Home Office and

Branch Accounting
ACC5116- ACCOUNTING FOR
SPECIAL TRANSACTIONS
Sales Agency
In their effort to generate more sales, business firms usually open sales outlets.‡

The creation of sales outlets develops business in distant areas or improves the

company’s share of existing markets through more effective and efficient contact with
the customers.‡

The new sales outlets may be organized as sales agencies or branches.‡

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.
Sales Agency and Branch Office
Sales Agency Branch Office
✔ Usually carries a line of samples ✔ Carries stocks of merchandise
or displays merchandise but which may be obtained solely
does not carry stocks of it. from the home office or a
✔ Orders are taken from portion may be obtained from
customers and sent to the home outside suppliers.
office for approval of credit. 
✔ Makes the usual warranties
✔ Home office then ships the
merchandise directly to with respect to quality and
customers. Customers remit makes collections of accounts
payments to HO directly receivable, and function in
✔ A working fund of sales agency most respect as an
expenses is provided by the HO independent business unit.
and replenished when ✔ Restricted until it is more than
exhausted. a sales agency
✔ No other cash is handled by the
sales agency
Accounting System for Sales Agencies
Sales agency neither keeps a complete set of books nor uses a double-
entry system of accounts.

❖ Imprest System is used,

- Usually adopted by the home office for the working fund of the sales
agency.
- Entries made by the home office depend on whether sales agency net
income is determined separately or not separately.
- If HO 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.

For example:
Sales –Sales Agency
Rent Expense –Sales Agency

The cost of good sold of each agency must also determined.

Accounting System for
Sales Agencies

❖ Perpetual Inventory System is used,

- Entry for Shipments to customers of the sales agencies are
Cost of Goods Sold – Sales Agency
Merchandise Inventory

❖ Periodic Inventory System is maintained,

- Entry to shipments to sales agency customers are recorded by,
Cost of Goods Sold – Sales Agency
Shipment of Merchandise – Sales Agency

At the end of accounting period, the account Shipment of Merchandise –

Sales Agency is deducted from the total of beginning inventory and
purchases to determine the cost of goods available for sale by the home
office for its own operation
Accounting for Branch Operations
o Normally, the home office and the branch maintain
separate accounting systems.
o Each maintains a full set of books with a complete
self-balancing set of accounts.
o Both home office and branch must record
transactions with one another (inter-office
transactions) in their respective accounting
systems.
o All accounts are combined for external reporting so
that the external financial statements will represent
the company as a single economic enterprise.
o Certain elimination is necessary.
Reciprocal Accounts

In recording inter-office transactions, two

reciprocal accounts are used, namely, the
Investment in Branch (Branch Current) account
used by the home office which is classified as an
asset (receivable and investment); and the Home
Office (HO Current account) used by the branch
which is classified as a liability and equity.
Reciprocal Accounts
The reciprocal nature of the Investment in Branch
and the Home Office accounts and the way in which
they are affected by various inter-office transactions
are shown below:

(Home Office Books) (Branch Books)

Investment in Branch Home Office
XX Assets transfer to branch XX
XX Assets transfer from branch XX
XX Branch profit XX
XX Branch loss XX
Establishment of Branch
When a company establishes a branch, the transfer of assets
to the branch is recorded by the home office in the Investment
in Branch account. Likewise, the branch records the transfer
with an entry to the Home Office account.
Example entry;
Home Office books
Investment in Branch XX
Cash XX
Office Equipment XX
Branch books
Cash XX
Office EquipmentXX
Home Office XX
Recognition of Branch Income or
Loss
• Income for each branch is computed periodically in the normal manner.

• All of the branch’s revenue and expense accounts are closed to its
Income Summary account in the usual manner.

• 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 retained earnings and

other owner’s equity accounts in the book of the branch.

• When the branch income and loss is reported to the home office, an
entry is made on the home office books to recognize the income or
loss of the branch.
Recognition of Branch Income or
Loss
For example, assume there is a credit balance of P60,000 in
Manila branch’s Income Summary account at the end of the
Manila branch:

Branch books
Income Summary 60,000
Home Office Current 60,000
Close income summary.

