ACC132 Home Office and Branch Accounting

Home Office and Branch Accounting

Sales Agency vs. Branch •  Sales Agency –  Does not carry stocks –  Takes orders but approval and shipment of items done by HO –  Only a working fund is provided –  No separate accounting entity

•  Branch –  Carries merchandise w/c may be purchased from outsider or from HO –  May function as an independent business unit. –  Has a branch accounting system

Accounting for an Agency •  Normal accounting is followed in the books of home office. •  Certain accounts are extended with “Agency”.

Accounting for Sales Agency ›  › 

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Cash - Imprest fund Sales agency income is not tracked separately: records sales agency sales and expenses in in the HO’s own revenue and expense accounts If the home office wants to determine the net income of the sales agency - it must maintain distinct revenue and expense accounts for the sales agency in its GL by appending the account with the agency name

Prepared by: Rona Corda-Prado

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Inventory Accounting for Sales Agency in HO books Perpetual System: COGS - Sales Agency Merchandise Inventory

xxx xxx

Periodic System: COGS - Sales Agency Shipments of Merchandise – Sales Agency Under the periodic system, the Shipments of Merchandise - Sales Agency is deducted from HO’s COGAFS.

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Inventory Accounting for Sales Agency in HO books Fixed Asset Transfers: Appropriate Asset Account - Sales Agency xxx Appropriate Asset Account

xxx

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Sales Agency: Illustration Iloilo Fashion House opened a sales agency in Bacolod. The revenues and expenses of the agency are recorded separately from those of the home office. Income from sales and home office operations are determined separately at the end of each accounting period. Assume that the home office uses the periodic inventory system. 7

Sales Agency: Illustration Transactions Home Office Books Working fund of P18,000 is established Working Fund - Bacolod Agency Cash Shipped merchandise to Bacolod Agency for use as samples - P3,800

Samples Inventory - Bacolod Agency Shipments to Agency

18,000 18,000 3,800 3,800

Fill sales orders from Bacolod Agency, Accounts Receivable P162,000 Sales - Bacolod Agency

162,000

COGS identified with agency sales, P108,000 (periodic system)

COGS - Bacolod Agency Shipments to Agency

108,000

Replenishment of working fund with agency for the following expenses: Rent, P5,000; Office Supplies, P3,000; Salaries, P6,400

Rent Expense - Bacolod Agency Office Supplies Expense - Bacolod Agency Salaries Expense - Bacolod Agency Cash

Close revenue and expense accounts Sales - Bacolod Agency of the agency COGS - Bacolod Agency Rent Expense - Bacolod Agency Office Supplies Expense - Bacolod Agency Salaries Expense - Bacolod Agency Bacolod Agency Income

162,000

108,000 5,000 3,000 6,400 14,400 162,000 108,000 5,000 3,000 6,400 39,600 8

Branch Accounting •  Reciprocal Accounts •  Journal entries on the books of Branch and Home Office •  Combined Financial Statements •  Reconciliation of Reciprocal Accounts

Accounting System For A Branch •  Branches normally keep a separate and complete set of accounting records at each branch. •  Branch maintains a complete set of accounting records consisting of: –  Journals –  Ledgers –  Chart of accounts

•  Transactions with outside parties are recorded similar to that of an independent business enterprise. 10

Accounting System For A Branch • Financial statements are prepared by branch accountant and forwarded to home office. • The home office usually establish policy such as –  Number and types of ledger accounts –  The internal control structure –  Form and content of the financial statements –  Accounting policies 11

Accounting System For A Branch •  Both the home office and the branch must record transactions with one another (intraoffice transactions) in their respective accounting systems •  Transactions between the home office and branch are recorded in intracompany (reciprocal) accounts •  When the books of both branch and home office are completely updated, the reciprocal accounts in both books should have equal but opposite balances and be eliminated for the preparation of consolidated financial statements 12

Reciprocal Ledger Accounts – Branch Books •  Accounting records maintained by a branch include a Home Office ledger account •  This account reflects all activity between the branch and home office •  Home office account is a quasi-ownership equity account that shows the net investment by the Home Office in the branch. •  Home office is credited for all merchandise, cash or other assets provided by the home office (“investment” from HO); 13

Reciprocal Ledger Accounts – Branch Books •  Home office is debited for all cash, merchandise, or other assets sent by the branch to the home office or the other branches (“drawings” by HO). •  At the end of an accounting period when the branch closes its accounting records, the Income Summary account is closed to the Home Office account. •  Net income increases the credit balance of the Home Office account; a net loss decreases (debit) this balance. 14

Reciprocal Ledger Accounts – Home Office Books •  In the home office accounting records, a reciprocal ledger account with a title such as Investment in Branch is maintained. •  Investment in Branch is non-current asset account •  Debited for cash merchandise, and services provided to the branch, and for the net income reported by the branch (“receivable” from branch). •  Credited for the cash or other assets received from the branch, and for net losses reported by the branch. 15

Reciprocal Ledger Accounts – Home Office Books • Thus the Investment in Branch account reflects the equity method of accounting. • A separate investment account generally is maintained by the home office for each branch.

