Professional Documents
Culture Documents
Chapter 4
Chapter 4
CHAPTER FOUR
ACCOUNTING FOR HOME OFFICE AND BRANCH
Defn.
The term branchis used to describe a business unit located at some distance from the home
office. This unit carries merchandise obtained from the home office, makes sales, approves
customers' credit, and makes collections from its customers.
The cash receipts of the branch often are deposited in a bank account belonging to the home
office; the branch expenses then are paid from the cash fund or a bank account provided by
the home office.
As the imprest cash fund is used up, the branch submits a list of cash payments supported by
vouchers and receives a check or a transfer from the home office to replenish the fund.
OBJECTIVE OF BRANCH ACCOUNTS
A business firm establishes branches for marketing the products or services. The parent firm
(head office) is always interested to know the trading results of its branches. For this purpose,
branch accounts are kept. The main purposes of branch accounts are as follows:
i. Branch accounts helps to know the profit or loss of each branch.
ii. It enables the head office to know the financial position of each branch.
iii. It shows the requirements of goods or cash for each branch.
iv. Branch account is the basis and helps the head office to control the activities of branch.
v. Suggestions and improvements are based on the branch accounts.
4.1 The difference between Sales Agency and Branch
Sales Agency Branch
Degree of Subject to the control of the home office
autonomy and is governed by general corporate
policies.
Neither sales agencies nor branches are has more autonomy and provides
separate legal or accounting entities; a greater range of services
they do not prepare separate external
accounting reports.
Not an autonomous operation but acts
on behalf of the home office.
Decision little management decision making; Greater degree of management
making decisions are made at the home office decision making
Reporting Does not keep a financial accounting Maintains separate financial
system; operations are recorded on the accounting records.
books of the home office.
Note that the entries are recorded in the same way as if the home office had engaged in the
transactions except that the assets, revenues, and expenses are specifically designated as relating
to the Sales agency.
Example:
Assume that Arada Electronics establishes a sales agency in Awassa.
The journal entries to record typical sales agency transactionson the home office books are given
below.
“Investment in Branch is debited when assets are transferred to the branch or if the branch
reports a net income. The account is credited when the branch transfers assets to the home
office or reports a net loss.”
The account serves as a record of investment in the branch and also as a controlling account
over the branch ledger; that is, the amount of net assets reported on the branch books should
equal the balance in the Investment in Branch account.
“Home Office is credited to offset the equal amount of debits made to the asset accounts.
Conversely, the account is debited when assets are returned to the home office. The account
is also credited (debited) for the amount of reported profit (loss) of the branch.”
A branch is established when a home office transfers cash, inventory, or other assets to an
outlying location. Because the home office views the assets transferred to the branch as an
investment, it makes the following entry:
Investment in branch - - - - - - - - - - - - - - - xx
Asset (s) - - - - - - - - - - - - - - - - - - - - xx
On receipt of the assets from the home office, the branch makes the following entry:
Asset(s) - - - - - - - - - - - - - - - - - - - - - - xx
Home office equity - - - - - - - - - - - - - - xx
The balance in the Investment in Branch account on the books of the home office always equals
the balance in the Home Office Equity account on the books of the branch. In practice, these
accounts are referred to as the Intra Company or reciprocal accounts. At the end of each
accounting period, the branch closes its income or loss to its home office equity account. Upon
the receipt of the branch’s financial statements, the home office adjusts its Investment in Branch
account to reflect the branch’s income or loss and makes the offsetting credit or debit to an
income statement account called branch income or branch loss. As a result of this entry and
upon closing the branch income or branch loss account to retained earnings, the branch’s income
or loss is included in the home office’s retained earnings account.
Reciprocal Accounts:
Transactions with external parties are recorded in the normal manner.
Solution:
The home office records the transfer with the following entry:
Investment in JimmaBranch 55,000
Cash 20,000
Office Equipment 5,000
Store Equipment 30,000
(To record the transfer of assets to Jimma Branch)
Jimma Branch records the transfer of assets from the home office with the following entry:
Cash 20,000
Office Equipment 5,000
The balance of the home office account is offset against the balance of the investment in branch
account; also any receivable and payables between the home office and the branch (or between
two branches) are eliminated.
A convenient staring point in the preparation of a combined balance sheet consists of the
adjusted trial balances of the home office and of the branch.
If a complete set of statements is prepared, a three-part working paper might be used to combine
the accounts of the home office and branch.
