TEHNOLOGICAL INSTITUTE of the PHILIPPINES

ACCOUNTING for SPECIAL TRANSACTIONS (AdvAc)

MODULE 6 – Home Office and Branch Accounting

In seeking out for increased sales, business organizations are constantly reaching out into more
distant areas. Their services are available in more areas through their travelling salesman or by
shipments on consignment. Selling activities are conducted from sales offices at different
locations under the direction of the home office.

Agency and Branch Distinguished

Agency:
 It is established to display merchandise.
 It does not stock merchandise to fill customer’s orders
 Merchandise orders obtained are sent to the Home Office for approval.
 The imprest system is often adopted for the control of agency fund.
 It has no separate accounting or business entity.
 Its transactions are recorded in the books of the Home Office either:
o Separate record from home office transaction
o No separate records from home office transaction

Branch:
 Sells goods out of a stock that it maintains
 Possesses the authority to engage in transactions as an independent business.
 Makes sales to customers, passes on customers , collects receivable, incurs expenses
 Has a branch accounting system comparable to the systems of independent businesses.

Accounting System for Agency

The typical agency does not require a complete set of books. Ordinarily, summaries of working
fund receipts and disbursements and records of sales to customers are sufficient which when
accompanied by supporting evidence in the form of paid vouchers are sent to the home office.

CASE ILLUSTRATION:
WANTON Trading established a sales agency, the MATET Agency. The result of operations are
recorded separately from those of the other sales agencies. Assume that the home office uses
the periodic inventory system.

ACCOUNT TITLE
TRANSACTIONS HOME OFFICE BOOKS DEBIT CREDIT
1. Establishment of petty Working Fund – Matet Agency 10,000
cash fund, P10,000 Cash 10,000
2. Shipped merchandise Samples Inventory – Matet 4,000
to Agency for use as Agency 4,000
samples, P4,000 Shipment to Matet Agency
3. Purchase of Agency Equipment 20,000
equipment, P20,000 Cash 20,000

4. Payment of salaries to Salaries expense – Matet Agency 6,500

employees of Agency, Cash 6,500
P6,500.

5. Sales orders from Accounts receivable 100,000

Agency are filled and Sales – Matet Agency 100,000
customers are billed,
P100,000 and goods
are delivered by the
home office.

6. The following
expenses were
incurred out of the No entry required
working fund: utilities, – Imprest Fund System
P2,000; advertising
expense, P3,000 and
other expenses,
P4,000.

7. End of the year

adjustments:
a) Cost of goods sold Cost of goods sold – Matet 60,000
identified with the Agency 60,000
Agency, P60,000 Shipments to Matet Agency

b) Depreciation Depreciation expense – Matet 2,000

expense for Accum depreciation - 2,000
Agency Equiptment
equipment,
P2,000

c) Replenishment of Utilities expense 2,000

Agency’s working Advertising expense 3,000
fund: utilities, Other expenses 4,000
advertising and Cash 9,000
other expenses
 d) Agency samples Advertising expense – Matet 3,000
inventory Samples Inventory 3,000
amounted to
P1,000 net
realizable value.

8. Closing entries:
a) To close sales Sales 100,000
revenue account Income Summary - Matet 100,000

b) To close cost of Income Summary 60,000

goods sold Costs of goods sold 60,000
account

c) To close expenses Income Summary 20,500

account Salaries expense 6,500
Depreciation expense 2,000
Utilities expense 2,000
Advertising expense 6,000
Other expenses 4,000

d) To close the Income Summary – Matet Agency 19,500

Agency Income Income Summary 19,500
Summary to
General Income
Summary

Agency Accounting Records Not Separate from the Home Office

 The home office may record transactions of the agency in the revenue and expense
accounts used for its own transactions if there is no desire to summarize agency
operations separately. After these accounts are closed, the income summary account
reports the results of combined operations.

