Adavanced Financial Accounting and Reporting 1

HOME OFFICE AND BRANCH ACCOUNTING

Part 1: Nature and Basic Accounting Procedures for Agencies and Branches

NATURE OF AGENCY AND BRANCH

Branch and Agency Distinguished
New sales outlets may be organized as sales agencies or branches.
A sales agency is not self-contained business but rather acts only on behalf of the home office.
On the 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 office.

The following further differentiates agency and branch:

Sales Agency Branch
Displays merchandise and takes customers' orders Carries stock of merchandise used to fill
but does not carry stock of merchandise to fill customers' orders (or provides services similar to
customers' orders. those provided by the home office).
Customers' orders are sent to the home office for Grants credit in accordance with the company
approval of credit. Customers directly remit policy, makes normal warranties, fill customer's
payment to the home office. orders and makes collection on sales.
Holds revolving cash fund provided by the home Has its own assets and liabilities and generates its
office that is replenished when depleted. No other own revenues and incurs its own expenses. Makes
cash funds are held. periodic remittances to home office subject to
company policy.
Not a separate accounting entity. The only A separate accounting entity for internal
accounting records maintained are the cash reporting. It maintains its own complete set of
receipts and cash disbursements books accounting records.
necessarily to account for the revolving fund. The
main office maintains records of sales made For external reporting, the branch's financial
through the agency and the expenses it incurs. statements are combined with the home office's
FS.

Examples of sales agencies:

1. A booth located in a shopping mall that displays miniature designs of house and lots and
condominium units for real estate business.
2. A booth located on a side walk offering internet connection on behalf of an internet service
provider wherein interested customers apply directly to the internet service providers office.
Examples of branch:
1. A branch of BDO in a shopping mall.

ACCOUNTING FOR AN AGENCY

 Since an agency does not maintain its own separate accounting books, all of its transactions are
recorded in the books of the home office.
  The agency maintains a simple record (e.g. a log book) to record its cash receipts and cash
disbursements, similar to a petty cash system.
 In order to identify the transactions of the agency from other transactions, the home office may
set up a specific account code and accoun titles for the agency.
(e.g. Cash - Agency No. 01 with an account code of 101103)
Illustrative Example
Agency Transactions Entries in the Home Office Books
Jan. 01: Transfer of cash to the agency to serve as DR: Cash - Agency 01 (P1,000)
the revolving fund. CR: Cash in Bank (P1,000)
Jan. 01-31: Orders sent by agency to home office. To record the sale in connection to the orders
received:
DR: Accounts Receivable (P200)
CR: Sales - Agency 01 (P200)

To record the cost of inventory sold

DR: Cost of Sales - Agency 01 (P120)
CR: Inventory (P120)
Jan. 01-31: Collection by home office of agency DR: Cash in Bank (P200)
sales. CR: Accounts Receivable (P200)
Jan.01-31: Disbursements from the revolving fund NO ENTRY
held by the agency. (see note below)
Jan. 31: Replenishment of the agency's revolving DR: Various expenses - Agency 01 (P50)
fund. CR: Cash in Bank (P50)
To determine the profit attributable to the agency, DR: Sales - Agency 01 (P200)
the following closing entry shall be made: CR: Cost of Sales - Agency 01 (P120)
CR: Various Expenses - Agency 01 (P50)
CR: Income Summary - Agency 01 (P30)
Note: Accounting for the disbursements pertaining to revolving fund is treated the same way with the
petty cash fund. Expenses are only recorded upon replenishment (Imprest PCF System)

