Chapter 1

Home Office and Branch Accounting –

General Procedures

The creation of outlets develops business in distant areas or improves the company’s
existing market share through more effective and efficient contact with the customers.
One technique to corporate expansion to generate more sales is the external approach of
acquiring other companies in business combinations. Another approach to expansion is
through internal growth. While such growth can occur at a single location, companies
often expand by establishing additional locations.

When operations are performed at more than a single location, the different locations
may be referred to as sales agencies, branches, plants, or by several other terms. A
home office establishes branches and agencies in order to have a wider systematized and
effective outlet for its products. The scope of an activity of an agency is much limited
compared with branch.

Many different approaches are taken in establishing internal accounting and reporting
systems for companies operating through distant locations. Regardless of which form of
operation is used, the financial statements of each separate unit are combined with those
of the controlling unit to come up with financial statements of the economic entity as a
whole.

Distinction between Sales Agency and Branch

Branch is used to describe a business unit located at some distance from the home office.
This unit carries merchandise obtained from the home office generates sales, approve
customer’s credit, and make collections from its customers. They may also obtain
merchandise from outside suppliers. The cash receipts of the branch are often deposited
in a bank account and branches expenses are paid from the imprest cash fund.

An Agency is an unincorporated entity in which orders are received and then transmitted
to the home office for processing, shipping and billing of merchandise. They do not have
merchandise available for sale, but they maintain samples inventory, they rarely collect
cash from customers, since collections are remitted by customers directly to the home
office.

While both the sales agency and the branch office are means for increasing sales volume,
they exhibit a number of significant operational differences. These differences between a
sales agency and a branch most often has to do with the degree of autonomy.
 2 Chapter 1

A sales agency, sometimes referred to simply as an “agency,” usually is not an

autonomous operation but acts on behalf of the home office. The agency may display
and demonstrate sample merchandise, take orders, and arrange for delivery. The orders
typically are filled by the home office because a sales agency usually does not stock
inventory. A working fund for sales agency expenses is provided by the home office and
replenished when exhausted. Merchandise selection, advertising, granting of credit,
collection on accounts, and other aspects of operating the business usually are conducted
by the home office.

On the other hand, a branch office usually has more autonomy and provides a greater
range of services than a sales agency does, although the degree differs with the individual
company. A branch typically stocks merchandise which may be obtained solely from the
home office or a portion may be purchased from outside suppliers. For some companies
the branches perform their own credit function, while for other companies credit is
handled by the home office. The branch makes the usual warranties with respect to
quality, makes collections of accounts receivable, and functions in most respect as an
independent business unit. Banks have been especially aggressive in expanding through
extensive networks of branch banks. Some manufacturing companies also conduct
business through a comparable system of operating locations, usually referred to as
“plants.”

There typically is little management decision making in a sales agency; decisions are
made at the home office, and the agency conducts routine operations. The degree of
management decision making in branches usually is greater than in sales agencies but
differs considerably from company to company.

Accounting Systems and the Accounting Entity

A sales agency usually does not maintain a financial accounting system but only keeps
sufficient records to conduct its business. The home office maintains the accounting
system, and transactions of the agency are recorded by the home office. A branch, on the
other hand, does maintain a complete financial accounting system in most cases. The
maintenance of separate accounting systems for the home office and each branch often
provides better control over operations and allows top management to assess the
performance of individual branches.

Neither sales agencies nor branches are separate legal or accounting entities; they do not
prepare separate external accounting reports. Whether the accounting system is
centralized in the home office or separate accounting systems are maintained by
individual branches, the external reporting entity is the company as a whole. When
separate branch accounting records are maintained for internal purposes, such as
responsibility accounting and performance evaluation, the accounts of the branches and
the home office must be combined in preparing external accounting reports.
 Home Office and Branch Accounting – General Procedures 3

ACCOUNTING FOR BRANCH OPERATIONS

Since home office and branch are separate accounting entity, they maintain separate
accounting systems. Each maintains a full set of books with a complete self-balancing
set of accounts. Each records its transactions with external parties in its own accounting
system. These transactions are recorded in the normal manner, and no special treatment
is needed. In addition, the home office and branch both must record inter-office
transactions in their respective accounting systems.

