SALES AGENCY,

HOME OFFICE &

BRANCH
ACCOUNTING
BRANCH AND S ALES AGENCY DIS TINGUIS HED

Sales Ag ency Branch

Sco pe o f o peratio ns Limited to accepting customerAccepts customer orders and
orders and sending these orders
may approve and extend credit
to the home office for approval.
to customers without prior
approval from the home office.
Invento ry manag ement  Merchandise are all coming  Merchandise are coming
from the home office from either the home office
or from outside suppliers

 Merchandise onsite are  Merchandise on onsite are

normally for sample or
display purposes
Cas h Manag ement Petty Cash Fund (PCF)
Decis io n making Centralized
Acco unting reco rds Usually only includes cash
receipts and disbursement book
available for immediate
sale.
Maintains cash balance aside
from PCF
Centralized or Decentralized
Complete set of books
 ACCOUNTING FOR SALES AGENCY
ABC Company whose home office is located in Taguig has established a sales office in Pasig City.
The transactions during the month are as follows:

(a) The entity established the petty cash fund for the agency at Php10,000.
(b) The home office purchased merchandise for Php200,000, plus freight of Php5,000. The supplier
granted the entity a 10% trade discount.
(c) The home office purchased a laptop for the sales office's use. The cost of the laptop is
Php30,000, and has an estimated useful life of 5 years.
(d) Shipped goods to the sales agency for display and sample purposes, Php4,000.
(e) The sales agency sent a total sales order of Php200,000. The home office delivered the goods
ordered to the sales agency with a Php1,200 freight.
(f) Collections from sales agency customers, Php150,000.
(g) Sales agency expenses paid by the home office:
Utilities 7,000
Rent 10,000
Advertising 5,000
(h) Expenses disbursed from the petty cash fund:
Repairs expense 4,500
Advertising 1,000
Miscellaneous 800
(i) Ending balances
Utilities payable 1,250
Samples inventory 700
(j) It was determined that the cash price of inventory sold by the agency amounted to Php90,000.
(k) Replenishment of the agency's petty cash fund.
(l) The home office has the following details:
Sales 800,000
Purchases 500,000
Freight-in 15,000
Utilities expense 40,000
Rent expense 50,000
Advertising expense 30,000
Repairs expense 25,000
Miscellaneous expense 12,000
Inventory, beginning 17,000
Inventory, ending 22,000
BRANCH ACCOUNTING - THE RECIPROCAL ACCOUNTS

Investment in Home Office

branch account Current account
Books Home Office Branch
Normal balance Debit Credit
Presentation in the Noncurrent asset Equity
separate FS

Presentation in the Eliminated Eliminated

combined FS

Inte r-office trans actions

 Transactions b etween the Home Office and the Branch
 Recip rocal accounts must be used in recording ALL inter-office transactions.
BRANCH ACCOUNTING - S HIPMENTS OF INVENTORY
Pe rpe tual "Inventory" account shall be used in record ing shipments of inventory to and from the
Inve ntory branch.

Pe rio dic The following ad ditional reciprocal accounts are used for inventory shipments between
Inve ntory Home Office and the Branch:

Shipments to Branch Shipments from Home Office

Books Home Office Branch
Normal balance Credit Debit
Amount recorded Cost of merchandise Billed Price of merchandise
transferred to the Branch received by Branch

Presentation in the Contra account Adjunct account

separate FS Deduction from cost of Addition to cost of goods
goods available for sale available for sale