ACCOUNTING FOR BRANCH OPERATIONS

 Recall that a branch is accounted for as a separate business unit but subject to the control of the
home office. The home officd determines the degree of self-management exercised by the
branch.
 The branch maintains its own records and prepares its own financial statements. However, the
branch's financial statements are combined with the home office's FS when preparing general
purpose financial statements (FS for external reporting).
 Combined FS is done by doing the following two (2) basic procedures:
1. Adding together similar items of assets, liabilities, income and expenses; and
2. Eliminating reciprocal accounts.
 Reciprocal Accounts (Inter-company or intraoffice accounts)
 a) Transactions of either the HO or the branch with external parties are recorded and treated
in the normal way. Thus PFRSs apply when recording these transactions.
b) However, for internal reporting purposes, transactions between a HO and its Branch are
recorded in the reciprocal accounts, namely:
I. "Investment in Branch" account (or "Branch Current" account)
 The home office uses this account in its books to record and account for its
investments or transactions with the branch.
 It has a normal debit balance.
II. "Home Office" account (or "Home Office Current" account)
 The branch uses this account in its books to record and account for its transaction
with the home office.
 It has a normal credit balance.
 The "Investment in Branch" account is an asset account in the home office's individual FS while
the "Home Office" account is an equity account in the branch's individual FS.
 The aforementioned accounts are eliminated when combined FS is made.
 A branch is treated as a separate accounting entity for internal reporting purposes. However,
when preparing FS for external reporting, the home office and its branch are viewed as a single
reporting entity.
 Summary of Transactions affecting the reciprocal accounts
Investment in Branch
Debit Credit
(a) Asset transfers to the branch (b) Assets received from the branch
(c) Profit reported by branch (d) Loss reported by the branch
(e) Liabilities and expenses incurred or paid by HO
on behalf of the branch.
Home Office
(b) Asset transfers to the home office (a) Assets received from the home office
(d) Loss reported (c) Profit reported
(e) Liabilities and expenses incurred or paid by HO
on behalf of the branch.
Notice that for every debit in an account, there is a corresponding credit on the other account
and vice versa. Therefore, these reciprocal accounts must be equal at any given point of time.
In case that these accounts are not equal, recomciliation procedures, similar to a bank
reconciliation, must be performed.
Adjusting entries should be made first before combined FSs are prepared.
Comprehensive Illustrative Example
(Please guys, pakiintindi itong example na'to. It will hone your foundation regarding the basics of this
topic!)

Transaction 1: Initial Investment

Transaction: Home Office establishes a branch with an initial investment of P1,000,000 cash.
HO's Books Branch's Books
 DR: Investment in Branch (P1,000,000) DR: Cash in Bank (P1,000,000)
CR: Cash in Bank (P1,000,000) CR: Home Office (P1,000,000)
 The investment by the HO is recorded as a debit to the Inv. in Branch account in the HO's books
and a credit to the Home Office account in the branch's books.

Transaction 2.1: Property recorded in branch's books - Acquired by the Branch

Transaction: The branch acquires an equipment for P400,000 to be carried in the branch's books.
HO's Books Branch's Books
No entry DR: Equipment (P400,000)
CR: Cash in Bank (P400,000)
 When the branch acquires property to be recorded in its books, the acquisition is recorded in
the branch's books in the normal way. No entry is made in the HO books.
 Subsequent depreciation on the property is also recorded in the branch books in the normal
way. Again, no entry is made on the HO books regarding its depreciation.

Transaction 2.2: Property recorded in branch's books - Subsequent Depreciation

Transaction: The annual depreciation on the acquired equipment amounts to P40,000.
HO's Books Branch's Books
No entry DR: Depreciation Expense (P40,000)
CR: Acc. Depreciation - Eqpt. (P40,000)

Transaction 3.1: Property recorded in HO's books - Acquired by the Branch

Transaction: Branch acquires an equipment for P200,000 to be carried in the HO's books.
HO's Books Branch's Books
DR: Equipment - Branch (P200,000) DR: Home Office (P200,000)
CR: Investment in Branch (P200,000) CR: Cash in Bank (P200,000)
 When the branch acquires property to be recorded in the HO books, the acquisition is treated as
a reduction to both the reciprocal accounts.
[Parang ganito yung scenario dyan, si Branch ang bumili at nagbayad ng equipment pero ang
agreement ni Home Office, sa books ng Home Office i-rerecord or ichacharge instead sa books ni
Branch. Ito ay tumutukoy lang sa recording ng transaction kasi ang gagamit pa rin ng equipment
ay si Branch. It just so happenned na ang agreement is sa books ni Home irerecord ang
acquisition.]
 In this case, subsequent depreciation shall be recorded by the Home Office but charged to the
"Investment in Branch" account. The branch, on the other hand, will recognize depreciation
expense with a corresponding credit to the Home Office account.

