= 460 Minded Sapient) Chapter 11 Home office, Branch and Agency Accounting Learning Objectives . Account for transactions between a home office and its branch. Reconcile interoffice accounts. . Prepare combined financial statements of a home office and its branch, Introduction A prospering business may need to establish new sales outlets to serve more customers. A sales outlet may be organized as a sales agency or a branch. Branch and Agency distinguished A sales agency is not a self-contained business but rather acts only on behalf of the home office. On the other hand, a branch is a self- contained business that acts independently but within the bounds of company policies set by the home office. The following further differentiate these two: Sales agency Branch > Displays merchandise and takes customers’ orders but does not carry inventory to fill customers’ “orders. » Carries inventory to fill customers’ orders (or provides services similar to those provided by the home office). % Forwards customers’ orders to the home office for processing. Customers remit payments > May hold revolving cash fund which is replenished when. depleted. directly to the home % Processes customers’ orders, makes normal warranties, and makes own collections, > its. own. assets and liabilities and generates and incurs its ‘own income and expenses. Scanned with CamScanos Brave amd Age ye office, Bran Hand Agency Acc 461 — fa separate accounting —— Nore separe tiny ~—— * » Aseparate accounting eniity for viene ‘internal reporting, an for the revolving cash ans ‘a.com ple tof an Accounting tecords.and proparce OWwn financial statements which are com bitied with the home: office's Financial statements for external reporting. entity: Maintains only -ggamples Sales agenc je ‘Nbooth located in a shopping Bratch % pall that offersdebitor credit |" branch of Banco De Oro card issued by a bank located in a shopping mall Applicants complete their application with the bank's office. Mea eet all etleing 16; Mang Tony’s fish ball - New Globe internet connection. ‘Yolk nancts Gives een Customers complete their cooked fish bal straight ea |. teankectione woth Giobe's fees the frying pan...etc. (end of thinking capacity) #1 Yeu already got the difference between a sales agency and Lt branch.....right?6O- Accounting for an agency Since an agency does not maintain its own separate accounting books, all of its transactions are recorded in the home office’s books. The agency only maintains a simple record (e.g., a log book) to account for any revolving fund, similar to a petty cash - To distinguish the agency's transactions from other transactions, the home office may set up specific account codes and account titles for the agency. For example a specific agency's revolving fund may have the following account code and account title; Scanned with CamScan‘The 1 digit (2) refer to assets 4 digit (1) refers to “cash” and Illustration: Accounting for agency ‘the 2-4 and the lasttwo digits ‘ge daggts (01) refer to “Agency HI”, thy 103) refer to “aevolving fund” following closing entry: Agency transactions Home office books dant | Receipt of revolving fund _ | Cash - Agency a 1,000 from home office. Cash 1,000 2 Ca Ai Oe eae fait 1-31 Orders sent by agency to | Accounts receivable 200 home office for processing: Sales - Agency #1 200 Cost of sales Agency #1 120 Inventory 120 Collection by home office | Cash 200 | of agency sales. Accounts receivable 200 Tan, 1—31 Se Disbursements from the No entry in H.0. books. The agency ‘ records the disbursements in its ‘log revolving fund : book’. Tad Replenishment of Various expenses ~ Agency #1 50 revolving fund Cash To determine the profit Sales — Agency #1 200 attributable to the agency, Cost of sales - Agency #1 120 the home office makes the Various expenses - Agency #1 50 Income summary - Agency #1. 30 Scanned with CamScargone Brat oud Agency Ae counting for branch operations hough not a separate leg: al enti ness unit. Accordingly, a bray 2 i @ branch re d prepares its own financial statements in the r The only peculiar: accounting procedures ee ihe ath ar. maine rs Recording the transactions betzocen the home opine, branch; and i¢ office and the bi Preparing the combined finan office and the branch branch is a separate Cords its own transactions cial statements of the home transactions between home office and branch for internal reporting purposes, the transacti ions between a home office and a branch are recorded using the gecounts (interoffice or intra-comy “{avestment in branch” account or ‘Bratch current’ account) following reciprocal accounts): “Home office” account (or ‘Home office current’ account: > Maintained in the Home > Maintained in the Branch’s _ Office's books as anasset._| _books as. equity. > Used to record to record the | > Used to record to record the ___ following: vx Gal Ants secelved fom Y ‘heme atfice Wp ames! — xe | ve (e)Linbilitin te transferred, eyeue too bby HO on behalf of Be wx | xx e)Lomnal Be | (e)Lom ofc x | x (a) Frofitof Be ‘ Notice that each debit/credit in one account has a corresponding credit/debit in the other account. Therefore, the balances of the two must be equal at any given point of time. For instance, if the “Investment in branch” account in the home office books has a P20,000 debit balance, the “Home office” account in the branch books must also