Home office and

branch accounting
 Agency vs branch

Agency is an organization in which:

1. It is established to display merchandise. Samples of merchandise
offerings as well as advertising materials are provided by the home
office
2. Does not stock merchandise to fill customer’s orders
3. No separate accounting or business entity.
4. Transactions are recorded in the books of the home office
 Agency vs branch

Branch is an organization in which:

1. Sells goods out of stock that it maintains
2. Possesses the authority to engage in transactions as independent business
3. Make sales to customers, passes on customer credit, collects receivable
4. Has a separate branch accounting system.
 Accounting for branches

Records Maintained at the Branch

• Generally, the branch accounting system is maintained at the branch. The
branch keeps the books of original entry and posts to ledger records.
Financial statements are prepared by the branch periodically and are
submitted to the home office.
 Accounting for branches
Reciprocal accounts
• ‘Home office current” account shows the net investment by the home office in the branch.
Credited When:
1. Cash, goods, or services received from the home office, and
2. For profits resulting from branch operations
Debited When:
3. For remittances made by the branch to the home office, and
4. For losses from operations.
 Accounting for branches
Reciprocal accounts
• “Branch Current” or “Investment in Branch”.
Credited When:
1. For cash, goods, or services transferred to the branch, and
2. For branch income
Debited When:
3. For remittances from the branch or other assets received from the branch and
4. For branch losses
Property, plant and Equipment used by the
branch
Depreciable branch assets are normally carried on the home office books.
I. Equipment is purchased by the home office for the branch; the entry for the acquisition on the
• home office books Branch books
Equipment – branch XX No entry
Cash or accounts payable XX
II. If the branch will purchase the equipment
• Home office books branch books
Equipment – branch XX Home office current XX
Branch current XX Cash or accounts payable
XX
 Rules for expenses incurred by the home office
but charged to Branch
1. Items that can be directly identified with individual branches should be charged
immediately to the respective branches.
2. Other charges resulting in benefits that are not directly identified with certain branches
are summarized on the home office books and charged periodically to the branches
using equitable basis
3. Home office may charged the individual branches for interests and rent on the working
capital and properties and equipment transferred to the branches. Charges will be
recognized by the branch as an expense while the home office will report the
corresponding revenues.
 Transactions between branches

1. Inter branch transfers of Cash

2. Inter branch transfers of merchandise
3. Freight costs on shipments
• Transfer of merchandise from one branch to another does not justify increasing the
carrying amount of inventories by the freight costs incurred because of the indirect
routing
• The amount of freight costs properly include in inventories at a branch is limited to the
cost of shipping merchandise directly from the home office to its present location
• Excess freight costs are recognized as expenses of the home office.
 Illustrative problem I

Lacoste Philippines has two merchandise outlets, its main store in Manila and its Cebu City branch. For control purposes,
all purchases are made by the main store, the shipments to the Cebu City branch are at cost plus 10%. On January 1, 2020,
the inventories of the main store and the Cebu City branch were P13,600 and P3,960, respectively. During 2020, the main
store purchased merchandise costing P40,000 and shipped 40% of these to the Cebu City branch.
At December 31, 2020, the following journal entry was made to prepare the Cebu City branch books for the next
accounting period:
Sales 32,000
Inventory 4,840
Inventory 3,960
Shipments from main store 17,600
Expenses 10,480
Main store 4,800
What was the actual branch income of 2020 on a cost basis, assuming the use of the provisions of the PAS and (2) if the
main store has P11,200 worth of inventory on hand at the end of 2020, the total inventory that should be appear on the
combined balance sheet at December 31, 2020.
 Solution for Illustrative problem 1

Actual branch income

Sales P 32,000
Less: Cost of goods sold
Inventory, January 1, at billed price P3,960
Shipments from main store, at billed price 17,600
Cost of goods available for sale, at billed price 21,560
Less: inventory, December 31, at billed price (4,840)
Cost of goods sold at billed price P16,720
Multiplied by: Cost ratio 100/110 15,200
Gross profit 16,800
Less: Expenses 10,480
True Branch Net income P6,320
 Illustrative problem II

Masaya Commercial Corp. maintains a branch in IloIlo City. Selected account balance taken from the books of Masaya
and its Iloilo branch as of December 31, 2020 are as follows:
Home office Branch
Merchandise inventory January 1, 2020 P 12,000 P 8,000
Purchases 150,000 30,000
Shipments from home office 93,750
Shipments to branch 75,000
Branch inventory allowance 19,750
Sales 115,000 176,500
Merchandise inventory
December 31, 2020 14,000 10,350
P4,350 of the branch’s ending inventory came from purchases/suppliers other than the Home Office.

1. As far as the home office is concerned, what is the cost of sales of the branch?
2. the branch’s net income must be understated by?
 Solution for Illustrative problem II

True cost of sales of branch

Branch Merchandise Inventory, January 1, 2020 P8,000

Add: Purchases 30,000
Shipments from home office 93,750
Cost of goods available for sales 131,750
Less: Branch merchandise inventory, December 31, 2020 10,350
Cost of goods sold 121,400
Less Overvaluation of cost of goods sold:
Branch inventory allowance 19,750
less: unrealized profit in ending inventory (1,200) 18,550
Cost of sales in so far as home office is concerned P102,850
 Illustrative problem III
The Quezon City branch of Asset enterprises, Manila, was billed for merchandise shipments from home office at cost plus
25% in 2019 and cost plus 20% in 2020. Other pertinent data for 2020 show:
Quezon City Branch Home office
Sales P 63,000 P 212,000
Inventory, beginning
at cost 23,000
at billed price 8,900
Purchases 164,000
Inventory transfers
To quezion city, at cost 42,000
from Manila, at billed price 50,400
Inventory, end
at cost 28,500
at billed price 11,700
Expenses 20,300 76,400

Compute the (1) realized inventory profir from branch sales and the ending inventory that should be presented in the
combined income statement.
 Solution Illustrative problem III

Realized profit from branch sales:

Inventory, beginning (P8,900 x 25/125) P 1,780
Add: Shipments (P50,400 x 20/120) 8,400
total 1 0,180
less: inventory, ending (P11,00 x 20/120) 1,950
Realized inventory profit from branch sales 8,230

Ending inventory in the income statement

home office 28,500
Branch: (P11,00 x 100/120) 9,750
38,250