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Reciprocal Ledger Accounts Investment in Branch (Home Office books) •  Asset transfers to branch

•  Asset transfers from branch

•  Branch profit

•  Branch loss

Home Office (Branch books) •  Asset transfers from branch •  Branch loss

•  Asset transfers to branch •  Branch profit

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Illustration •  Smaldino opened a new branch called Mason branch. •  Assume that Smaldino Company bills merchandise to Mason Branch at home office cost and that Mason Branch maintains complete accounting records and prepares financial statements. •  Both the home office and the branch use the perpetual inventory system. Generally, equipment used at the branch is carried in the home office records unless specifically stated. •  Expenses, such as advertising and insurance, incurred by the home office on behalf of the branch, are billed to the branch. 18

Illustration • Cash of $1,000 was forwarded by the home office to Mason Branch. Home Office Journal Entries

Mason Branch Journal Entries

Investment in Mason Cash 1,000 Branch 1,000 Home Office Cash 1,000

1,000

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Shipment of Merchandise •  Three alternative methods.

–  Billing at home office cost – simplest of all. –  Billing at a percentage above home office cost. –  Billing at the branch’s retail selling price.

•  Transfer of merchandise at cost is recorded the same way as any other asset transfer. •  Freight costs incurred in shipping merchandise from the HO to a branch become part of the branch inventory cost. •  Shipment of merchandise to a branch does not constitute a sale because ownership title has not changed 20

Illustration •  Merchandise with a home office cost of $60,000 was shipped by the home office to Mason Branch. Home Office Journal Entries

Mason Branch Journal Entries

Investment in Mason Inventories 60,000 Branch 60,000 Home Office 60,000 Inventories 60,000

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Inventories •  Purchase of branch from outside supplier –  Ex. Bacolod Branch purchased P100,000 worth of merchandise from a local supplier, on account.

•  Shipments of Merchandise to Branch –  Ex. Makati head office shipped merchandise costing P250,000 to its Davao Branch. These merchandise were billed at costs and freight paid by HO amounted to P25,000.

Acquisition of Fixed Assets Used in Branch •  Transactions recorded by a branch should include all controllable expenses and revenue initiated by the branch •  If the branch manager has responsibility over all branch assets, liabilities, revenue and expenses, the branch accounting records should reflect this responsibility. 23

Acquisition of Fixed Assets Used in Branch •  Expenses such as depreciation often are not subject to control by a branch manager. •  Branch plant assets and the related depreciation ledger accounts are generally maintained by the home office (would apply if the problem is silent). •  The policy adopted by the company would depend on where the acquisition of plant assets are recorded and who does the actual acquisition. 24

Acquisition of Fixed Assets Used in Branch If a fixed asset is acquired by the home office for a branch’s usage and the accounting record for the fixed asset is maintained by the home office, the accounting treatments are: Home Office Journal Entries Fixed Asset – Branch Cash or Liability Account

Branch Journal Entries No entry

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Acquisition of Fixed Assets Used in Branch If a plant asset is acquired by a branch for its usage but the accounting record for this plant asset is maintained by the home office, the accounting treatments are: Home Office Journal Entries Fixed Asset – Branch Investment in Branch

Branch Journal Entries Home Office Cash/Liability Account 26

Acquisition of Fixed Assets Used in Branch If a fixed asset is acquired by the home office for the branch and the accounting record for this asset is maintained by the branch, the accounting treatments are: Home Office Journal Entries Investment in Branch Cash/Liability Account

Branch Journal Entries Fixed Asset Account Home Office 27

Illustration •  Equipment was acquired by Mason Branch for its use and paid $500, to be carried in the home office accounting records. Home Office Journal Entries Equipment - Mason Branch 500 Investment in Mason Branch

Mason Branch Journal Entries Home Office 500 Cash

500

500 28

Illustration •  Credit sales by Mason Branch amounted to $80,000; the branch’s cost of the merchandise sold was $45,000 Home Office Journal Entries None

Mason Branch Journal Entries Accounts Receivable Sales Cost of Goods Sold Inventories

80,000 80,000

45,000 45,000 29

Illustration › Collections of trade accounts receivable by Mason Branch amounted to $62,000. Home Office Journal Entries None

Mason Branch Journal Entries Cash 62,000 Account Receivable 62,000

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Start-Up Costs ■ Based on IAS38 “Intangible Assets”, all start-up costs, including costs associated with organizing a branch or division should be expensed in the accounting period in which the costs are incurred.