Agency Accounting Records Separate from the Home Office

 If the home office wishes to determine the net income of each of its agencies as well as
of the home office:
o It will maintain separate sales revenue and expense accounts for the individual
sales units including a supplementary record of the cost of goods sold by each
sales unit.
 o The shipments to agency account balance are subtracted from the sum of the
home office beginning inventory and purchases in determining the merchandise
available for home office sales. The ending inventory when subtracted from
merchandise available for home office sales gives the cost of goods identified
with home office sales.
o Agency sales revenue and expenses accounts are closed into an income
summary account for each agency. Subsequently transferred to the general
income summary account.

Accounting for Branches

Although a branch operates as a separate business unit, it is subject to control by the home
office with the general policies and standards adopted and applied to all of the branches.
Procedures to be observed by the branch are as follows:
 A branch’s cash and merchandise and such other assets as may be needed are supplied
by the home office
 The branch may purchase merchandise from outsiders to satisfy certain local needs for
goods not available from the affiliated unit.
 The branch ships merchandise, bill its customers, makes collections on account, and
deposits the sum in its own bank account.

Records maintained at the Branch

 Generally, the branch accounting system is maintained at the branch. The branch keeps
the books of original entry and post to ledger records. Financial statements are
prepared by the branch periodically and are submitted to the home office which is
usually verified by the company’s internal auditors.

Reciprocal Accounts
 When complete self-balancing books are kept by the branch, an account called Home
Office Current takes the place of the customary Capital Accounts. The Home Office
account is a quasi-ownership account equity that shows the net investment by the
home office in the branch.

This Home Office Current account is credited for the following:

 Cash, goods or services received from the home office
 For profits resulting from branch operations

On the other hand, this account is debited for the following:

 For remittances made by the branch to the home office
 For losses from operations

The home office in turn, keeps a reciprocal account called Branch Current or Investment in
Branch. This non-current asset account is debited for:
  Cash, goods or services transferred to the branch, and
 Branch income

Conversely, the account is credited for:

 Remittances from the branch or other assets received from the branch, and
 Branch losses.

Property, Plant and Equipment Used by the Branch

Depreciable branch assets are normally carried on the home office books. This procedure may
be followed when depreciation rates are to be uniformly applied to certain groups of assets,
whether used by the branch or the home office.

CASE ILLUSTRATION:
 Equipment is purchased by the home office for the branch, journal entry for the
acquisition is:

Home Office Books: EQUIPMENT – BRANCH xxx

CASH or ACCOUNTS PAYABLE xxx

BRANCH Books: NO ENTRY REQUIRED

 Equipment is purchased by the Branch:

Home Office Books: EQUIPMENT – BRANCH xxx
BRANCH CURRENT or xxx
INVESTMENT IN BRANCH

BRANCH Books: HOME OFFICE CURRENT xxx

CASH or ACCOUNTS PAYABLE xxx

Expenses Incurred by the Home Office but Charged to Branch

Certain expenses relating to the branch operations are sometimes paid by the home office. The
home office notifies the branches of the expenses incurred so the branch can record them in
their books. The following guidelines should be strictly followed:
 Certain items can be easily identified with individual branches and are immediately
charged to the respective branch. Such items include taxes and insurance paid by the
home office on branch asset.
 Other charges resulting in benefits that are no directly identified with certain branches
such as: advertising.
 When a home office does not sell to customers but acts solely in a supervisory capacity
that is may charged all of its expenses to branches.
  The home office may charge the individual branches for interest and rent on the
working capital and the properties and equipment transferred to the branches.