Transaction 3.2: Property Recordes in HO's books - Subsequent Depreciation

Transaction: The annual depreciation charge on the equipment acquired by branch but maintained in
the home office books amounts to P20,000.
HO's Books Branch's Books
DR: Investment in Branch (P20,000) DR: Depreciation Expense (P40,000)
 CR: Acc. Depreciation - Branch (P20,000) CR: Home Office (P20,000)
 Notice that although the HO maintains the accounting records of the equipment, the related
depreciation expense is charged to the branch. This is because the physical possesion and the
use of the equipment is maintained by the branch.

Transaction 4: Property recorded in Branch Books - Acquired by HO

Transaction: Home office acquires furniture for P50,000 to be carried in the branch books.
HO's Books Branch's Books
DR: Investment in Branch (P50,000) DR: Furniture (P50,000)
CR: Cash in Bank (P50,000) CR: Home Office (P50,000)
Subsequent depreciation of P5,000 on the above furniture is to be recorded as follows:
HO's Books Branch's Books
No Entry DR: Depreciation Expense (P5,000)
CR: Accum. Depreciation - Furniture (P5,000)

Transaction 5: Property recorded in Home Office's Books - Acquired by HO

Transaction: HO acquires furniture for P30,000 to be carried/recorded in the HO's books but the
possesion and use of the equipment is transferred to the branch.
HO's Books Branch's Books
DR: Furniture - Branch (P30,000)
CR: Cash in Bank (P30,000)
No Entry
Subsequent Depreciation of P3,000 on the above furniture is recorded as follows:
HO's Books Branch's Books
DR: Investment in Branch (P3,000) DR: Depreciation Exp. (P3,000)
CR: Accum. Depreciation - Branch (P3,000) CR: Home Office (P3,000)

Transaction 6: Transfer of Inventories - Freight Paid by HO

Transaction: HO transfers inventory worth P150,000 to the branch. Freight paid by the HO is P10,000.
HO's Books Branch's Books
DR: Investment in Branch (P160,000) DR: Shipments from HO (P150,000)
CR: Shipments to Branch (P150,000) DR: Freight In (P10,000)
CR: Cash in Bank (P50,000) CR: Home Office (P160,000)

[Analysis of this special transaction]

 The "shipments from HO" account is similar to the "Purchases" account and is used under a
periodic inventory system.
 Under perpetual inventory system, the "Inventory" account may be used in lieu of the
"Shipments from HO (to Branch)" accounts.
 Notice that subsequent transfers of assets from the HO to the branch are accounted for similarly
to the initial investment transaction.
  Any freight paid by the HO for transfers of inventory forms part of the inventory of the branch.
The freight is debited to "Investment in Branch" account and credited to the "HO" account.

Transaction 7: Transfer of inventories - Freight paid by Branch

Transaction: HO transfers inventories worth P80,000 to the branch. Freight paid by the branch is P6,000.
HO's Books Branch's Books
DR: Investment in Branch (P80,000) DR: Shipments from HO (P80,000)
CR: Shipments to Branch (P80,000) DR: Freight In (P6,000)
CR: Home Office (P80,000)
CR: Cash in bank (P6,000)
Note: If the branch pays for the freight charges for the shipments from HO, the freight still forms part of
the branch's inventory. The only diff. is that nothing is to be charged to the investment acct of the HO.

Transaction 8: Purchase of Inventories - Acquisition from Outside Parties

Transaction: Branch purchases inventory worth P40,000 on account from an outside party. Freight paid
by the branch is P2,000.
HO's Books Branch's Books
No Entry DR: Purchases (P40,000)
DR: Freight In (P2,000)
CR: Accounts Payable (P40,000)
CR: Cash in Bank (P2,000)
Notice that transactions with external parties are recorded in the normal way.

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)

Transaction 10: Collection

Transaction: The branch collects P400,000 from accounts receivable.
HO's Books Branch's Books
No Entry DR: Cash in bank (P400,000)
CR: Accounts Receivable (P400,000)

Transaction 11: Remittance to HO

Transaction: Branch remits P300,000 cash collections to HO.
HO's Books Branch's Books
DR: Cash in Bank (P300,000) DR: Home Office (P300,000)
CR: Investment in Branch (P300,000) CR: Cash in bank (P300,000)

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.