have a corresponding 20,000 credit . In case the two accounts do not balance, reconciliation (Similar to the “bank reconciliation’) is prepared and adjusting Scanned with CamScanChapter 464 apter 1 bined financial statements ay, vig check immediately if the ty, ave you time (NOt 0 MENHON thy hts if you commit a very simple for branches is Very common entries are made before the com prepared, Later on in practice, accounts are equal ~ this will si embarrassment and sleepless nig oversight error) #@, Accounting when auditing banks. When there are several bra maintain a separate investment accou! niches, the home office with nt for each branch. Illustration: Accounting for branch operations Initial investment 1. Home office establishes P1,000,000 in cash. ‘a branch for an initial investment of Tnvestment in branch......~ ‘Caathhsasotssvo Branch acquisition 1+ P400,000 to be carried in the Property carried in branch books - 2, Branch acquires equipment fo branch books. __bravich books. ____— Home office books ‘No-entry Property acquired by the branch and carried in its books is recorded in the regular manner. No entry is made in the home office books. The recording of the subsequent depreciation follows the same manner, Assume a subsequent depreciation of £40,000: Home office books Branch books No entry Depreciation expense....40K ‘Accumulated depreciationAJK Property carried in home office books ~ Branch acquisition 3, Branch acquires equipment for 200,000 to be carried ia home office books. Scanned with CamScanee, Branch aint Ay pmeoffice, Branch W8eNCY Accounting ee a Home office books ~~ Apament- Branch. 20) Investment in branch. Peperty aequited by the branch but carried in the books of the home office is recorded as reduction to both the sineestet Be Eranh ane “home ibice® sormnsnke ‘The erties recognizes the subsequent depreciation expense as it uses the equipment, Tut the home office records the acrumalated reciation. Assume a subsequent d reciation of P20,000: Home office books = Froestment in branch .......20K Accum. depreciation ~ Branch... 20K One reason for having the asset recorded in the home office books but the branch maintains physical possession and use is to facilitate the computation of depreciation when the entity uses the ‘group method’ or ‘composite method’ of depreciation. Property carried in branch books - Home office acquisition 4 Home office acquires furniture for ‘50,000 to be carried in the branch books. Home office books ‘Branch books | Investment in branch.......50K Cash. Noentry Property carried in home office books - Home office acquisition | 5. Home office acquires furniture for P30,000 to be carried in the home office books, but the branch maintains physical possession and use. Scanned with CamScan466 — Home office books Furniture - Branel 0K Cash. . Assume a subsequent depreciation |___Home office books _ Investment in branch.......dK Accum, depreciation - Branch....3K Transfer of inventories - freight pat 6. Home office transfers inventory wo [—__ Branch books ——~ Chapter 51 Noentry of 3,000: Branch books Depreciation expense....3K ssc id by home office th P150,000 to the branch The “Shipments from home office” account is similar to the "Purchases" account and is used under a periodic inventory system, Under a perpetual inventory system, the “Inventory” account may be used in lieu of the “Shipments from home office (to branch)” and {freight-in accounts Transfer of inventories — freight paid by branch 7. Home office transfers inventory worth P80,000 to the branch, Branch pays freight of P6,000 Home office books Branch books Investment in branch......0K Shipments to branch......-..80K Shipments from HO.......80K Freight-in, K Hote office. Cash... Regardless of whoever pays the branch), the freight forms part of the branch's inventory. Purchase of inventories — acquisition from outside parties 8 Branch purchases inventory woi supplier, Branch pays freight of the freight (the home office ot rth P40,000 on account from @ 2,000. Scanned wit CamScarones Bette and Agoiy Accounting 467 (—__Home office books ~~ Branch books Purchases, ‘No entry Freight- Accaunts payable. Transactions with ex: " ternal i recorded in the regular manner. Poetics ate om Revenue 9, Branch makes total sales of P500,000 on account ales OF PSO Home office books [i tka | No entry Accounts receivable,, Sales... Collection 10, Branch collects 400,000 from accounts receivable. Home office books Remittance to home office 11. Branch remits P300,000 cash collections to home office, Cah... 300K Investment in branch......300K Allocation of expenses Expenses incurred by the branch are recorded in the regular manner. However, expenses incurred by the home office on behalf of the branch are recorded similar to an investment. For instance, costs incurred centrally are allocated to the various business units within the company in order to properly measure the financial performance of each business unit. The following are examples of costs that may be allocated to the branch: : Cost of maintaining information systems Scanned with CamScanChapter 11 an a company level, eR curity, and the like foup oF composite method b. Cost of contracts signed © pest control, insurance, advertising, ¢. Depreciation computed under the BF of depreciation d. Other general overhead costs 12. Branch incurs salaries expense of 100,000, one-fourth of [Howie ofc jocks __|___ Bawa Bon -—_] No entry Salaries payable. 