Billing Methods for Merchandise Shipped to Branch

Three alternative methods are available to the home office for billing merchandise shipped to
its branches as follows:
 At home office cost (at original cost) – simplest procedure and widely used since it
avoids the complication of unrealized gross profit in inventories and permits the
financial statements branches
 At billed price or a percentage above home office cost (original cost plus mark-up based
on cost)
 At the branch’s retail selling price (mark-up based on billed price)

CASE ILLUSTRATION
Assume that on January 1, 2021, the Manila Company establishes its first branch in Bulacan.
Separate books are to be kept by the branch and financial statements are to be submitted to
the home office at the end of each month. Merchandise is to be billed at cost. Depreciable
assets are to be carried on the books of the home office. Both the home office and the branch
books use the periodic inventory method. Transactions during the year for the month of
branch operations are provided below:
1. Received cash of P 40,000 from the home office,
2. Purchased equipment with a five-year life for P 20,000 cash.
3. Received merchandise shipments from home office at the P32,0000 home office cost.
4. Purchased merchandise from outside suppliers for P8,000 cash.
5. Sold merchandise for P60,000 cash.
6. Returned P2,000 of the merchandise acquired from home office.
7. Paid the following expenses:
8. Remitted P30,000 to the home office
9. Salaries payable at year-end were P2,000 and depreciation of equipment for the year
was P4,000.
10. Merchandise branch inventory at year-end consisted of P2,000 merchandise acquired
from outside suppliers and P10,000 acquired from home office.
11. Home office : sales, P95,000; beginning inventory P40,000; purchases P90,000; ending
inventory, P25,000.

REQUIRED:
1. Present the journal entries in the books of the Home Office and the Branch including the
appropriate adjusting journal entries (AJE).
2. What are the balances of home office and branch current accounts on December 31,
2021 ?
JOURNAL AND ADJUSTING ENTRIES

HOME OFFICE BOOKS BRANCH BOOKS

ACCOUNTS DEBIT CREDIT ACCOUNTS DEBIT CREDIT
1. Branch current 40,000 Cash 40,000
Cash 40,000 Home office current 40,000
2. Equip – branch 20,000 Home office current 20,000
Branch current 20,000 Cash 20,000
3. Branch current 32,000 Shipment from Home O 32,000
Shipment to branch 32,000 Home office current 32,000
4. No entry Purchases 8,000
Cash 8,000
5. No entry Cash 60,000
Sales 60,000
6. Shipment to Branch Home office current 2,000
cost 2,000 Shipment from H.O. 2,000
Branch current 2,000
7. No entry Salaries expense 12,000
Utilities expense 2,000
Rent expense 6,000
Misc expense 4,000
Cash 24,000
8. Cash 30,000 Home office current 30,000
Branch current 30,000 Cash 30,000
ADJUSTING ENTRIES:
9.a no entry Salaries expense 2,000
Salaries payable 2,000
9.b Branch current 4,000 Depreciation exp 4,000
Accm depreciation 4,000 Home office current 4,000
– Equipment Branch

HOME OFFICE & BRANCH CURRENT BALANCES

Home Office Books:
Branch Current
Cash sent to branch 40,000 Equip acquired by branch 20,000
Shipment to branch 32,000 Shipment returned 2,000
Depreciation charged to branch 4,000 Remittance 30,000
Balance forwarded 24,000
Total 76,000 76,000
Branch Books:
Home Office Current

Equip acquired by branch 20,000 Cash sent to branch 40,000

Shipment returned 2,000 Shipment to branch 32,000
Remittance 30,000 Depreciation charged to branch 4,000
Balance forwarded 24,000 0
Total 76,000 76,000

TRANSACTIONS GUIDE

 Transfer of assets other than merchandise by Home Office to Branch (1)

 Purchase of assets by branch to be carried on Home Office books. (2)
 Transfer of merchandise by Home Office to Branch. (3)
 Transactions of Branch with outsiders (4&5)
 Return of merchandise by Branch to Home Office (6)
 Transactions of Branch with outsiders (7)
 Remittances by Branch to Home Office (8)
 Adjustments of Branch affecting outsiders (9.a)
 Branch charges submitted by Home Office (9.b)

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:
o Expenses incurred by the branch but paid by the home office
o Expenses incurred by the home office on behalf of the branch – For example,
depreciation on branch equipment carried on the home office books.
o Allocations of expenses incurred by the home office – for example: a portion of
the cost of general advertising.

