Home and Branch Accounting, Part 1.

Branch is the extension of the operations of the Home Office.

Each represent a reciprocal account depending on which book you are accounting for.

Investment in Branch account – account name of HO books representing its branch; it is

an asset account having a debit normal balance (idk sure if CA or NCA :D)
Home Office account – account name of Branch books representing the Home Office; it
is a capital account in the books of the branch having a credit normal balance.

To fully understand the idea/concept of the topic, think of it as a BANK RECON. The balances MUST be
equal. Transactions pertaining to the reciprocal accounts must be simultaneously recorded – just like the
bank reconciliation.

Transactions:

1. Establishment of the branch – a branch may be established using various asset.

Example the HO transfer cash and equipment to the branch.
HO Investment in Branch xx BR Cash xx
Cash xx Equipment xx
Equipment xx Home Office xx

2. Shipment of Inventory (@ cost) – this will represent a SHIPMENT TO BRANCH or

SHIPMENT FROM HOME OFFICE account. So base sa grammatical arrangement ng
account, malalaman mo kung kaninong account yang mga yan. Diba?
Ganito ka dapat mag-analyze, si HO magbibigay ng inventory kay BR. Anu
mangyayare? Sagot. Mababawasan ng Inventory si HO, therefore magcre-credit siya
ng SHIPMENT TO BRANCH, tas magde-debit ng Investment in Branch. Because in
every INTERCOMPANY TRANSACTION, reciprocal accounts must be present.
And base dyan, mag-eentry din si BR ng….? (alam mo na yun)

 Treatment for Freight-in account. In the prior example, inventory shipment to

branch, any freight charge will be account for separately in the Branch’s book. So
what will the HO record? It must not credit a Freight-in account, instead, it must
record the freight charge as cash or accounts payable as the case may be.
 Purchase of inventory by branch from the outsiders. Question, is this an
intercompany-transaction? No, therefore journal entry will be in a normal manner.
What if si home office naman ang bumili? Is it a intercompany transaction?

3. Acquisition of a Property, Plant & Equipment – treatment will be based on, who
will pay and who will keep the records of the PPE.
a. The one who will pay the PPE will be the one who will record a credit to
cash/accounts payable or any liability account.
 b. The one who will keep the records of the PPE will be the one who will record a
debit to Property, plant and equipment.

 Is it possible that only one will record both? Yes. Example if the branch will pay
for the PPE and will also keep the records. What if the home office? Same
principle, but as if ang mga susunod na mangyayare is additional investment
(establishment) or for its use only.

Treatment for depreciation

a. The one who uses the PPE, will be the one who will record Depreciation
Expense
b. The one who keeps the records of the PPE, will be the one who will record
Accumulated Depreciation

4. Recognition of income or loss – ( you must first know and understand the closing
entries process)
First close the income summary account of the branch to its capital account (the
Home Office account), debit/credit depending if the branch gain income/loss. Then
record “branch income/loss” to the home office. Debit or credit? Think of the effect.
Example, upon closing the nominal accounts of the branch a credit balance of
income summary remain – meaning an income, therefore it will increase the capital
account. Dr. income summary and Cr. Home office. Nagkaroon ng increase the
branch, anu ngayon irerecord ni Home office? Must be also an increase, therefore,
Dr. Investment in Branch and Cr. Branch Income.

5. Allocation of expenses (aside from depreciation) – same concept in the

depreciation, who incurs the expense will record the expense and who pays for the
expense will record payment.
a. An expense of branch is paid by the H.O – Dr. Investment in Branch Cr. Cash for
H.O and Dr. Expenses Cr. Home Office for Branch
b. An expense of home office is paid by the branch – isipin mo nalang; kaya mo na
yan

Note that same concept will apply if the other party pays for the liability of the other.

c. Allocation of expense by the Home office to the branch – meaning my prior

incurrence of expense na si home office ng expense. Ang IDEA is that, mag
aallocate tayo ng certain amount ng expence kay branch. Pano gagawin yun?
Babawasan mo ng expense si home office, credit for expense and debit sa
investment in branch .And to allocate expense to the branch, the branch will debit
an expense account and credit sa home office account.
6. Cash collection of a receivable by the other party – the one who receive the
cash will be the one to record a debit to cash, and the other will credit a receivable.
a. Receivable of home office collected by the branch – debit cash and credit home
office by branch; debit investment in branch and credit account receivable
b. Receivable of branch collected by the home office – debit cash and credit
investment in branch by the home office; debit home office and credit accounts
receivable by the branch.

Lastly, the presentation of the financial position. Intercompany accounts must be

CLOSED. (Investment in Branch, Home Office, Shipment to branch and Shipment from
Home Office)

A very important factor in understanding the Home and Branch accounting is the SIMPLE
RULES of debit and credit. Don’t hesitate to go back to the basics and review your basic
accounting process.