Home office and branch are separate accounting entity but they are not separate legal
entity. This is the reason why all accounts are combined for external reporting in such a
way that the external financial statements represent the company as a single economic
enterprise. In the preparation of consolidated financial statements, certain elimination
entries are necessary to eliminate the effect of inter-office transactions.

Reciprocal (Intracompany) Accounts

Transactions between the home office and a branch also are treated in the normal manner
except that they are recorded in intracompany accounts. These accounts are reciprocal
accounts between the home office and the branch. The intracompany account on the
books of the home office often is called Investment in Branch, while the reciprocal
account on the branch books may be labeled Home Office Current. When a company
has more than one branch, a separate investment account for each branch is maintained
on the home office books.

The balance of the Investment in Branch account indicates the extent of the home office’s
investment in a particular branch through contributions of cash and the transfer of assets
to the branch. The procedures employed by the home office in accounting for its
investment in a branch are similar to a parent’s application of the equity method in
accounting for its investment in a subsidiary. The reciprocal Home Office account on the
books of the branch represents the home office’s equity in the branch, and the balance is
shown in place of owners’ equity in the separate financial statements of the branch
prepared for internal reporting purposes.

The balances of the two reciprocal accounts are adjusted for the same transactions. The
account balances are increased for asset transfers from the home office to the branch and
reduced for asset transfers from the branch to the home office. Adjustments to the
accounts also are made for profits and losses of the branch, with branch profits leading to
an increase in the account balances and branch losses leading to a decrease. Note that
increases in the home office’s Investment in Branch account are accomplished with debit
entries and decreases with credit entries. The opposite is true with respect to the branch’s
Home Office account.
 4 Chapter 1

When the books of both the home office and the branch are completely up to date, the
balance of the Investment in branch account in the home office book will be equal to the
Home office current account in the branch book. In the event that Investment and branch
and Home office current accounts are not equal, a reconciliation statement should be
prepared.

The following shows the reciprocal nature of the Investment in Branch and the Home
Office accounts, and the way in which they are affected by various transactions:

Investment in Branch Home Office Current

(Home Office Books) (Branch Books)
xxxxx Asset transfers to branch xxxxx
xxxxx Asset transfers from branch xxxxx
xxxxx Branch profit xxxxx
xxxxx Branch loss xxxxx

Account Title Where reported Financial Statement Presentation

Investment in branch Home office books Asset on the Statement of Financial

Position of the home office

Home office current Branch books Equity on the Statement of

Financial Position of the Branch

Shipment to branch Home office books Deduction from the goods available
for sale on the Statement of
Comprehensive Income of the home
office

Shipment from home office Branch books Addition to the goods available for
sale on the Statement of
Comprehensive Income of the
Branch
 Home Office and Branch Accounting – General Procedures 5

Key observations from the illustration:

Ø Only the home office can debit or credit the Investment in Branch account in its
books and only the branch office can debit or credit the Home Office Current
account in its books.

Ø When a transaction affects a reciprocal account, entries are required on both home
office books and branch books. The reciprocal relationship between the
Investment in Branch and Home Office Current accounts is a continuous
relationship.

Ø Since the Investment in Branch and Home Office Current accounts are reciprocal,
a debit to the Investment in Branch account requires a credit to Home Office
Current account and a credit to Investment in Branch account requires a debit to
Home Office Current account. Whenever the home office increases (debits) its
Investment in Branch account, the branch should also increase (credit) its Home
Office Current account. Similarly, any decrease (credit) in the Investment in
Branch account should be accompanied by a decrease (debit) in the Home Office
Current account.

The reasons that cause a difference in the amount between the Investment in
Branch and Home Office Current accounts are (a) time lags regarding information
in the two sets of books, and (2) errors.

Ø When a number of branches are maintained, a separate account is established for

each branch. This is done by assigning a number to each branch or indicating the
place where the branch is situated.

Ø The Home Office Current account takes the place of equity in a branch.

Ø The branch’s Home Office Current account is used to represent the net assets of
the branch. Because the Investment in Branch and Home Office Current accounts
are reciprocal, they are eliminated in preparing combined financial statements for
the enterprise. Similarly, the Shipments to Branch and Shipments from Home
Office accounts are used to determine the separate cost of sales fro home office
and branch operations. Because they are reciprocal accounts, they are also
eliminated in preparing combined financial statements.

