Matakuliah
Tahun
: Akuntansi Keuangan Lanjutan I
: 2010
Accounting for Branches
Combined Financial Statements
Pertemuan 5-6
Scope of The Chapter
• Accounting and reporting for segments of a business
enterprise, primarily branches and divisions.
• Branches are not separate legal entities but they are
separate economic and accounting entities.
• Accounting procedures tailored for the special features
such as reciprocal ledger accounts.
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Branches & Divisions
•
Branch is a business unit located at some distance
from Home Office.
• Unit carries merchandise obtained from the home
office, makes sales, approves customers’ credit, and
makes collections from it’s customers.
• A branch may obtain merchandise solely from the
home office.
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Branches & Divisions
• Cash receipts of the branch may be deposited in a
bank account belonging to the home office.
• Branch expenses are paid from an imprest cash fund
or bank account provided by home office.
• Branch must submit a list of cash payments supported
with vouchers in order to get replenishment from home
office.
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Branches & Divisions
• Use of imprest cash fund gives the home office
considerable control over the cash transactions of the
branch.
• Common practice for a large branch to maintain its
own bank accounts.
• Extent of autonomy and responsibility of a branch
varies, even among different branches of the same
business enterprise.
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Branches & Divisions
• A segment of a business enterprise may be
operated as a division, which generally has
more autonomy than a branch.
• Accounting procedures for a division (not
organized as a subsidiary company) are similar
to those used for branches.
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Start-up Costs of Opening New Branches
• Some businesses would capitalize and
amortize such start-up costs on the grounds
that such costs are necessary to successful
operation at a new location.
• Most enterprises recognized start-up costs in
connection with the opening of a branch as
expenses of the accounting period in which the
costs are incurred.
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Start-up Costs of Opening New Branches
• Decision should be based on the principle that
net income is measured by matching expired
costs with realized revenue.
• Costs that benefit future accounting periods
are deferred and allocated to those periods.
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Start-up Costs of Opening New Branches
• Seldom is there complete certainty that a new branch will
achieve a profitable level of operations in later years.
• In 1998 the AICPA Accounting Standards Executive Committee
issued Statement of Position 98-5 (SOP 98-5), “Reporting on
the Costs of Start-Up Activities,” which required expensing of
all start-up costs, including those associated with organizing a
new entity such as a branch or division.
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Accounting System For A Branch
• Business enterprise with branches may provide for a complete set
of accounting records at each branch.
• Branch may maintain a complete set of accounting records
consisting of:
– Journals
– Ledgers
– Chart of accounts
Similar to those of an independent business enterprise.
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Accounting System For A Branch
• Branches may keep all accounting records in the home office and
have the branch submit daily reports and business documents to
the home office,
• Home office would then enter all transactions by branches in
computerized accounting records.
• In this case, home office may not even conduct operations of its
own; it may serve only as an accounting and control center for the
branches.
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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
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Accounting System For A 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.
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Accounting System For A Branch
• Expenses such as depreciation often are not
subject to control by a branch manager.
• Branch plant assets and the related
depreciation ledger accounts generally are
maintained by the home office.
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Accounting System For A Branch
• Reciprocal Ledger Accounts /(Home office/Investment in Branch)
• Expenses Incurred By Home Office And Allocated To Branches
• Alternative Method Of Billing Merchandise Shipments To
Branches
• Separate Financial Statements For Branch And For Home Office
• Combined Financial Statements For Home Office and Branch
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Accounting System For A Branch
•
•
•
•
•
Journal Entries For Operations Of A Branch
Working Paper For Combined Financial Statements
Treatment of Beginning Inventories Priced Above Cost
Reconciliation Of Reciprocal Ledger Accounts
Transaction Between Branches
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Reciprocal Ledger Accounts
• 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 is credited for all merchandise, cash or other assets
provided by the home office;
• Home office is debited for all cash, merchandise, or other assets
sent by the branch to the home office or the other branches.
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Reciprocal Ledger Accounts
• Home office account is a quasi-ownership equity account that
shows the net investment by the Home Office in the branch.