CASE ILLUSTRATION:
Assume that the home office incurs the following expenses assigned to its Cebu branch:

Utilities expense ( expenses incurred by Cebu branch

and billed to home office account) 15,000
Depreciation expense (on Cebu branch fixed assets
carried on home office books) 5,000
Advertising expense (allocated to Cebu branch) 10,000
Total 30,000
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 P30,000 of
allocated expenses:

Home: Investment in Cebu branch 30,000

Utilities expense 15,000
Depreciation expense 5,000
Advertising expense 10,000

Upon notification of the expense by the home office, the branch records the expenses as
follows:
Branch: Utilities expense 15,000
Depreciation expense 5,000
Advertising expense 10,000
Home Office 30,000

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 or intracompany account
balances must be eliminated because they relate to activities within the company rather
than activities between the company and outside parties.
 To facilitate the preparation of combined financial statements, a working paper
normally is used to combine the accounts of the home office and its branches, 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.

CASE ILLUSTRATION:
Assume the following balances of the reciprocal accounts on December 31, 2021 after adjusting
and closing entries have been prepared:
 Investment in branch 295,000
 Home Office 295,000
 Shipments to branch 85,000
 Shipments from Home Office 85,000

To facilitate the preparation of combined financial statements on December 31, 2021, working
paper is to be used. The following working paper elimination entries are needed:

Elimination: Home Office 295,000

Investment in Branch 295,000
To eliminate reciprocal accounts

Elimination: Shipments to Branch 85,000

 Shipments from Home Office 85,000
To eliminate shipments of merchandise

These entries do not appear on the books of either the home office or the branch.

CASE ANALYSIS : BOOK PROBLEMS

CASE #1:
QC Company had an agency in Iloilo City. During the year, the transactions of the agency are
summarized below:
 Sales 868,000
 Disbursements:
o Purchases 800,000
o Salaries 140,000
o Rent 40,000
o Supplies 20,000
o Other expenses 10,000

The agency had P200,000 receivables and P100,000 payables as of the end of the period. Also,
there are inventories on hand of P180,000 and unused supplies of P12,000. The agency was set
up as an experiment for one year and would be closed if losses were incurred. The agency
should be :
a) Reviewed again, because it was a break-even operation
b) Closed with the period’s operational loss of P310,000
c) Closed with the period’s operational loss of P118,000
d) Continued with the period’s profit of P50,000.

CASE #2 :
On June 1, 2021, BOBSY Company established a sales agency in Makati. Upon the establishment
of the sales agency, the Makati sent merchandise samples costing P8,000 and a cash working
fund of P3,000 to be maintained on the impress basis. During the month of June, the sales
agency reported to the home office sales orders. These were billed at P70,000 of which P40,000
was collected. The sales agency paid expenses of P2,800 but was reimbursed by the home
office.
On June 30, 2021, the sales agency samples were valued at P6,000. T was estimated that the
gross profits on goods shipped to fill agency sales orders averaged 40% of cost.

REQUIRED:
1. What is the net income of the sales agency for the month ended June 30, 2021 ?
CASE #3 :
On January 2, 2021, Company BEE established a sales agency in Pasig City. During the year, the
following transactions occurred:
 Transfer of P10,000 worth of merchandise to Pasig Agency to establish a working fund.
 Receipts of sales orders from the agency, P100,000.
 Collection of agency accounts by the home office, P70,000.
 Home office disbursements representing agency expenses, P9,000.
 Replenishment of the agency working fund upon receipt of expense vouchers for
P4,500.
 Cost of goods sold identified with the agency sales, P72,000.

REQUIRED:
1. What is the net income (loss) of the agency for the year 2021 ?

CASE #4 :
VIZMINDA Corporation starts a branch operation in a nearby town. Merchandise costing
P80,000 is shipped to this branch along with equipment costing P50,000. During the initial year,
the home office assigns P8,000 in expenses to the branch. The branch sells 70 percent of the
inventory that it received for 80,000 and remits P40,000 in cash to the home office.

REQUIRED:
1. What is the correct Home Office account balance on the records of the branch ? Closing
entries have not been made.

