pro"t of 5+;,666. Requirements #ompute for the followin&: a. True &ross pro"t of the branch. b. )ales of branch to be included in the combined "nancial statements. c. #OB) of branch to be included in the combined "nancial statements.
Interbranch transaction 2nter-branch transfers of assets are accounted for "as i" the asset transerred 2ent through the home ofce& The transactin& transactin& branches branches account for the transaction "as i" they are dealing 2ith the home ofce rather than 2ith each other&
Interbranch transer o cash The home oce instructs instructs ranch ranch J+ to transfer transfer 5+6,666 cash cash to ranch J0. The entries on the respecti$e respecti$e boos of the the home oce and and the transactin& transactin& branches are as follows:
Interbranch transer o merchandise merchandise Accounted for similarly with inter-branch transfer of cash. %owe$er, special problems may arise on the accounting or reight&
A branch should not be char&ed for e*cessive reight caused by indirict routin&. The branch should be char&ed only$for the normal reight& The e*cess reight is char&ed as an e*pense in the home ofce boo$s&