Presentation in the Eliminated Eliminated

combined FS

The e xce s s of S hipments from H.O. over S hipments to Branch account rep resents the
mark-up on cost, that is record ed b y the H.O. und er "Allowance fo r Mark-up" account.
BRANCH ACCOUNTING - GENERAL PROCEDURES
The trial balance of ABC Company, whose head office is located in Ortigas, as of January 1, 2020 is shown below. 15 The initial sales summary of Ortigas Office and Mandaue Branch are as follow:
Ortigas Mandaue
Debit Credit Cash sales 300,000 90,000
Cash 50,000 Credit sales 220,000 40,000
Petty cash fund 10,000 17 The Ortigas office paid the January 8 accounts including Mandaue's account. Ortigas issued a debit memo for
Accounts receivable 20,000 the corresponding discount on the shipments.
Inventory 30,000 22 Various expenses paid by Ortigas Office and Mandaue Branch amounted to Php75,000 and Php50,000,
Supplies 4,500 respectively. The entity uses the expense method in recording deferred charges.
Equipment 500,000 24 Ortigas office sent a debit memo for the payment of Php4,000 repairs expense of Mandaue. Mandaue Branch
Accumulated depreciation 100,000 likewise charged the Ortigas office for the Php5,000 for delivery expense.
Accounts payable 35,000 26 Collections on accounts are as follow:
Accrued expenses 40,000 Ortigas Mandaue
Ordinary shares 300,000 With no cash discount 176,000 32,000
Retained earnings 164,500 With 1% cash discount 21,780 3,960
Treasury shares 25,000 27 A customer of Mandaue Branch paid directly to the Home Office. The Ortigas Office collected Php4,950, net of
639,500 639,500 1% cash discount.
28 Mandaue branch remitted Php20,000 cash to Ortigas Office.
On January 1, 2020, after three years of operations, ABC Company finally established its first branch as part of its
30 The sales summary of Ortigas Office and Mandaue Branch for the month of January are as follow:
business expansion, the Mandaue Branch. The transactions of Ortigas Office and Mandaue Branch for the month of
Ortigas Mandaue
January are as follows:
Cash sales 585,000 198,000
Credit sales 429,000 78,000
Jan. 2 Ortigas Office transferred cash of Php50,000 to establish the petty cash fund of the branch. 31 Replenishment of branch's petty cash fund. The petty cash box shows vouchers amounting to Php40,000
5 Ortigas Office transferred two computers with a cost of Php40,000 each. The computers have an original life while bills and coins amounted to Php10,000. The home office increased the petty cash fund of Mandaue
of 5 years and are already used for one year with an accumulated depreciation of Php8,000 each as of the date branch to Php60,000.
of transfer. The Ortigas Office paid the freight on the transfer for a total of Php2,400. 31 Ortigas office paid the prior period expenses due this month.
8 Ortigas and Mandaue purchased product X and Y, respectively from DEF Corporation. The credit term is 2/10, 31 The following are the additional information:
n/30 FOB shipping point. Ortigas Office paid the freight on the purchases at 4% based on purchase price. Ortigas Mandaue
Accrued expenses, end 12,500 5,000
Product X Product Y Supplies, end 7,000 3,000
Units 40,000 16,000 In units:
Unit price 5 5 Inventory, end: outside supplier 5,000 3,000
10 10,000 units of product X are transferred to Mandaue branch. The freight on the shipment amounted to Inventory, end: home office None
Php1,500 and is paid by Ortigas Office. Remaining life of equipment, Jan 1 4 years 4 years
POINTS TO REMEMBER:

u If one reciprocal account incre as e d, the other account should also incre as e , and vice
versa. This simp ly means that if one reciprocal account is DEBITED, the other should
be CREDITED, and vice versa.

v All nominal accounts of the branch should be recorded in the branch's b ooks.
However, real accounts of the branch can b e maintained in the home office books, in
this case, the accounts related to the branch must be properly labeled.

w Freight on the shipment of inventory from home office to the branch should be
re corde d in the branch's books regardless of which office actually paid the freight.
S uch freight is an inventoriable cost in the branch's books.
x Only the ne t inco me o f the branch is b eing closed to the Home Office Current
account and Investment in Branch account.

y Co mbine d ne t income is being closed to the Retained Earnings.

BRANCH
ACCOUNTING
(Special Procedures)
S HIPMENTS OF INVENTORY - PERIODIC INVENTORY S YS TEM
Pro fo rma Journal Entrie s :
H.O. Bo o ks Branch Bo o ks
Ship me nts o f me rchandis e to b ranch S hip me nts of me rchandis e to b ranch
Investment in Branch xxxx Ship ments from Home Office xxxx
S hipments to Branch xxxx Home Office xxxx
Allowance for Mark-up xxxx

Re turn of me rchand is e to Home Office Re turn o f me rchandis e to Ho me Office

S hipments to Branch xxxx Home Office xxxx
Allowance for Mark-up xxxx S hipments from Home Office xxxx
Investment in Branch xxxx

Allo wance fo r Mark-up

➪ Also known by other account title as "Overvaluation of branch inventory".
➪ The unrealized mark-up charged by Home Office on inventory shipp ed to the b ranch.
➪ Red uced when inventories are sold b y Branch to external customers.
➪ Normal b alance is "Cred it".
COS T OF INVENTORY

S upplie r Home
Office

Exce s s fre ight:

 Excess of Freight 1+2 over Direct
Freight
 Freight on return of inventory to
home office/supp lier.