CASE #5 :
ELECTRIC Company has been operating a branch in IMUS, Cavite for a year. Shipments are billed
to the branch at cost. The branch carries its own accounts receivable, makes its own collections,
and pays its own expenses. On December 31, 2021, the branch books shows the following
balances:
Cash 8,500
Home Office 35,000
Shipments from home office 135,000
Accounts receivable 25,000
Sales 147,000
Expenses 13,500
The branch inventory on December 31, 2021 is P18,500.

REQUIRED:
 1. What is the balance of investment in branch account on January 1, 2022 in the books of
the Home Office ?
2. What is the balance of shipments to branch account on January 1, 2022 in the books of
the Home Office ?

CASE #6 :
On December 31, 2021, the branch manager of DOLOMITE Company in Iligan City submitted
the following data to the home office in Manila as follows:
Petty cash fund 6,000
Sales 390,000
Shipments from home office 270,000
Accounts receivable, January 1, 2021 86,000
Inventory, January 1, 2021 74,000
Inventory, December 31, 2021 82,000
Expenses 96,000
All cash collected on accounts receivable amounting to P378,000 were remitted to the home
office.

REQUIRED:
1. What is the balance of the Home Office account on January 1, 2021 ?
2. What is the balance of the Home Office account on January 1, 2022 ?

CASE # 7 :
A reconciliation of the Investment in Naga Branch account of Las Pinas Company and the Home
Office account carried in the books of the branch shows the following discrepancies at
December 31, 2021 :
 A credit for merchandise allowance for P3,500 was taken by the branch as P4,000.
 A charge by the branch of P5,750 for an advance taken by the president when he visited
the branch has not yet been recorded by the home office.
 The branch has not taken up P9,500 covered by a debit memo from the home office as
share in advertising expenses.
The Investment in Naga Branch account in the home office books had a debit balance of
P430,000 at December 31, 2021. The reciprocal accounts were in agreement at the beginning of
the year.

REQUIRED:
 1. What is the unadjusted balance of the Home Office account in the books of the branch
on December 31, 2021 ?

CASE # 8 :
On December 31, 2021, the Investment in Branch account on the home office books of the DIVA
Company shows a balance of P84,000, and the Home Office account on the books of the branch
shows a balance of P97,350. The following data are determined in accounting for the
difference.
 Merchandise billed at P6,150 was shipped by the home office to the branch on
December 28. The merchandise is in transit and had not been recognized on the books
of the branch.
 The branch collected a home office accounts receivable of P25,000, but failed tonotify
the home office of this collection.
 The home office recorded incorrectly the branch net income of P11,250. The branch
reported net income of P12,150.
 The home office was charged P6,400 when the branch returned merchandise to the
home office on December 31. The merchandise is in transit.

REQUIRED:
1. What is the reconciled amounts of the reciprocal accounts on December 31 ?

CASE # 9 :
On December 31, 2021, the Investment in Branch account on the home office’s books has a
balance of P85,000. In analyzing the inter-company transactions recorded in each of these
accounts for December, you discover the following discrepancies:
 A P10,000 branch remittance to the home office initiated on December 27, 2021 was
recorded on the home office books on January 4, 2022.
 A home office merchandise shipment to the branch on December 29, 2021 was
recorded by the branch on January 5, 2022. The cost of merchandise is P20,000.
 The home office incurred P12,000 of advertising expenses and allocated P5,000 of this
amount to the branch on December 15, 2021. The branch has not recorded this
transaction.
 A branch customer erroneously remitted P3,000 to the home office. The home office
recorded this cash collection on December 23, 2021. Meanwhile, back at the branch, no
entry has been made yet.
 Merchandise costing P43,000 was sent to the branch by the home office on December
10, 2021. The billing was at cost, but the branch recorded the transaction at P34,000.
REQUIRED:
1. What is the unadjusted balance of the Home Office account ?
2. What is the adjusted balances of the reciprocal accounts ?