Illustrative Entries

Dayle Company of Ortigas City established a branch in Baguio City. The following are
transactions of the Company and its branch together with the entries:
 6 Chapter 1

Establishment of a Branch

1. Home office transfers to the Baguio branch P50,000 in cash, new office
equipment that costs P25,000, and new store equipment with a cost of P125,000

Home office books: Investment in Baguio branch 200,000

Cash 50,000
Office equipment 25,000
Store equipment 125,000

Branch books: Cash 50,000

Office equipment 25,000
Store equipment 125,000
Home office current 200,000

When a company establishes a branch, the transfer of assets to the branch is recorded by
the home office in the Investment in Baguio branch account. Likewise, the branch
records the transfer with an entry to the Home office account. Note that after both the
home office and the branch have recorded the transfer, the Investment in Baguio branch
account on the home office books and the Home office account on the branch books have
reciprocal balances of P 200, 000.

Merchandise Shipments to a Branch

2. Home office transfers merchandise at cost of P 175,000 to its Baguio branch

paying freight cost of P7,500. Home office uses periodic inventory system
Home office books: Investment in Baguio branch 182,500
Shipment to Baguio branch 175,000
Cash 7,500

Branch books: Shipment from home office 175,000

Freight – in 7,500
Home office current 182,500

Both the home office and the branch treat the transfer of merchandise in the same way as
the transfer of any other asset.

The balance of the Shipments to Branch account is subtracted from the total of beginning
inventory and purchases in the computation of the home office’s cost of goods sold for
the period. This reduces the total goods available for sale and avoids overstatement of
cost of goods sold.
 Home Office and Branch Accounting – General Procedures 7

The Shipments from home office account on the branch books is included in the
computation of the branch’s cost of goods sold as an addition to purchases; it increases
the branch’s total goods available for sale.

The home office’s Shipments to branch account and the branch’s Shipments from home
office account are nominal accounts and therefore closed at the end of the period to the
Income Summary account together with the other revenue and expense accounts.

Freight costs incurred in shipping merchandise from the home office to a branch become
part of the cost of the branch inventory.

Accounting for Branch Plant Assets

3. Home office purchases P 75,000 of office equipment for its Baguio branch. The
assets are recorded in the books of the branch.
Home office books: Investment in Baguio branch 75,000
Cash 75,000

Branch books: Equipment 75,000

Home office current 75,000

The procedures to be used in accounting for branch plant assets will depend on whether
branch plant assets are recorded in the branch or in the home office books.

If branch assets are recorded in the books of the branch, and plant assets are purchased by
the home office for the branch, an entry is required on the books of both the home office
and the branch.

If branch assets are recorded in the books of the home office rather than on the books of
the branch, the home office records the purchase as follows:

Home office books: Equipment 75,000

Cash 75,000

Branch books: No entry

On the other hand, no entry is necessary in the book of the home office if the branch
purchases plant assets that are recorded on the books of the branch. As an example,
assume that Baguio branch purchased the office equipment to be used by the branch. The
following entries are made:
 8 Chapter 1

Home office books: No entry

Branch books: Equipment 62,500

Cash 62,500

If the branch purchases plant assets that are recorded on the books of the home office,
entries are needed by both the home office and the branch.

Home office books: Equipment 62,500

Investment in Baguio branch 62,500

Branch books: Home office current 62,500

Cash 62,500

When the branch purchases an asset that is carried on the home office books, the balance
of both the reciprocal accounts is reduced. The transaction is treated as if the branch had
purchased equipment for the home office.

Apportionment of Expenses

Branch expenses incurred and paid by the branch are recorded directly on the books of
the branch in the usual manner. However, the home office may allocate expenses to a
branch. These allocated expenses might be of several types:
a. Expenses incurred by the branch but paid by the home office.
b. Expenses incurred by the home office on behalf of the branch; for example,
depreciation on branch equipment carried on the home office books.
c. Allocation of expenses incurred by the home office; for example, a portion of the
cost of general advertising.

4. Utilities expenses incurred by Baguio branch and billed to home office master
account, P30,000
Depreciation expense on Baguio branch fixed assets carried on home office
books, P8,750
Advertising expense allocated to Baguio branch, P 18,750.