Transaction 12: Expenses incurred and paid by the branch

Transaction: Branch incurs various operating expenses amounting to P100,000, 25% of which remains
unpaid.
HO's Books Branch's Books
No Entry DR: Various OPEX Accounts (P100,000)
CR: Cash in Bank (P75,000)
CR: Accrued Expenses (P25,000)

Transaction 13: Expenses allocated from HO to the branch

Transaction: HO allocates P10,000 utilities expenses and P4,000 general overhead costs to the branch.
HO's Books Branch's Books
DR: Investment in branch (P14,000) DR: Utilities Expense (P10,000)
CR: Utilities Expenses (P10,000) DR: Gen. Overhead Expense (P4,000)
CR: Gen. Overhead Expenses (P4,000) CR: Home Office (P14,000)
Special Note: Why are the expenses in HO's books recorded in credit side?
Ganito kasi yan.
All of the expnses incurred ng company as a whole ay inirerecord muna ng HO bago s'ya mag-allocate sa
mga business units o branches. Ngayon sa mismong allocation, ikinecredit ang expense account na
naallocate to show transfer of amounts to specific Investment in Branch accounts. In short, sa allocation
ng expenses from HO, parang naglipat ka lang ng amounts or figures from expense accounts to
Investment in Brach Account.

Individual Financial Statements

The trial balance of the branch as of this point is shown below:
Account Title DEBIT CREDIT
Cash in Bank 417,000
Accounts Receivable 100,000
 Shipments from HO 230,000
Purchases 40,000
Freight In 18,000
Equipment 400,000
Accum. Depreciation - Equipment 40,000
Furniture 50,000
Accum. Depreciation - Furniture 5,000
Accounts Payable 40,000
Accured Expenses 25,000
Home Office 827,000
Sales 500,000
Depreciation Expense 68,000
Utilities Expense 10,000
Gen. Overhead Expense 4,000
Various Operating Expenses 100,000
TOTALS 1,437,000 1,437,000

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:

Individual Statement of P(L)

BRANCH
For the Year Ended December 31, 20X1
Sales 500,000
Cost of Good Sold:
Inventory, beginning -0-
Shipments from HO 230,000
Purchases 40,000
Freight in 18,000
Total Goods Available for Sale 288,000
Inventory, end. (150,000) (138,000)
Gross Profit 362,000
Depreciation Expense (68,000)
Utilities Expense (10,000)
General Overhead Expense (4,000)
Various Operating Expense (100,000)
Profit for the Period - Branch 180,000

Transaction 14.1: Closing Entries

Transaction: To close the branch's nominal accounts to the income summary account.
HO's Books Branch's Books
No Entry DR: Sales (P500,000)
DR: Inventory (P150,000)
CR: Shipments from HO (P230,000)
 CR: Purchases (P40,000)
CR: Freight In (P18,000)
CR: Depreciation Expenses (P68,000)
CR: Utilities Expenses (P10,000)
CR: Gen. Overhead Expenses (P4,000)
CR: Various Operating Expenses (P100,000)
CR: Income Summary (P180,000)

Transaction 14.2: Closing Entries

Transaction: To close the branch's profit to the reciprocal accounts.
HO's Books Branch's Books
DR: Investment in Branch (P180,000) DR: Income Summary (P180,000)
CR: Income Summary (P180,000) CR: Home Office (P180,000)

Reconciliation of Reciprocal Accounts

Branch's Books: Home Office's Books:
HOME OFFICE ACCOUNT INVESTMENT IN BRANCH ACCOUNT
TN DEBIT CREDIT TN TN DEBIT CREDIT TN
(3) 200,000 1,000,000 (1) (1) 1,000,000 200,000 (3)
(11 300,000 20,000 (3) (3) 20,000 300,000 (11)
)
50,000 (4) (4) 50,000
3,000 (5) (5) 3,000
160,000 (6) (6) 160,000
80,000 (7) (7) 80,000
14,000 (13) (13 14,000
)
180,000 (15) (15 180,000
)
1,007,000 1,007,000
*TN - Transaction Number
Recall that reciprocal accounts should be balanced before getting eliminated when combined FS is to be
prepared.

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

Combined Financial Statements

 As mentioned earlier, the home office and its branch are viewed as a single reporting entity for
external reporting. Thus, the individual FS of the HO and its branch need to be combined when
preparing general purpose financial reports.
 Combined FS are prepared simply by adding together similar items of assets, liabilities, income
and expenses, and eliminating the reciprocal accounts.

