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Home Office and Branch Accounting - Part 1
Home Office and Branch Accounting - Part 1
Transaction 9: Revenue
Transaction: Branch makes a total sales of P500,000 on account.
HO's Books Branch's Books
No Entry DR: Accounts Receivable (P500,000)
CR: Sales (P500,000)
Allocation of Expenses
Expenses incurred and paid by the branch are recorded in the normal way. However, expenses
incurred by the HO on behalf of the branch are recorded similarly to an investment transaction
(e.g. debit to investment account and credit to HO account)
For instance, costs which are incurred centrally are allocated to the various business units within
a single company in order to have proper financial performance measurements for each of the
business units. (Just recall the concept you encountered durinh your Management Accounting
subject about Responsibility Accounting)
The following are examples of costs which may be allocated to the branch:
1. Costs of maintaining information systems
2. Costs of contracts signed on a company as a whole level (e.g. security, pest control,
insurance, advertising, etc.)
3. Depreciation computed under the group or composite method of depreciation (Recall this
concept using your notion during your FAR 1)
4. Other general overhead costs.
Assuming the branch has an ending inventory of P150,000, the branch's individual Statement of Profit
(Loss) for the period will be as follows:
The individual Statement of Financial Position (Balance Sheet) of the branch is shown below:
ASSETS
Cash in Bank 417,000
Accounts Receivable 100,000
Inventory 150,000
Equipment 400,000
Accumulated Depreciation- Equipment (40,000)
Furniture 50,000
Accumulated Depreciation - Furniture (5,000)
TOTAL ASSETS 1,072,000
LIABILITIES AND EQUITY
Accounts Payable 40,000
Accrues Expenses 25,000
Home Office 1,007,000
TOTAL LIABILITIES AND EQUITY 1,072,000
Solutions:
ABC Co.
Working Paper for Combined FS
December 31, 20X1
HOME OFFICE BRANCH ELIMINATIONS COMBINED
Dr. (Cr.) Dr. (Cr.) Dr. (Cr.) Dr. (Cr.)
Cash 1,100,000 417,000 1,517,000
Accounts Receivable 180,000 100,000 280,000
Inventory - Jan. 1 650,000 -0- 650,000
Shipments from HO 230,000 (230,000)** -0-
Purchases 72,000 40,000 112,000
Freight In 22,000 18,000 40,000
Shipments to Branch (230,000) 230,000** -0-
Investment in Branch 827,000 (827,000)* -0-
Equipment 720,000 400,000 1,120,000
Accumulated (72,000) (40,000) (112,000)
Depreciation -
Equipment
Furniture 90,000 50,000 140,000
Accumulated (9,000) (5,000) (14,000)
Depreciation - Furniture
Accounts Payable (72,000) (40,000) (112,000)
Accrued Expenses (45,000) (25,000) (70,000)
Share Capital (2,000,000) (2,000,000)
Share Premium (500,000) (500,000)
Retained Earnings - Jan. (206,200) (206,200)
1
Home Office (827,000) 827,000* -0-
Sales (900,000) (500,000) (1,400,000)
Depreciation Expense 168,000 68,000 236,000
Utilities Expense 18,000 10,000 28,000
Gen. Overhead Expense 7,200 4,000 11,200
Various Operating 180,000 100,000 280,000
Expense
TOTALS -0- -0- -0- -0-
Notes:
All similar assets, liabilities, expense and income accounts are added together.
Only the reciprocal accounts (Investment in Branch and Home Office) and the shipments
accounts (shipments from HO ans shipments to branch) were eliminated. The elimination
entries were as follows:
*E1 DR: Home Office (P827,000)
CR: Investment in Branch (P827,000)
**E2 DR: Shipments to Branch (P230,000)
CR: Shipments from Branch (P230,000)
If individual Statement of P(L) is to be prepared for the Home Office, then it would be as follows:
Special Note:
From the previous discussions, the individual profit of the branch is P180,000. If this amount is added to
the individual profit of the home office, we can derive the combined profit of P462,800 (P180,000 +
P282,800).
After posting the above entries, the inventory and retained earnings shall have balances of P420,000
and P669,000 (P206,200 + P462,800), respectively.
-END OF PART 1-