Branc h 2
Co s t per Branch 2's POV Branch 1
S FHO + Lower of Freight 1+2
& Direct Freight
ANALYSIS OF BRANCH INVENTORY

Unrealized Shipments from

Shipments
Mark-up Home Office
to Branch

The "S hipme nts to branc h"

Cost per GAAP; account is re corde d at the
Freight-in: from
cost per home home office 's cos t to acquire
home to branch
office's POV the goods from the s upplie r
(not exceeding the
cost of direct which compris e s of the
shipment) following:

Cost per branch  Purchas e s

books  Fre ight-in (from s upplie r
to home )
 Purchas e
dis counts /allowance s
 SPECIAL PROCEDURES
On February 1, 2020, ABC Company established another branch located in Cagayan de Oro. Moreover, starting February,
11 Mandaue Branch returned to the home office 500 units of product X, the freight on the return is
the Ortigas office decided to put mark-up on cost for shipments of inventory to its branches. The mark-up on shipment to
paid by the home office.
CDO branch is 10% on cost, while 20% for Mandaue. The separate statements of financial position as of January 31, 2020
are shown below: From the current shipments, Mandaue Branch transferred 2,000 units of product X to CDO branch.
The freight on the transfer amounted to Php0.70 per unit, paid by the home office.
15 Mandaue branch transferred Php20,000 cash to CDO branch.
Ortigas Mandaue
28 Summary of sales for the month is shown below:
Cash 353,230 163,960
Ortigas Mandaue CDO
Petty cash fund 10,000 60,000
Accounts receivable 251,000 37,000 Cash sales 700,000 420,000 300,000
Inventory 25,500 15,300 Credit sales 500,000 200,000 80,000
28 Collections on account, net of 2% discount, during the month:
Supplies 7,000 3,000
Beyond Within
Equipment 420,000 82,400
discount discount
Accumulated depreciation (91,000) (17,383)
period period Remarks
Investment in Mandaue Branch 339,277 - Ortigas 380,000 49,000 includes Php10,000 accounts from customers of Mandaue
Total Assets 1,315,007 344,277 Branch, without discount
Mandaue 100,000 39,200
Accounts payable 35,000 - CDO 15,000 31,360 includes Php5,000 accounts from customers of Mandaue Branch,
Accrued expenses 12,500 5,000 less 2% discount
Ordinary shares 300,000 -
28 Payments on account:
Retained earnings 992,507 - Ortigas 35,000
Treasury shares (25,000) - Mandaue 280,000
Home Office - 339,277 CDO 125,000
Total Liabilities and Shareholders' Equity 1,315,007 344,277
In addition, Ortigas Office also paid Php7,500 and Php12,000 to Mandaue and CDO branches' suppliers,
Feb 2 Ortigas office transferred Php20,000 cash to CDO branch to set up its petty cash fund. respectively.
2 The Ortigas office purchased a computer for the use of CDO branch. The computer was purchased in Mandaue 28 Summary of cash expenses, including the opening balance of accrued expenses:
City, and was shipped to CDO by Mandaue Branch. The purchase price amounted to Php48,000 with a 5-year Ortigas 250,000
estimated useful life. The freight amounted to Php1,200 and was paid by Mandaue branch. Mandaue 125,000
CDO 30,000
4 Ortigas purchased for cash 100,000 units of product X for Php5.50 each, FOB shipping point. The freight paid on the
purchase amounted to Php0.04 per unit.
Payments of Ortigas include common costs of Php45,000, divided equally among the three offices.
5 Mandaue Branch purchased on account, 70,000 units of product Y for Php5.20 each, FOB destination. The freight The entity uses expense method in recording deferred charges.
amounted to Php2,000, freight prepaid.
28 The following are the available information for month-end adjustments.
7 CDO branch purchased on account, 20,000 units of product Z for Php7.00 each, FOB shipping point. Freight Ortigas Mandaue CDO
amounted to Php0.12 per unit.
Uncollectible accounts based on outstanding balance 5% 5% 5%
9 Inter-office transfers of product X are as follow: Supplies, end 11,000 4,200 3,400
Freight cost per Accrued expenses, end 18,000 5,700 4,350
To unit of inventory Depreciation 7,000 1,383 820
From Mandaue CDO To Mandaue To CDO Units of Inventory on hand as of month-end
Ortigas 10,000 20,000 0.50 1.00 From home office 500 1,500
Inter-office transfer of inventories are all taken from current purchases. Freight on transfers of inventory to Mandaue From outside supplier 4,600 5,100 1,400
Branch is paid by the branch, while transfers to CDO branch are paid by Ortigas office.
 BRANCH ACCOUNTING - SPECIAL PROCEDURES
XYZ Company established its only branch few years ago in Olongapo, while its head office is
located in Makati City. The head office ships merchandise to its branch at 120% billed price.
Home
Office Branch
Cash 30,000 18,000
Accounts receivable 120,000 72,000
Inventory 20,000 13,600
Prepaid expenses 7,500 4,500
Equipment 500,000 300,000
Accumulated depreciation (75,000) (45,000)
Investment in branch 287,600
Unrealized mark-up in branch inventory (24,600)
Accounts payable (12,500) (7,500)
Accrued expenses (8,000) (4,800)
Ordinary shares (200,000)
Retained earnings (323,000)
Home Office (287,600)
Sales (700,000) (500,000)
Sales discount 21,000 12,600
Purchases 400,000 240,000
Shipments from home office 144,000
Shipments to branch (120,000)
Freight-in 20,000 12,000
Purchase discount (8,000) (4,800)
Purchase returns and allowances (15,000) (15,000)
Expenses 80,000 48,000