Illustration: Combined Financial Statements

The trial balance of ABC Co.'s HO and branch are shown below:
ABC Co.
Trial Balance
December 31, 20X1
HOME OFFICE BRANCH
Dr. (Cr.) Dr. (Cr.)
Cash 1,100,000 417,000
Accounts Receivable 180,000 100,000
Inventory - Jan. 1 650,000 -0-
Shipments from HO 230,000
Purchases 72,000 40,000
Freight In 22,000 18,000
Shipments to Branch (230,000)
Investment in Branch 827,000
Equipment 720,000 400,000
Accumulated Depreciation - Equipment (72,000) (40,000)
Furniture 90,000 50,000
Accumulated Depreciation - Furniture (9,000) (5,000)
Accounts Payable (72,000) (40,000)
Accrued Expenses (45,000) (25,000)
Share Capital (2,000,000)
Share Premium (500,000)
Retained Earnings - Jan. 1 (206,200)
Home Office (827,000)
Sales (900,000) (500,000)
Depreciation Expense 168,000 68,000
Utilities Expense 18,000 10,000
Gen. Overhead Expense 7,200 4,000
Various Operating Expense 180,000 100,000
TOTALS -0- -0-
The HO and branch have ending inventories of P270,000 and P150,000, respectively.

Required: Prepare the combined

1. Statement of Profit (Loss); and
2. Statement of Financial Position

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)

Requirement 1: Combined Statement of Profit (Loss)

ABC Co.
Combined Statement of Profit (Loss)
For the Year Ended December 31, 20X1
Sales 1,400,000
Cost of Goods Sold:
Inventory - Jan. 1 650,000
Purchases 112,000
Freight In 40,000
Total Goods Available for Sale 802,000
Inventory - Dec. 31 (420,000)* (382,000)
Gross Profit 1,018,000
Depreciation Expenses (236,000)
Utilities Expenses (28,000)
General Overhead Expenses (11,200)
Various Operating Expenses (280,000)
'Combined' Profit for the Period 462,800
* (P270,000 + P150,000)

If individual Statement of P(L) is to be prepared for the Home Office, then it would be as follows:

Individual Statement of P(L)

HOME OFFICE
For the Year Ended Dec. 31, 20X1
Sales 900,000
Cost of Good Sold:
Inventory, beginning 650,000
Purchases 72,000
Shipments to Branch (230,000)
Freight in 22,000
Total Goods Available for Sale 514,000
Inventory, end. (270,000) (244,000)
Gross Profit 656,000
Depreciation Expense (168,000)
Utilities Expense (18,000)
General Overhead Expense (7,200)
 Various Operating Expense (180,000)
Profit for the Period - Home Office 282,800

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).

Requirement 2: Combined Statement of Financial Position

Before we prepare the combined statement of financial position, first provide the closing entries for all
the nominal accounts.
December 31, 20x1 DR: Sales (P1,400,000)
DR: Inventory - Dec. 31 (P420,000)
CR: Inventory - Jan. 1 (P650,000)
CR: Purchases (P112,000)
CR: Freight In (P40,000)
CR: Depreciation Expense (P236,000)
CR: Utilities Expense (P28,000)
CR: Gen. Overhead Expenses (P11,200)
CR: Various Operating Expenses (P280,000)
CR: Income Summary (P462,800)
(To close net profit for the period to Income Summary account)
December 31, 20x1 DR: Income Summary (P462,800)
CR: Retained Earnings
(To close Income Summary account to Retained Earnings)

After posting the above entries, the inventory and retained earnings shall have balances of P420,000
and P669,000 (P206,200 + P462,800), respectively.

The combined statement of financial position is shown below:

ABC Co.
Combined Statement of Financial Position
As of December 31, 20x1
ASSETS
Cash in Bank 1,517,000
Accounts Receivable 280,000
Inventory 420,000
Equipment 1,120,000
Accumulated Depreciation- Equipment (112,000)
Furniture 140,000
Accumulated Depreciation - Furniture (14,000)
TOTAL 'COMBINED' ASSETS 3,351,000
LIABILITIES AND EQUITY
Accounts Payable 112,000
Accrues Expenses 70,000
Share Capital 2,000,000
Share Premium 500,000
Retained Earnings 669,000
TOTAL 'COMBINED' LIABILITIES AND EQUITY 3,351,000

-END OF PART 1-

Please proceed to the next module named "HOBA_P1_Exercises"

This will be recorded as your Classroom Activity and Assignment