Home Office books

Investment in Cebu Branch 60,000
Manila Branch Income 60,000
Record Manila branch income.
Merchandise Shipments to a Branch
Merchandise sold by the branch may be obtained entirely from
the home office or it may be allowed to acquire some
merchandise from outside parties.

Purchases of merchandise from outsiders are recorded in the

normal manner.

If for example, Cebu branch purchases P10,000 of merchandise

from outside parties, and the branch uses a periodic inventory
system, the branch records the transaction as follows:
Purchases 10,000
Cash or Accounts Payable 10,000
Record purchase of merchandise from outsiders.
Merchandise Billed at Cost
Both the home office and the branch treat the transfer of merchandise
in the same way as the transfer of any other asset.

To illustrate, assume that the home office transferred merchandise

with a cost of P80,000 to its Cebu branch and the home office use
periodic inventory system.
Home Office books
Investment in Cebu Branch 80,000
Shipments to Branch 80,000
Transfer of merchandise to Cebu branch.
Branch books
Shipments from Home Office 80,000
Home Office Current 80,000
Transfer of merchandise from home office.
Freight Charges on Merchandise Shipments
Freight costs incurred in shipping merchandise from the home office to a
branch become part of the cost of the branch inventory.

For example, assume the home office paid P5,000 to transport P80,000 of
merchandise to Cebu branch.

Home Office books

Investments in Cebu Branch 85,000
Shipments to Branch 85,000
Transfer of merchandise to Cebu Branch
Branch books
Shipments from Home Office80,000
Freight-In 5,000
Home Office Current 85,000
Transfer of merchandise from home office.
Merchandise Billed at above Cost
• Billings to the branch may be made at an amount above cost, or
cost plus an arbitrary percentage, also known as the “billed price.”
Information on actual costs is withheld from the branch.

• Therefore, upon receipt of shipments, the branch records the

merchandise received at the billed price, rather than at cost.

• When combined financial statements are prepared, the markup on

shipments are eliminated. This is necessary to restate the cost of
goods sold and ending inventory of the branch to their original
costs.
.
Merchandise Billed at above Cost
To illustrate, assume that the home office shipped merchandise with a
cost of P80,000 to its Cebu branch at billed price of P100,000 and the
home office applies the periodic inventory system.
Home Office books
Investment in Cebu Branch 100,000
Allowance for Overvaluation 20,000
Shipments to Branch 80,000
Transfer of merchandise to Cebu branch.
Branch books
Shipments from Home Office 100,000
Home Office Current 100,000
Transfer of merchandise from home office.
.
Preparation of Combined Financial Statements
• In the preparation of combined financial statements for the
company, the accounts of the home office and its branches
are combined.

• Reciprocal and intra-company account balances must be

eliminated because they relate to activities within the
company rather than activities between the company and
outside parties.

• Working paper normally is used to combine the accounts

of the HO and its branched, and to eliminate the reciprocal
accounts

• All eliminations are only made in the working paper, not on

the separate books of the units being combined.
Preparation of Combined Financial Statements
Assume the following balances of the reciprocal accounts on December 31,
2021 after adjusting and closing entries have been prepared:

Investment in Branch P 295,000

Home Office 295,000
Shipments to Branch 85,000
Shipments from Home Office 85,000

Elimination entries:
(1)Home Office Current 295,000
Investment in Branch 295,000
Eliminate reciprocal accounts.
(2)Shipment to Branch 85,000
Shipments from HO 85,000
Eliminate shipments of merchandise.
Separate Financial Statements
Normally, the branch prepares its own financial
statements so that the management of the home
office can review and evaluate the operating
results and financial position of the branch.
The home office also prepares its own financial
statements so that it may appraise independently
the results of its own operation and its own
financial position.
The separate financial statements for the branch
and the home office are presented to the next
slides.
Combined Financial Statements
❑ Combined financial statements of the home office
and the branch are prepared to show the effects of
business transactions must be eliminated.

