Home office, Branch and Agency Accounting PDF

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Home office, Branch and Agency Accounting Branch and Agency distinguished New sales outlets may be organized as sales agencies or branches. A sales agency is not a self- contained business but rather acts only on behalf of the home office. On the other hand, a branch is a self-contained business which acts independently, but within the bounds of company policy and subject to the control of the home office. The following further differentiate these two: Sales agency  Displays merchandise and takes customers’  order but does not carry stock of merchandise to fill customers’ orders. 

Customers’ orders are sent to the home  office for approval of credit. Customers remit payments directly to the home office.



Holds revolving cash fund provided by the  home office that is replenished when depleted. Not other cash funds are held.



Not a separate accounting entity. The only  accounting records maintained are cash receipts and cash disbursement books necessarily to account for the revolving fund. The main office maintains records of sales made through the agency and the expenses it incur.

Branch Carries stock of merchandise used to fill customers’ orders (or provides services similar to those provided by the home office). Grants credit in accordance with the company’s policies, makes normal warranties, fill customers’ order, and makes collections on sales. Has its own assets and liabilities and generates its own revenues and incurs its own expenses. Makes periodic remittances to home office subject to company policy. A separate accounting entity for internal reporting. It maintains its own complete set of accounting records. For external reporting, the branch’s financial statements are combined with the home office’s financial statements.

Accounting for an agency Since an agency does not maintain its own separate accounting books, all of its transactions are recorded in the books of the home office. The agency maintains a simple records (e.g., a log book) to record its cash receipts and cash disbursements, similarly to a petty cash system. In order to identity the transactions of the agency from other transactions, the home office may set up specific account codes and accounts titles for the agency. For example, the revolving fund of a certain may be an account title “Cash - Agency #1,” and designated a code similar to the following: - where the 1st digit (1) refers to assets the 2nd and 3rd digits refer to the agency (01), the 4th digit (1) refers to “cash” and the last two digits refer to “revolving fund” (03). Illustration: Accounting for agency Agency transactions Jan. 1 Receipt of revolving fund from home office. Jan. 1 - 31 Orders sent by agency to home office.

Collection by home office of agency sales Jan. 1 - 31 Disbursements from the revolving fund Jan. 31 Replenishment of revolving fund To determine the profit attributable to the agency, the following closing entry shall be made:

Home office books Cash - Agency #1 Cash on hand

1,000 1,000

Accounts receivable Sales - Agency #1

200

Cost of sales - Agency Inventory

120

Cash on hand Accounts receivable

200

200

120

200 No entry

Various expenses - Agency #1 50 Cash on hand Sales - Agency #1 200 Cost of sales Various expenses- Agency#1 Income summary - Agency #1

50 120 50 30

Accounting for branch operations A branch is accounted for as a separate business unit, but subject to the control of the home office. The home office determines the degree of self-management exercised by the branch. The branch maintains its own records and prepares its own financial statements. However, the branch’s financial statements are combined with the home office’s financial statements when preparing general purpose financial statements. Combined financial statements are prepared by: 1. Adding together similar items of assets, liabilities, income and expenses, and 2. Eliminating reciprocal accounts. Reciprocal accounts (Interoffice or Intra-company accounts) Transactions of either the home office or the branch with external parties are recorded in the normal way.Thus, the PFRSs apply when recording these transactions. However, for internal reporting purposes, transactions between a home office and its branch are recorded in reciprocal accounts, namely: 1. “Investment in branch” account (or ‘Branch current’ account) - the home office maintains this account in its books to account for its investments in the branch. 2. “Home office” account (or ‘Home office current’ account) - the branch maintains this account in its books to account for investments received from the home office. The “Investment in branch” is an asset account in the home office’s individual financial statements; while the “Home office” is an equity account in the branch’s individual financial statements. These accounted are eliminated when combined financial statements are prepared. A branch is treated as a separate accounting entity for internal reporting. However, when preparing financial statements for external reporting, the home office and its branch are viewed as a single reporting entity. Moreover, the branch does not have a separate legal existence. The reciprocal accounts are debited (credited) for the following: Home Office’s books: Investment in branch (a) Asset transfers to branch

xx xx

(c) Profit of branch

(b) Assets received from branch

xx (d) Loss on branch

(e) Liabilities and expenses incurred or paid by home office on behalf of branch

xx

Branch’s books Home office

(b) Asset transfers to home office

xx

(d) Loss

xx

xx

(a) Assets received from home office

xx

(c) Profit

xx

(e) Liabilities and expenses incurred or paid by home office on behalf of branch

Notice that for every debit in an account, there is a corresponding credit on the other account. Therefore, these accounts must be equal at any given point of time. For instance, if the “investment in branch” account in the home office books has a P20,000 debit balance, the “Home office” account in the branch books must also have a corresponding P20,000 credit balance. In case these accounts do not balance, reconciliation procedures similar to bank reconciliation, must be performed. Adjusting entries should be made first before combined financial statements are prepared. This is normally the case in actual practice. During your analytical procedures later on when auditing, do check immediately if these account balance - this will save you time (not to mention from embarrassment and sleepless nights if you commit oversight errors). Accounting for branches is very common when auditing banks. When an entity has more than one branch, a separate investment account for each branch is maintained in the home office books. Allocation of expenses Expenses incurred and paid by the branch are recorded in the normal way. However, expenses incurred by the home on behalf of the branch are recorded similarly to an investment (i.e., debit to investment account and credit to home office account). For instance, costs which are incurred centrally are allocated to the various business units within a single company in order to have proper financial performance measurement for each of the business units. The following are examples of costs which may be allocated to the branch: a. Cost of maintaining information systems b. Cost of contracts signed on a company level, e.g., security, pest control, insurance, advertising, and the like c. Depreciation computed under the group or composite method of depreciation d. Other general overhead costs Combined financial statements are prepared simply by: adding together similar items of assets, liabilities, income and expenses, and eliminating the reciprocal accounts. Illustration: Combined financial statements The trial balances of ABC Co.’s home office and branch are shown below: ABC CO. Trial balance December 31, 20x1 Home office Dr. (Cr.) 1,100,000 180,000 650,000

Branch Dr. (Cr.) 417,000 100,000 230,000 40,000 18,000

Cash Account receivable Inventory, beg. Shipments from home office Purchases 72,000 Freight-in 22,000 Shipments to branch (230,000) Investment in branch 827,000 Equipment 720,000 400,000 Accumulated depreciation -equipment (72,000) (40,000) Furniture 90,000 50,000 Accumulated depreciation -furniture (9,000) (5,000) Accounts payable (72,000) (40,000) Accrued expenses (45,000) (25,000) Share capital (2,000,000) Share premium (500,000) Retained earnings-beg. (206,000) Home office (827,000) Sales (900,000) (500,000) Depreciation expense 168,000 68,000 Utilities expense 18,000 10,000 General overhead expense 7,200 4,000 Various operating expenses 180,000 100,000 TOTAL The home office and the branch have ending inventories of P270,000 and P150,000, respectively: Requirement: Prepare the combined a. Statement of financial position; and b. Statement of profit or loss....