The home office already has recorded these expenses in the usual manner, as if they are
related to the home office. Periodically, the home office notifies the branch of the
allocated expenses. The home office records the following entry upon notifying the
branch of the P 57,500 of allocated expenses:
Home office books: Investment in Baguio branch 57,500
Utilities expense 30,000
Depreciation expense 8,750
Advertising expense 18,750
 Home Office and Branch Accounting – General Procedures 9

Branch books: Utilities expense 30,000

Depreciation expense 8,750
Advertising expense 18,750
Home office current 57,500

Without these entries, the home office income would be understated and the branch
income would be overstated.

Collection of Accounts Receivable

In some cases, the Branch may collect accounts receivable of the home office or the
home office may collect account receivable of the branch. In both cases, the office
whose accounts receivable was collected must be notified in order to make the necessary
adjusting entry.

5. Baguio branch’s receivable was collected by the home office, P 45,000

Home office books: Cash 45,000
Investment in Baguio branch 45,000

Branch books: Home office current 45,000

Account receivable 45,000

On the other hand if, the branch collected accounts receivable of the home office, the
branch should notify the home office of such collection. The following entry should be
made:

Home office books: Investment in Baguio branch 45,000

Accounts receivable 45,000

Branch books: Cash 45,000

Home office current 45,000

Cash Remittance

6. Baguio branch cash remittances amounting to P 227,500 deposited to the credit

of the home office
Home office books: Cash 227,500
Investment in Baguio branch 227,500

Branch books: Home office current 227,500

Cash 227,500
 10 Chapter 1

Recognition of Branch Income or Loss

Income for each branch is computed periodically in the normal manner. Branches seldom
compute income taxes on individual income or record income tax expense on their books.
Because the home office and its branches are separate legal entities, income taxes are
computed for the company as a whole. All of the branch’s revenue and expense accounts
are closed to its Income Summary account in the usual manner.

7. Baguio branch’s income summary account has a credit balance of P 132,500

Branch books: Income Summary 132,500
Home office current 132,500

The balance of the Income summary account represents the branch’s income or loss, and
is closed to the Home office account. The Home office account serves in place of
accumulated profits and other owner’s equity accounts on the books of the branch.

When the branch income or loss is reported to the home office, the following entry is
made on the home office books to recognize the income or loss of the branch.

Home office books: Investment in Baguio branch 132,500

Baguio branch income 132,500

Preparation of Combined Financial Statements

While a home office and its branches may maintain separate books for internal
recordkeeping and evaluation purposes, the external accounting reports represent the
home office and its branches as a single entity; the reporting entity is the company as a
whole. Preparation of these financial statements requires the elimination of reciprocal
accounts such as home office current, investment in branch, inter-company receivable
and payables, shipment to branch and shipment from home office. Reciprocal account
balances must be eliminated because they relate to activities within the company rather
than activities between the company and external parties.

To facilitate combining the accounts of the home office and its branches and eliminating
the reciprocal accounts, working papers normally are used in the preparation of financial
statements for the company as a whole. Take note that all elimination journal entries are
off the books in the sense that none of these elimination entries are entered into the
journals and ledgers of either the home office or the branch. They are made in the
working papers and not on the separate books of the units being combined.
 Home Office and Branch Accounting – General Procedures 11

Illustration: Preparation of Combined Financial Statement

Selected information from the trial balance of the home office of Dayle Company and its
branch in Baguio City as of December 31, 2011 follows:

Home Office Baguio Branch

Debit Credit Debit Credit
Cash P 115,000 P 53,150
Accounts receivable 28,050 79,200
Merchandise inventory, beg. 103,900
Prepaid expenses 9,000
Investment in branch 233,700
Furniture and fixture 220,000 70,000
Accumulated depreciation P 33,000
Accrued expenses 5,250
Account payable 75,100 P 70,750
Home office current 227,150
Ordinary Share, P 10 par 310,000
Accumulated Profits 331,500
Sales 585,000 335,000
Shipment to branch 207,500
Purchases 721,500 90,300
Shipment from home office 267,500
Operating expenses 116,200 72,750
P 1,547,350 P 1,547,350 P 632,900 P 632,900

The inventory of the home office and Baguio branch on December 31, 2011 is
P225,550 and P108,350 respectively.

Additional information:
a. The home office failed to record a P25,000 shipment to Baguio branch
b. The home office collected Baguio branch accounts receivable of P8,200 and fails
to notify the branch
c. P10,000 covering marketing expense of the home office only was erroneously
charged by home office to Baguio branch
d. Baguio branch recorded a debit memo on inventory transfer from home office of
P35,000 twice
e. Home office recorded cash transfer of P65,200 from Baguio branch as collection
of accounts receivable
f. Baguio branch recorded a debit memo from home office as share in advertising
expense of P5,380 as P5,830.