• 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.
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Reciprocal Ledger Accounts
• 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.
• Credited for the cash or other assets received from the branch,
and for net losses reported by the branch.
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Reciprocal Ledger Accounts
• 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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Expenses Incurred By Home Office And Allocated
To Branches
• If a plant asset is acquired by the home office for a
branch, the journal entry for the acquisition is a debit to
an asset account such as Equipment:Branch and a
credit to Cash or a Liability Account.
• The home office also usually acquires insurance, pays
property and other taxes, and does advertising that
benefits all branches.
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Expenses Incurred By Home Office And Allocated
To Branches
• An expense incurred by home office for a branch is
recorded by home office by a debit to Investment in
Branch and a credit to an appropriate expense
account;
• Branch debits an expense account and credits Home
Office.
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Expenses Incurred By Home Office And Allocated
To Branches
• If the home office does not make sales and serves only
as accounting center then most or all of its expenses
may be allocated to branches.
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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
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Illustration 1
• In a typical Home Office and Branch transactions and
events (Perpetual Inventory System), the transactions
and events are recorded by the Home Office and by a
Branch are depicted in the following illustration. The
explanations for the journal entries are omitted.
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Illustration 1
Home Office Accounting Records
Branch Accounting Records
Journal Entries
Journal Entries
1. Investment in Branch
Cash
2. Investment in Branch
Inventories
3. Equipment : Branch
Investment in Branch
4. None
1,000
1,000
60,000
Inventories
500
1,000
60,000
Home Office
Home Office
60,000
500
500
6. None
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1,000
Home Office
60,000
5. None
7. Cash
Investment in Branch
8. Investment in Branch
Operating Exps.
Cash
37,500
3,000
Cash
Trade Accts. Receivables
Cost of Goods Sold
Sales
Inventories
Cash
Trade Accts. Receivable
Operating Exps.
Cash
Home Office
37,500
Cash
Operating Exps.
3,000
Home Office
500
80,000
45,000
80,000
45,000
62,000
62,000
20,000
20,000
37,500
37,500
3,000
3,000
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Alternative Methods Of Billing Merchandise
Shipments To Branches
• 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.
• Shipment of merchandise to a branch does not
constitute a sale because ownership title has not
changed
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Separate Financial Statements for Branch & Home
Office
• A separate income statement and balance sheet helps
management of the enterprise to review the operating
results and financial position of the branch.
• If the merchandise is billed at retail selling price then
Branch’s income statement will show loss
approximating the operating expenses.
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Separate Financial Statements for Branch & Home
Office
• The branch balance sheet will have Home Office Ledger Account
instead of Ownership Equity Account.
• The separate financial statements prepared by branch will be
revised by home office to include expenses incurred by the home
office for branch and to show the results of branch operations after
elimination of any intra-company profits on merchandise
shipments.
• 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 For Home Office
And Branches
• A balance sheet for distribution to creditors, stockholders,
and government agencies.
• A starting point in preparation of a combined balance sheet
would be the adjusted trial balances of the home office and
of the branch.
• The reciprocal ledger accounts are eliminated because they
have no significance when the branch and home office
report as a single entity.
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Combined Financial Statements For Home Office
And Branches
• Assets and liabilities of branch are substituted for the
Investment in Branch ledger (on Home Office books)
• Similar accounts are combined to produce a single
total amount for cash, trade accounts receivable and
other assets and liabilities of the enterprise
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Combined Financial Statements For Home Office
And Branches
• The balance of the Home Office account is offset
against the balance of the Investment in Branch
account;
• In addition, any receivables and payables between the
home office and the branch (or between branches) are
eliminated
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Combined Financial Statements For Home Office
And Branches
• 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.