The inventories of the home office and branch are shown below:

Home Branch
Office From Home From Outside
Beginning inventory 20,000 3,600 10,000
Ending inventory 15,000 6,000 13,000
POINTS TO REMEMBER:

u The "Home Office Current" account is used by branches

for all inte r-branch trans actions .
v There is always a a corresponding journal entry in the
home office b ooks for every inter-branch transaction,
whether the home office is actually involved or not in the
transaction.
w The freight on the inter-office shipments of inventory mus t
no t e xce e d the fre ight co s t of dire ct s hipme nts from
the home office.
x The b ranch net income(loss) that is being closed to the
re ciprocal accounts is b ased on the branch's records,
that is, e xcluding realized mark-up .
y The b ranch net income(loss) that is being closed to the
Re taine d Earning s account is based on the home office's
point of view, that is, including realized mark-up .
z Branch's true net income is always gre ate r than branch's
net income per books.
MARK-UP ON BRANCH INVENTORY
The effects of Allowance for Markup are follows:
Outs ide Branch
S upplie r H.O. Bo o ks Mark-up Co mbine d
Beginning inventory xxxx ➕ xxxx Ⓐ ⚌ xxxx ➖ xxxx u ⚌ xxxx
Purchases - from outsid e sup pliers xxxx ⚌ xxxx xxxx
S hip ments from home office xxxx Ⓑ ⚌ xxxx ➖ xxxx v ⚌ xxxx
Freight-In xxxx ➕ xxxx ⚌ xxxx xxxx
Cost of good s availab le for sale xxxx ➕ xxxx Ⓒ ⚌ xxxx ➖ xxxx w ⚌ xxxx
End ing inventory (xxxx) ➕ (xxxx) Ⓓ ⚌ (xxxx) ➖ (xxxx) x ⚌ (xxxx)
Cost of good s sold xxxx ➕ xxxx Ⓔ ⚌ xxxx ➖ xxxx y ⚌ xxxx

H.O. Bo o ks Branch Bo o ks
Allo wance fo r Markup Inve nto ry fro m H.O. @ Bille d Price
Realized Mup  y xxxx xxxx u  Beginning b alance  Ⓐ xxxx xxxx Ⓔ  COGS
Ending b alance  x xxxx xxxx v  S hipments to Branch  Ⓑ xxxx xxxx Ⓓ  End ing Balance
xxxx xxxx w Ⓒ xxxx xxxx

Because of the mark-up, the following should be noticed:

Branch books Combined FS

Inventory and COGS Overstated At cost
Gross profit/ Net income Understated Without effect of mark-up
THE COMBINED FINANCIAL S TATEMENTS - ELIMINATING ENTRIES
Eliminating Entrie s ➪ Working p a p e r e ntrie s tha t a re not re fle c te d in the b ooks.
➪ Elim ina te s a ll a c c ounts tha t a re re la te d to tra nsa c tions of the Hom e Offic e a m ong its b ra nc he s.