You are required to prepare a combined Statement of Comprehensive Income and

combined Statement of Financial Position for Dayle Company for the year 2011.
 12 Chapter 1

Reconciliation Statement

The Investment in branch account on the home office books and the Home office account
on the branch books are reciprocal accounts and theoretically, should have the same
balance at the end of the accounting period. However, this condition seldom exists in
practice because of bookkeeping or mechanical errors such as duplication of entries,
slides and transpositions on either set of books that have occurred, or certain transactions
may already have been recorded by one office and not yet by the other, or there is a time
interval between the recording of the same transaction on the home office and branch
books. If the reciprocal accounts are not equal, a reconciliation statement is to be
prepared before the preparation of combine financial statements.

The data to be considered in reconciling the two accounts may be classified as follows:

Ø Debits in the Investment in Branch account without corresponding credits in the

Home Office account
Ø Credits in the Investment in Branch account without corresponding debits in the
Home Office account
Ø Debits in the Home Office account without corresponding credits in the
Investment in Branch account
Ø Credits in the Home Office account without corresponding debits in the
Investment in Branch account
Ø Bookkeeping or mechanical errors on either set of books.

The lack of agreement between the reciprocal accounts poses no problem during the
accounting period. However, at the end of the accounting period, the reciprocal accounts
must be brought into agreement before combined financial statements are prepared.

As an illustration of the procedures for reconciling account balances at year-end, the

home office and the branch accounting records of the Dayle Company should make the
following adjusting entries:

The home office failed to record the shipment of merchandise to the branch in the amount
of P25,000; therefore, no entry for the shipments appears on its books. The required
adjustment at year-end for this type of reconciling item will be an entry on the branch
books as follows:

a. Home office books: Investment in Baguio branch 25,000

Shipment to branch 25,000

An accounts receivable of the branch was collected by the home office from a branch
customer. The collection was recorded by the home office by a debit to Cash and a credit
to Investment in branch account. No entry has been made by the branch; therefore, the
following entry is required on the branch books:
 Home Office and Branch Accounting – General Procedures 13

b. Baguio branch books: Home office current 8,200

Accounts receivable 8,200

Marketing expense of the home office amounting to P10,000 was erroneously charged by
home office to Baguio branch. The entry made by the home office for the payment was
a debit to Investment in branch and a credit to Cash. To correct this entry, the following
adjusting entry should be made in the home office books:

c. Home office books: Operating expenses 10,000

Investment in Baguio branch 10,000

The branch recorded a shipment twice, if no adjusting entry is made, the home office
account and shipment from office including cost of good available for sale of the branch
will be overstated, therefore, it is necessary to make the following entry:

d. Baguio branch books: Home office current 35,000

Shipment from home office 35,000

The entry made by the home office for the cash remittance was a debit to Cash and a
credit to Accounts receivable. The entry should be a debit to Cash and credit to
Investment in Baguio branch. The following adjusting entry should be made in the home
office books:

e. Home office books: Accounts receivable 65,200

Investment in Baguio branch 65,200

The error in recording the advertising expense resulted to overstatement of operating

expenses. The following entry is required on the books of the branch:

f. Baguio branch books: Home office current 450

Operating expenses 450

The effect of these six end-of-period adjusting entries is to bring the reciprocal accounts
into agreement, as shown by the following reconciliation statement.

Dayle Company
Reconciliation of Reciprocal Accounts
December 31, 2011

Unadjusted balance of Investment in branch 233,700

Add/deduct: Unrecorded shipment 25,000
Erroneous charge to branch (10,000)
Error in recording cash remittance (65,200)
Adjusted balance of Investment in branch 183,500
 14 Chapter 1

Unadjusted balance of Home office current 227,150

Add/deduct: Collection of accounts receivable (8,200)
Error in recording shipment (35,000)
Error in recording debit memo (450)
Adjusted balance of Home office current 183,500

The effect of these six end-of-period adjusting entries can also be summarized using the
general ledger as shown below:

Investment in branch Home office current

233,700 227,150
25,000 8,200
10,000 35,000
65,200 450
183,500 183,500

A reconciliation statement is prepared to bring into agreement the balance of Investment

in branch account and the Home office current account. After reconciling the reciprocal
account by considering the necessary adjustments, the trial balance before the preparation
of combined financial statement is as follows:

Home Office Baguio Branch

Debit Credit Debit Credit
Cash P 115,000 P 53,150
Accounts receivable 93,250 71,000
Merchandise inventory 103,900
Prepaid expenses 9,000
Investment in branch 183,500
Furniture and fixture 220,000 70,000
Accumulated depreciation P 33,000
Accrued expenses 5,250
Account payable 75,100 P 70,750
Home office current 183,500
Ordinary Share, P 10 par 310,000
Accumulated Profits 331,500
Sales 585,000 335,000
Shipment to branch 232,500
Purchases 721,500 90,300
Shipment fr. home office 232,500
Operating expenses 126,200 72,300
P 1,572,350 P 1,572,350 P 589,250 P 589,250
 Home Office and Branch Accounting – General Procedures 15

At this point, we can now prepare the combined financial statements. Combined
financial statements of the home office and the branch are needed to show the effects of
the business transactions of the business entity with outsiders. To achieve this,
intercompany transactions must be eliminated. To facilitate the preparation of combined
statements, working papers are usually prepared. In accounting for branch operations,
the trial balance working paper is normally used.

The following elimination entries are needed in the working papers:

Working Paper Elimination Journal Entries

1. Home office Current 183,500

Investment in Baguio Branch 183,500
To eliminate Home office account against Investment in
branch account.

2. Shipment to Baguio branch 232,500

Shipment from home office 232,500
To eliminate Shipments to branch and Shipments from
home office accounts.
 16 Chapter 1

Combined Financial Statements

 Home Office and Branch Accounting – General Procedures 17

The formal combined statements are easily prepared using the data found in the
combined financial statements worksheet. The combined statements of Dayle Company
are presented below:

Dayle Company
Statement of Comprehensive Income
For the year ended December 31, 2011

Sales P 920,000
Cost of goods sold:
Inventory , January 1, 2011 P 103,900
Add: Purchases 811,800
Cost of goods available for sale 915,700
Less: Inventory, December 31, 2011 333,900 581,800
Gross profit P 338,200
Operating expenses 198,500
Net income P 139,700

Dayle Company
Statement of Financial Position
As of December 31, 2011

Assets
Cash P 168,150
Accounts receivable 164,250
Merchandise inventory 333,900
Prepaid expenses 9,000
Furniture and fixtures P 290,000
Less: Accumulated depreciation 33,000 257,000
Total Assets P 932,300

Liabilities and Shareholders’ Equity

Accounts payable P 145,850
Accrued expenses 5,250
Ordinary Share, P 10 par 310,000
Accumulated Profits 471,200
Total Liabilities and Equity P 932,300

Key Observations from the Illustration:

 18 Chapter 1

Ø Accounts with debit balances are listed first, totaled, and ruled followed by
accounts with credit balances. Beginning inventories in the trial balance are
extended directly into the debit column of the Statement of Comprehensive
Income so that they are included in arriving at cost of goods sold. Ending
inventories are extended directly into the credit column of the Statement of
Comprehensive Income and into the debit column of the Statement of Financial
Position.

Ø The reciprocal accounts Investment in Branch and Home Office Current accounts
are eliminated although the elimination entry is not recorded on either books.

Ø The reciprocal accounts Shipment to Branch and Shipment from Home Office are
also eliminated.

Ø The elimination entries on the working paper do not appear on either set of books,
nor are they recorded on the books. These adjustments are made only for the
purpose of preparing financial statements for external users.

ACCOUNTING SYSTEM FOR SALES AGENCIES

The accounting process for the operations of a sales agency does not introduce any new
accounting problem because a sales agency is simply an extension of existing sales
territories. Because a sales agency normally does not have an accounting system, all
transactions involving the agency are recorded by the home office. Ordinarily, a record
of sales to customers and a list of cash payments supported by vouchers are sufficient.
For some types of transactions, the entries recorded by the home office are based on
source documents generated by the agency. For example, the home office may record
agency transactions based on sales invoices, payroll records, and documented petty cash
vouchers provided by a sales agency. Other transactions may be recorded based on
source documents provided by external parties directly to the home office. For example,
electricity, water, and phone service to the agency might bill the home office directly.
The entries made by the home office depend on whether sales agency net income is
determined separately or not separately. If the home office wants to determine the net
income of each of its sales agencies separately, it must maintain in the general ledger
distinct revenue and expense accounts in the name of the sales agency. If the home office
elects not to determine separately the sales agency net income, the transactions of the
sales agency are recorded in the home office’s own revenue and expense accounts. For
internal control purposes, the home office normally accounts for the assets, revenues, and
expenses of each agency separately. This allows the home office to maintain control over
the assets and provides information for assessing the performance of each agency.