C) AWASH COMPANY
Working Paper for Combined Financial Statements of Home Office and Baro Branch
For Year Ended December 31, 2006
(Billings at Cost)
D) AWASH COMPANY
Income Statement
For Year Ended December 31, 1999
Sales Birr 480,000
AWASH COMPANY
Retained Earnings
For Year Ended December 31, 2006
Retained Earnings, Jan 1 Birr70,000
Add: Operating Income 87,000
Total Birr 157,000
Less: Dividends declared (40,000)
Retained Earnings, Dec. 31 Birr117,000
AWASH COMPANY
Balance Sheet
December 31, 2006
Cash Birr30,000
Accounts Receivable 57,000
Inventories 60,000
Equipment 150,000
Less: Accumulated Depreciation (10,000) 140,000
Total assets Birr287,000
Accounts Payable Br20,000
Common Stock, Br10 par, 15,000 authorized shares 150,000
Retained Earnings 117,000
Total Liabilities Br Stockholders’ Equity Birr287,000
ii. Working Paper When Billings to Branches Are at Prices above Cost
When a home office bills merchandise shipments to branches at prices above home office cost,
preparation of the working paper for combined financial statements if facilitated by an analysis
of the flow of merchandise to a branch, such as the following for Baro Branch of Awash
Company:
E) AWASH COMPANY
Flow of Merchandise for Baro Branch
During 2006
Billed price HO Cost Markup (50ofcost)
Beginning inventories
Add: Shipments from Home Office 90,000 60,000 30,000
Available For Sale 90,000 60,000 30,000
Less: Ending Inventories 22,500 15,000 7,500
Cost of Goods Sold Birr 67,500Birr. 45,000 Birr. 22,500
AWASH COMPANY
Working Paper for Combined Financial Statements of Home Office and Baro Branch
For Year Ended December 31, 2006
(Billings above Cost)
Adjusted Trial Balance
Home Office Baro Eliminat- Combine
Branch ions d
Dr(Cr) Dr(Cr) Dr(Cr) Dr(Cr)
Income Statement
Sales (400,000) (80,000) (480,000)
Cost of Goods Sold 235,000 67,500 (a)(22,500) 280,000
Operating Expenses 90,000 23,000 113,000
Operating Income 75,000 (10,500) (b)22,500 87,000
Statement of Retained Earnings
Retained Earnings, Jan. 1 (70,000) (70,000)
Operating Income (above) (75,000) 10,500 (b)(22,500) (87,000)
Dividends declared 40,000 40,000
Retained Earnings, Dec. 31 117,000
Balance Sheet
Cash 25,000 5,000 30,000
Accounts Receivable 39,000 18,000 57,000
Inventories 45,000 22,500 (a)(7,500) 60,000
Investment in Baro Branch 56,000 (c)(56,000)
Unrealized intracompany profit: Baro (30,000) (a)30,000
Branch
Equipment 150,000 150,000
Accumulated Depreciation-Eqp. (10,000) (10,000)
Accounts Payable (20,000) (20,000)
Home Office (56,000) (c)56,000
Common Stock, Br10 par (150,000) (150,000)
Retained Earnings, Dec. 31 (above) (117,000)
a) To reduce ending inventories and cost of goods sold of branch to cost, and to eliminate
unadjusted balance of unrealized intracompany profit: Baro Branch Ledger Account
b) To increase income from home office by portion of merchandise markup that was
realized by branch sales
c) To eliminate reciprocal ledger account balances.
At the end of the period the branch will report its inventories at billed prices of 22,500
(15,000*50%). In the records of the home office the required balance of the Allowance for
Overvaluation of Inventories: Branch X account is 7,500 (22,500-15,000); thus, this account
balance must be reduced to 7,500 from the present amount of 30,000 to represent the excess
valuation contained in the ending inventories of the branch.
Home Office Adjusting and closing Entries and Branch Closing entries
The December 31,2006, adjusting and closing entries of the home office are given below:
Home Office Adjusting and Closing Entries
Income: Baro Branch…………………………………………………... 10,500
Investment in Baro Branch……………………………… 10,500
To record net loss reported by branch
Unrealized intracompany profit: Baro Branch……………...22,500
Realized Gross Profit: Baro Branch Sales ……………….. 22,500
To reduce allowance to amount by which ending inventories of branch exceed cost
Realized Gross Profit: Baro Branch Sales……………………………… 22,500
Income: Baro branch……………………………………… 10,500
Income Summary…………………………………………. 12,000
To close the branch net loss Br realized gross profit to Income Summary ledger account
2.2. Transactions between Branches
Branches sometimes transfer assets or services from one to another.
While there are several ways of accounting for such transfers, a commonly used approach is
to treat the transfers as if they went through the home office.
The branches involved in an inter branch transfer generally account for the transfer as if they
are dealing with the home office rather than with another branch.
One branch may transfer excessive inventory to another branch that has an inventory
shortage.
Example
Assume that Nice Corporation’s Good branch transfers Birr7,000 of cash and inventory costing
Birr22,000 to the Excellent branch.
Good branch records the following entry:
Home Office 29,000
Cash 7,000
Inventory 22,000
To record transfer of cash and inventory to Excellent branch.
The Excellent branch records the transfer with the following entry:
Cash 7,000
Inventory 22,000
Home Office 29,000
To Record the transfer of cash and inventory from Good branch
The transfer is recorded by the home office as follows:
Investment in Excellent Branch 29,000
Investment in Good Branch 29,000