PERIODIC INVENTORY S YS TEM

H.O. Branch Eliminating Entries Combined
Dr. (Cr.) Dr. (Cr.) Debit Credit Dr. (Cr.)
Cash xxxx xxxx xxxx Eliminating Entries:
Inventory, beginning xxxx xxxx xxxx xxxx ⓵ Home Office xxxx
Investment in Branch xxxx xxxx Investment in Branch xxxx
Allowance for Markup (xxxx) xxxx
Liabilities xxxx xxxx xxxx ⓶ Shipments to Branch xxxx
Share capital (xxxx) (xxxx) Allowance for Mark-up xxxx
Retained Earnings (xxxx) (xxxx) Shipments from Home Office xxxx
Home Office (xxxx) ⓵xxxx
Sales (xxxx) (xxxx) (xxxx) ⓷ Allowance for Mark-up xxxx
Purchases xxxx xxxx xxxx Inventory, beginning - Branch xxxx
Shipments to Branch (xxxx) (xxxx) xxxx
Shipments from H.O. xxxx xxxx
Expenses xxxx xxxx xxxx

⓵ Ensure tha t the Hom e Offic e a c c ount a nd Inve stm e nt in Bra nc h a c c ount a re e q ua l p rior to e lim ina tion, othe rwise , a
re c onc ila tion p roc e d ure is p e rform e d .

⓶ Ensure tha t the tota l of S hip m e nts to Bra nc h a nd Ove rva lua tion a c c ounts is e q ua l to S hip m e nts from Hom e offic e
a c c ount.

⓷ The b ra nc h's inve ntory a re c a rrie d a t b ille d p ric e , sinc e the COGS in the c om b ine d FS m ust b e m e a sure d a t c ost,
unre a lize d m a rk-up should b e e lim ina te d .
THE COMBINED FINANCIAL S TATEMENTS - ELIMINATING ENTRIES
PERPETUAL INVENTORY S YS TEM
H.O. Branch Eliminating Entries Combined
Dr. (Cr.) Dr. (Cr.) Debit Credit Dr. (Cr.)
Cash xxxx xxxx xxxx Eliminating Entries:
Inventory, ending xxxx xxxx xxxx xxxx Home Office xxxx
⓵
Investment in Branch xxxx xxxx Investment in Branch xxxx
Allowance for Markup (xxxx) xxxx
Liabilities xxxx xxxx xxxx xxxx
⓶ Allowance for Mark-up
Share capital (xxxx) (xxxx) Cost of goods sold xxxx
Retained Earnings (xxxx) (xxxx)
Home Office (xxxx)
⓵xxxx ⓷ Allowance for Mark-up xxxx

Sales (xxxx) (xxxx) (xxxx) Inventory, ending - Branch xxxx

Cost of Sales xxxx xxxx xxxx xxxx
Expenses xxxx xxxx xxxx

⓶ Scomb
ince the b ranch's COGS are recognized at b illed price, this entry will bring the branch's COGS at cost in the
ined FS .
INTER-BRANCH TRANS ACTIONS

When a branch enters into a transaction with another branch, both branches shall use the "Home Office "
account, "as if" they are transacting directly with the Home Office. There is no ad ditional reciprocal accounts in
inter-branch transactions.

Fre ight on inte r-branch s hipme nt o f

me rchandis e
Freight cost Actual Direct
From supplier to H.O. 15 15
From H.O. to Branch A 10
From Branch A to Branch B 20
15 From H.O. to Branch B 28
Total 45 43
HO
10 28 Freight shall be the "lower" between the actual freight and the freight
should direct shipment have been made.
Excess freight  Nonoperating expense
 Reported by the office in charge of the
shipments, usually the H.O.
20