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Working Paper for
Combined Financial Statements
• To combine ledger account balances for like
revenue, expenses, assets and liabilities
• To eliminate any intra-company profits or
losses
• To eliminate the reciprocal accounts
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Working Paper for
Combined Financial Statements
• Any elimination or offsetting the balances is done, 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
• An example of a typical working paper when billing to
branches is done at cost, is shown on the following
slide
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Illustration 2
SBH COMPANY
Working Paper for Combined Financial Statements of Home Office and Branch
For Year Ended December 31, 2002
(Perpetual Inventory System: Billings at Cost)
Adjusted Trial Balances
Home Office
Branch
Dr (Cr)
Dr (Cr)
Income Statement
Sales
Cost of goods sold
Operating expenses
Net Income (to statement of retained earnings
below)
Totals
Statement of Retained Earnings
Retained earnings, beginning of year
Net (Income) (from income statement above)
Dividends declared
Retained earnings, end of year (to balance
sheet below)
Totals
Balance Sheet
Cash
Trade accounts receivable (net)
Inventories
Investment in Branch
Equipment
Accumulated depreciation of equipment
Trade accounts payable
Home office
Common stock, $ 10 par
Retained earnings (from statement of retained
earnings above)
Totals
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Eliminations
Dr (Cr)
Combined
Dr (Cr)
(400,000)
235,000
90,000
(80,000)
45,000
23,000
(480,000)
280,000
113,000
75,000
0
12,000
0
87,000
0
(70,000)
(75,000)
40,000
(12,000)
(70,000)
(87,000)
40,000
117,000
0
25,000
39,000
45,000
26,000
150,000
(10,000)
(20,000)
5,000
18,000
15,000
30,000
57,000
60,000
(26,000)
150,000
(10,000)
(20,000)
(26,000)
26,000
(150,000)
0
(150,000)
0
0
(117,000)
0
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Illustration 3
• Preparation of working paper is used when a home
office transfer inventory above cost
• The following illustration depicts this.
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Illustration 3
SBH COMPANY
Working Paper for Combined Financial Statements of Home Office and Branch
For Year Ended December 31, 2002
(Perpetual Inventory System: Billings above Cost)
Adjusted Trial Balances
Home Office
Branch
Dr (Cr)
Dr (Cr)
Income Statement
Sales
Cost of goods sold
Operating expenses
Net Income (loss) (to statement of retained
earnings below)
Totals
Statement of Retained Earnings
Retained earnings, beginning of year
Net (Income) loss (from income statement
above)
Dividends declared
Retained earnings, end of year (to balance
sheet below)
Totals
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Balance Sheet
Cash
Trade accounts receivable (net)
Inventories
Investment in Branch
Allowance for Overvaluation of Inventories:
Branch
Equipment
Accumulated depreciation of equipment
Trade accounts payable
Home office
Common stock, $ 10 par
Retained earnings (from statement of retained
earnings above)
Totals
(400,000)
235,000
90,000
(80,000)
67,500
23,000
75,000
0
(10,500)
0
Eliminations
Dr (Cr)
Combined
Dr (Cr)
(22,500)
(480,000)
280,000
113,000
22,500
(70,000)
(75,000)
40,000
87,000
0
(70,000)
10,500
(22,500)
(87,000)
40,000
117,000
0
25,000
39,000
45,000
56,000
5,000
18,000
22,500
(30,000)
150,000
(10,000)
(20,000)
(7,500)
(56,000)
30,000
(56,000)
56,000
0
0
(150,000)
0
30,000
57,000
60,000
0
150,000
(10,000)
(20,000)
0
(150,000)
(117,000)
0
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Treatment of Beginning Inventories Priced Above
Cost
•
The beginning inventories can be treated differently.
Basically there are two systems to treat the beginning
inventories.
1. Perpetual Inventory System.
2. Periodic Inventory System.
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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.
• 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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Transactions Between Branches
• Occasionally operations require that merchandise or
other assets be transferred from one branch to another.
• Usually, a branch does not carry a reciprocal ledger
account with another branch.
• The transfer can be recorded in Home Office ledger
account and home office credits the inventories
(assuming perpetual inventory system is used).
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Transactions Between Branches
• On receipt of the inventories, the branch debits
inventories and credits Home Office.
• Home office records the transfer between branches by
a debit to Investment in recipient branch and credit to
Investment in delivering branch.
• Excess freight costs are recognized as expenses of the
home office.
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