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Expenses Incurred By Home Office And Allocated To Branches Types of expenses allocated by the home office to the branch: 1.  Expenses incurred by the branch but paid by the home office 2.  Expenses incurred by the home office in behalf of the branch (i.e. depreciation of branch equipment carried in HO books) 3.  Allocations of expenses incurred by the home office (i.e. advertising)

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Expenses Incurred By Home Office And Allocated To Branches ■ The home office usually acquires insurance, pays property and other taxes, and does advertising that benefits all branches. Home Office Journal Entries Investment in Branch Expense Account

Branch Journal Entries Expense Account Home Office 33

Expenses Incurred By Home Office And Allocated To Branches •  Home office may charge each branch interest on the capital invested in that branch •  Interest expense recognized by the branches would be offset by interest revenue recognized by the home office •  Amounts would be netted and would not be displayed in the combined income statement 34

Illustration •  Payments for operating expenses by Mason Branch totaled $20,000. Home Office Journal Entries

Mason Branch Journal Entries

None

Operating Expenses Cash

1st Semester 2013-2014

Prepared by: Rona Corda-Prado

20,000 20,000

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Illustration • Cash of $37,500 was remitted by Mason Branch to the home office. Home Office Journal Entries

Mason Branch Journal Entries

Cash 37,500 Home Office Investment in Cash Mason Branch 37,500

37,500 37,500

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Illustration ›  Operating expenses incurred by the home office and charged to Mason Branch totaled $3,000. Home Office Journal Entries Investment in Mason Branch 3,000 Operating Expenses 3,000

Mason Branch Journal Entries Operating Expenses 3,000 Home Office

3,000 37

Recognition of Branch Income or Loss ›  ›  › 

Income for each branch is computed periodically in the normal manner. Branch revenue and expense accounts are closed to its Income Summary in the usual manner. Income Summary account is closed to the Home Office account which serves as the capital account in the branch books.

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Recognition of Branch Income or Loss Home Office Journal Entries Investment in Branch Branch Income

Branch Journal Entries Income Summary Home Office

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Comprehensive Illustration •  Problem 2, page 19.

Separate Financial Statements › 

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A separate income statement and balance sheet helps management of the enterprise to review the operating results and financial position of the branch. The separate financial statements prepared by branch will be revised by home office to include reconciling items (if any) and to show the results of branch operations after elimination of any intra-company profits on merchandise shipments. The branch balance sheet will have Home Office Ledger Account instead of Ownership Equity Account.

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Separate Financial Statements for Branch & Home Office • Separate financial statements also may be prepared for the home office so that the results of its operations and its financial position can be appraised.

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Combined Financial Statements › 

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Combined FS of the home office and the branch are needed to show the effects of company transactions of the business entity with outsiders. HOBA eliminations: Use trial balance working paper A starting point in preparation of a combined balance sheet would be the adjusted trial balances of the home office and of the branch. Similar accounts are combined to produce a single total amount for cash, trade accounts receivable and other assets and liabilities of the enterprise. 43

Combined Financial Statements •  The reciprocal ledger accounts are eliminated because they have no significance when the branch and home office report as a single entity. •  The balance of the Home Office account is offset against the balance of the Investment in Branch account; •  Shipments to Branch account is eliminated against the Shipments from Home Office (periodic). •  In addition, any receivables and payables between the home office and the branch (or between branches) are eliminated. 44

Combined Financial Statements •  Operating results of the enterprise are shown by an income statement in which the revenue and expenses of the branches are combined with corresponding revenue and expenses for the home office. •  Intra-company profits of losses are eliminated (in the case of inventory sold with mark-up). 45

Working Paper for Combined Financial Statements • Any elimination or offsetting the balances is done only on working paper. No entry is to be made in the accounting record of either Home office or branch because its only purpose is to facilitate the preparation of combined financial statements

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1st Semester 2013-2014

Prepared by: Rona Corda-Prado

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Reconciliation of Reciprocal Ledger Accounts •  Balance of the Investment in Branch ledger account on the accounting records of the home office may not agree with the balance of the Home Office on the branch books •  Main reason certain transactions may have been recorded by one set of books office but not by the other due to timing differences (i.e. inventory in transit or cash remittances in transit); or 48

Reconciliation of Reciprocal Accounts › 

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Reconciling items exist because of bookkeeping and mechanical errors such as duplication of entries, slides and transpositions on either set of books. If the problem is silent, assume that the record in the originating books is correct. At the end of each period the reciprocal account balances must be brought into agreement before combined financial statements are prepared.

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The End

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