13, Home office allocates P10,000 utilities expens? and 4,000 ___advertising expense to the branch.___—__—_ Branch books Home office books aK Diilties expense..... Advertising expense. Individual financial statements ‘The trial balance of the branch as of this point is. shown below: Di Cr. Ir. i Cash 417,000 Accounts receivable 100,000 Shipments from home office 230,000 Purchases 40,000 Freight-in 18,000 Equipment 400,000 ‘Accumulated depreciation - equipment 40,000 Furniture 50,000 Accumulated depreciation - furniture 5,000 Accounts payable 40,000 Salaries payable 25,000 Home office 827,000 Sales 500,000 Depreciation expense 68,000 Salaries expense 100,000 Scanned with CamScanHom oes BPWCh and Agency per ‘ii Y Accounting ilities expense advertising expense 10,000 Totals 4,000 1,437,000 1,437,000 he branch's individuar i eee be Statement of profit or toss for the period is Cost of goods sold: Inventory, beg. Shipments from home off; 5 Purchases i 230,000 Freight-in tas Total goods availabe forsale = p00 eee (150,000) (138,000) Gross profit 362,000 Depreciation expense 6 00) Salaries expense a 004 000) Utilities expense (10,000) Advertising expense (4,000) Profit for the period 790,000 Closing entries: 14, To close the branch’s nominal accounts to the income summary account: Home office books Scanned with CamScanChapter 11 _—— Investment in branch. Inconne surnmuary ~ branch. Now, let us reconcile the se ‘procal accounls BRANCH BOOKS e branch is ‘The individual statement of financial position of th prepared as follows: | _——————_____— ASSETS Cash 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 49,000 Salaries payable 25,000 Home office 1,007,000 [oiibere office Total liabilities and equity 1,072,000 Scanned with CamScaname office, Branch and Agy combined financial statements 47 home office and its branch(es) are viewed as a single reporting eatity for external reporting (and also a single legal entity). THUS, the individual financial statements of the home office and its pranch(es) are combined when preparing the entity’s general purpose fitancial statements. Combined financial statements are repared by: a. Adding together similar items of assets, liabilities, income and expenses; and b, Eliminating the reciprocal and other interoffice accounts. Illustration: Combined financial statements The trial balances of ABC Co.'s home office and branch are shown below: ABC Co. ‘Trial balance December 31, 20x1. Cash Accounts receivable Inventory, beg. Shipments from home office Purchases Freight-in Shipments to branch Investment in branch Equipment ‘Accumulated depreciation - equipment Furniture Accumulated depreciation - furniture Accounts payable Salaries payable Share capital Share premium Retained earnings - beg. Home office Home office Dr. (Cr) 1,100,000 417,000 180,000 100,000 650,000 - 230,000 72,000 40,000 22,000 18,000 (230,000) 827,000 720,000 400,000 (72,000) (40,000) 90,000 50,000 (9,000) (5,000) (72,000) (40,000) (45,000) (25,000) (2,000,000) (500,000) (206,200) (827,000) Scanned with CamScan472 ae ee Sales (900,000) i (500 Depreciation expense 168,000 eg 3?) Salaries expense 180,000 10 oy Utilities expense 18,000 on i Advertising expense 7,200 The home office and the branch have ending inventories of 270,000 and P150,000, respectively. Requirement: Prepare the combined statement of financial positon and combined statement of profit or loss. Solution: ‘Working paper for combined financial statements December 31, 20%1 [Seer tere eas SEs office Branch tion Combined | Dr.(Cr) Dr. (Cr) __Dr.(Cr) Dr. Cr) Cash 1,100,000 417,000 1517000 Accounts receivable 180,000 100,000 20 Inventory, beg. 650,000 : 5 Shipments from HO 230,000 230,000)" Purchases 72,000 40,000 1290 Freight-in 22,000 18,000 0 Shipments to branch (230,000) 230,000 ; Investment in branch 827,000 (27,000) a Equipment 720,000 400,000 112000 Accum. dep, -equipt, (72,000) (40,000) ; (112.0) Fumiture 90,000 50,000 149000 Accum, dep. - furniture (9,000) (5,000) 4.0) Accounts payable (72,000) (40,000) (112,000)) Salaries payable (45,000) (25,000) mus ‘Share capital (2,000,000) (2,000,000) Share premium (00,000) eon) Retained earnings -beg. (206,200) (20620) Home office (827,000) = 827,000" 4 Sales (900,000) (500,000) sou. Scanned with CamScar- — a sce, Branch and Ageney Accounting 473 aft vt onse 168,000 68,000 236,000 sation expense K ee 180,000 100,000 280,000 gi pense 18,000 10,000 28,000 | cute ng expense 7,200 fy | Shipments to branch Shipments from home office he combined statement of profit or lass is prepared as follows: _egontined Statement of proft or los is prepared as follows: Statement of profit or loss For the year ended December 31, 20x1 sales 1,400,000 | cast of goods: sore: Inventory, beg. 650,000 Purchases 112,000 Freight-in 40,000 Total goods avaitable for sale 802,000 Inventory, end. (270,000+ 150,000) (420,000) (382,000) Grass profit 1,018,000 Depreciation expense (236,000) Salaries expense (280,000) Utilities expense (28,000) Advertising expense (11,200) Profit for the period = eaale| (500 The combined profit can be reconciled as the sum of the individual profits of the home Office and the branch. The profit of home office is computed as follows: Sales. ‘900,000 ‘Cost of goods sold: Inventory, beg. 650,000 Scanned with CamScan