Illustrative Entries
 Home Office and Branch Accounting – General Procedures 19

Didith Enterprises, a manufacturer of jewelry and ladies accessories based in Manila,

establishes a sales agency in Baguio City. The following are the transaction of the
Enterprises for the month of May, 2009:

1. Rent space for sales facility, P75,000

2. Transfer cash to agency for working fund of P8,750
3. Transfer inventory to be used as samples, P12,500
4. Pay bills received by home office for expenses of the sales agency;
utilities, P2,750; advertising expenses, P2,000
5. Fill sales orders from sales agency, P137,500. Cost of sale identified with these
sales is P62,500
6. Disburse payroll for sales agency, P18,750
7. Replenish sales agency petty cash; office expenses, P3,750; travel expenses,
P2,000
8. Record end-of-period adjusting and closing entries

The revenues and expenses of the home office are recorded separately from those of the
sales agency. Moreover, operating results of the sales agency and the home office are
determined separately at the end of each accounting period. The following are the journal
entries on the home office books to record typical sales agency transactions.
1. Prepaid rent – Baguio City sales agency 75,000
Cash 75,000
2. Petty cash – Baguio City sales agency 8,750
Cash 8,750
3. Inventory – Baguio City sales agency 12,500
Shipment to sales agency / Inventory 12,500
4. Utilities expense – Baguio City sales agency 2,750
Advertising expense – Baguio City sales agency 2,000
Cash 4,750
5. Accounts receivable 137,500
Sales – Baguio City sales agency 137,500
Cost of goods sold – Baguio City sales agency 62,500
Shipment to sales agency / Inventory 62,500
6. Salaries expense – Baguio City sales agency 18,750
Cash 18,750
7. Office Expense – Baguio City sales agency 3,750
Travel Expense – Baguio City sales agency 2,000
Cash 5,750
8. Rent Expense – Baguio City sales agency 25,000
 20 Chapter 1

Depreciation expense – Baguio City sales agency 1,250

Prepaid rent – Baguio City sales agency 25,000
Accumulated depreciation - Sales agency 1,250
To record year-end adjustments

Sales – Baguio City sales agency 137,500

Cost of goods sold- Baguio City sales agency 62,500
Utilities expense – Baguio City sales agency 2,750
Advertising expense – Baguio City sales agency 2,000
Salaries expense – Baguio City sales agency 18,750
Office Expense – Baguio City sales agency 3,750
Travel Expense – Baguio City sales agency 2,000
Rent Expense – Baguio City sales agency 25,000
Depreciation expense – Baguio City sales agency 1,250
Agency Income – Baguio City sales Agency 19,500
To close agency revenue and expenses

Agency Income – Baguio City sales Agency 19,500

Income Summary 19,500
To close agency income to income summary

From the above entries, it can be seen how the operations of the sales agency are
recorded on the books of the home office. Whether the transactions of the agency are
merged with those of the home office or accounted for separately, entries are made on the
book of the home office only. The home office specifically designates all assets,
revenues, and expenses as relating to the agency. At the end of the period, the home
office computes the income of the agency to evaluate its operation.

The cost of goods sold of each agency must also be determined. If the perpetual
inventory system is used, shipments to customers of the sales agencies are debited to Cost
of Goods Sold – Sales Agency and credited to Merchandise Inventory. On the other
hand, if the periodic inventory system is maintained, shipments to sales agency customers
are recorded by debiting Cost of Goods of Sold – Sales Agency and crediting Shipments
of Merchandise – Sales Agency. At the end of the accounting period, the account
Shipments of Merchandise – Sales Agency is deducted from the total beginning inventory
and purchases to determine the cost of goods available for sale by the home office for its
own operations.

Agency revenues and expenses are closed to the temporary account Agency Income
whose balance is closed to Income Summary account.