❑ To facilitate the preparation of combined

statements, working papers are usually prepared.

❑ Two formats of working paper may be used, the

trial balance working paper (normally used in
accounting for branch operations) and the three-
section working paper (used in parent-subsidiary
accounting)
INTEROFFICE TRANSACTIONS AND THEIR JOURNAL
ENTRIES
ILLUSTRATIVE EXAMPLE-WORKING PAPER & FINANCIAL STATEMENT
On December 31, 2021, the end of period, the following trial balances were prepared for the
SINOVAX Co. and its branch. Merchandise was billed to the branch by the home office at 120% of
Home Office Branch
cost. DEBIT CREDIT DEBIT CREDIT
(,000) (,000)
Cash 30,350.00 12,650.00
Accounts receivable 26,200.00 12,850.00
Merchandise inventory-1/1/2021 31,500.00 14,400.00
Furniture and fixtures 8,500.00 3,600.00
Accumulated depreciation – F&F 2,500.00 540.00
Allowance for Overvaluation 3,700.00
Store supplies 940.00 580.00
Branch Current 47,460.00
Accounts payable 35,400.00 4,200.00
Home office 47,460.00
Ordinary Share 65,000.00
Retained earnings 6,850.00
Sales 74,850.00 20,000.00
Shipment to branch 8,500.00
Purchases 37,600.00 9,520.00
Shipment from home office 10,200.00
Advertising expense 2,850.00 2,800.00
Salaries and commission expense 4,250.00 2,350.00
Other selling expense 1,850.00 1,050.00
Rent expense 2,700.00 1,500.00
General expense 2,600.00     700.00  
196,800.00 196,800.00 72,200.00 72,200.00
- -

Merchandise Inventory 12/31/2021-HO: 24,200.00

Merchandise Inventory 12/31/21-Branch: 14,600.00
From HO at Billed Price 11,700.00
From Outsider 2,900.00
ILLUSTRATIVE EXAMPLE- REQUIREMENTS

1. Prepare individual statements for The branch

and The home office for December, 2021.
2. Prepare a worksheet for combined financial
statements.
3. Prepare combined statements for The branch
and The home office.
4. Prepare The entries to close The books of (a)
The branch and (b) The home office.
REQUIREMENT 1 & 3
INDIVIDUAL AND COMBINED FINANCIAL STATEMENTS
REQUIREMENT 1 & 3
ANALYSIS OF ALLOWANCE FOR OVERVALUATION AND COMBINED
INVENTORY
REQUIREMENT 1 & 3
INDIVIDUAL AND COMBINED FINANCIAL STATEMENTS
Working Paper for Combined Financial Statements
(,000)
ADJUSTING AND CLOSING ENTRIES

ADJUSTMENT AND CLOSING ENTRIES

BRANCH BOOKS

TO CLOSE REVENUE & EXPENSE ACCOUNTS

SALES 20,000.00
Merchandise inventory-12/31/2021 14,600.00
INCOME SUMMARY 7,920.00
Shipment from home office 10,200.00
Merchandise inventory-1/1/2021 14,400.00
Purchases 9,520.00
Advertising expense 2,800.00
Salaries and commission expense 2,350.00
Other selling expense 1,050.00
Rent expense 1,500.00
General expense 700.00

Home office 7,920.00

INCOME SUMMARY 7,920.00
ADJUSTING AND CLOSING ENTRIES
REFERENCES

Dayag, A. J. (2021). Advanced Financial Accounting (A Comprehensive: Conceptual & Procedural Approach) Manila, Philippines:
Pixeplate Publishing and Printing

Guerrero, P. P and Peralta, J. F. (2017). Advanced Accounting: A Procedural Approach Volume I. Manila, Philippines: GIC
Enterprises & Co., Inc

Halsey, Robert F. and Hopkins, Patrick E. Advanced Accounting 4th ed. Cambridge Business publishers.
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