You are on page 1of 4

CHAPTER 5- Accounting for Home Office, Otherwise, the agency items are merged without

Branch and Agency. identification with those of the home office.


Sales Agency and Branch Distinguished The branch has its own complete set of accounting
records, therefore all its transactions, including those
Sales Agency
with the home office, are recorded in its books. It also
- Carries line of samples and displays
presents its own set of financial statements: the
merchandise but does not carry stocks of it.
income statement, the balance sheet, and the
- Orders are taken from customers and sent to
statement of cash flows. But because the branch is but
the home office for the approval of credit, the
a part of the home office, therefore, these set of
home office then ships the merchandise
financial statements are not acceptable for general
directly to customers and performs the
purposes. And since the home office is just also a part
collection function.
of the whole organization, its own set of financial
- A working fund for sales agency expenses is
statements: the income statement, the balance sheet
provided by the home office.
and the statement of cash flows are also not acceptable
- Simply an extension of existing sales
for general purposes. These two different sets of
territories. financial statements are internal to each of the
- Maintains a one book only ( Home office) reporting entities, combined financial statements must
be prepared for the combined entities (taken as one
Branch and the same) to meet the requirements of general-
- Carries stock of merchandise maybe obtained purpose statements.
solely from the home office or a portion may
be purchased from outside suppliers. A branch and its home office represent two
- Makes the collection of accounts receivable accounting systems but just one accounting and
and functions in most respect as an reporting entity. All entries in the accounting records
independent business unit. of the branch are also entered, at least in summary
- Maintains 2 books (Home office and Branch) form, in the accounting records of the home office.
The records of the home office and the branch are
linked by two reciprocal accounts; the Home Office
Agencies and branches are established to Equity account in the books of the Branch and the
decentralize operations or to expand into new Investment in Branch account in the books of the
markets. Agencies are simple extensions of the home Home Office. Because they are reciprocal, it means
office; branches, generally, are with regulated that the two accounts always have the same balance
autonomy to operate as an independent entity. although the Investment in Branch is a debit account
Because agencies do not maintain its own set of (as an asset in the books of the Home Office) and the
accounting records, all its transactions are recorded in Home Office is a credit account (as an equity item in
the books of the home office. If the home office would the books of the branch). The two accounts frequently
like to determine viabilities of the agencies, real and show different balances on a temporary basis due to
nominal accounts for the agency are identified in the errors and items in transit. A very important aspect of
home office books to facilitate such determination. the study of home office and branches is the
reconciliation of the reciprocal balances.
An illustration of journal entries recorded for interoffice transactions follow:

Transactions Home Office Books Branch Books

Transfer of cash from the home Investment in branch xx Cash xx


office Cash xx Home office equity xx

Transfer of cash from the Cash xx Home Office Equity xx


branch Investment in branch xx Cash xx

Transfer of mdse from HO at Investment in branch xx Shipment from HO xx


cost Shipment to branch xx HO Equity xx
Transfer of mdse from HO at Investment in Branch xx Shipment from HO xx
above Allowance for OV xx HO Equity xx
Cost Shipment to branch xx

Payment by HO of branch Investment in branch xx Expenses xx


expenses Cash xx HO Equity xx

Allocation of prev. paid branch Investment in branch xx Expenses xx


expense Expenses xx HO Equity xx

Transfer of Fixed asset from Memo entry Memo entry


home office to Branch
(Note: There will be no entry if all fixed assets are accounted in the
books of the home office); otherwise:
Investment in branch xx Fixed Assets xx
Accumulated depn xx Acc Depn xx
Fixed Assets xx HO Equity xx

To take-up branch Profit/(loss) Investment in branch xx Income Summary xx


Branch Income xx HO Equity xx
Branch loss xx HO Equity xx
Investment in branch xx Income Summary xx

To adjust the reported branch Allowance for Ovrvltn xx No Entry


NI /NL) for realized allowance Branch Income xx
Note: The adjusting entry to reflect the true net income or loss of
the branch from the standpoint of the home office is always
favorable and only relevant when billing policy is above cost:

Detailed computation of realized allowance for overvaluation thru sales by the branch to outsiders during the
period:

Billed Price Cost Price Mark-up on Cost


Branch Beg Invty (from HO) Xx Xx Xx
Net Purchases xx xx Xx
Current shipments (from HO) Xx xx Xx
Branch End Invty (from HO) (xx) (xx) (xx)
Cost of Goods Sold Xx xx Xx

Cost = ( Billed Price/100% + % mark-up on cost ) or Mark-up on cost/% mark-up on cost. The amount of
allowance considered realized will be the allowance carried by the cost of goods sold.

There are two pricing methods generally used by the allocates part of the gross margin to the branch and
home office in billing the branch for merchandise the remainder to the home office.
transfers:
Working paper adjustments and eliminations must be
1. Billed at cost the merchandise is transferred at determined in order to:
cost, thus when the branch sells the merchandise,
the entire gross margin is included in the branch 1. Eliminate inter-company balances from the
net income. combined statements to avoid redundancy, and
2. Adjust some items in the cost of sales section of
2. Billed at cost plus markup the merchandise is the branch income statement to their true costs (as
transferred at an amount between cost and the a consequence of the billing policy not equal to
selling price. This intermediate pricing method cost).
The working paper adjustment/elimination entries are as follows:

a. Billed at Cost b. Billed above cost


HO Equity x HO Equity x
Investment in Branch x Investment in Branch x
Accounts Payable x Accounts Payable x
Accounts Receivable x Accounts Receivable x
Shipment to Branch x Shipment to Branch x
Shipment from Allowance for Ovrvltn x
Home Office x Shipment from HO x

None Allownce for Ovrvltn x


Branch Beg Invty x
None Br Ending Invty (I/S) x
Branch End Invty (B/S) x

When a company is composed of a home office and more than one branch, the home office records include a
separate investment in branch account and a separate allowance for overvaluation account for each branch.
Separate worksheet adjustments are made for each branch.

When assets are transferred from one branch to another branch, the home office account on each branchs records
are used to record the transfers. (Inter-branch receivables and payables are not created.) In essence, the
transferring branch reverses the entry to record the transfer from the home office and the receiving branch enters
a transfer as if it comes from the home office.

( PUT ANY ADDITIONAL INFORMATION YOU HAVE AND SHARE IT ALSO TO THE WHOLE BSA
3-15. THANK YOU !!)

You might also like