CHAPTER 11
HOME OFFICE,
BRANCH AND
AGENCY
ACCOUNTING
SALES AGENCY VS BRANCH
Not a self-contained business
Self-contained business
Act only on behalf of the home
office
Acts independently but within the
bounds of company policies set
by the home office
Display merchandise and takes
customers’ orders but does not
carry inventory to fill customers’
orders
Carries inventory to fill
customers’ order (or provides
services similar to those provided
by the home office)
Forwards customers’ orders to
the home office for processing
Customers remit payments
directly to the home office
Processes customers’ orders,
make normal warranties, and
makes own collection
May hold revolving cash fund
which is replenished when
depleted
Has its own assets and liabilities
and generates and incurs its own
income and expenses
Not a separate accounting
entity
A separate accounting entity for
internal reporting
Maintain only cash records to
account for the revolving cash
fund
Does not collect AR
Maintains a complete set of
accounting records and prepares
own financial statements which
are combined with the home
offices financial statements for
external reporting
Collect AR from branch customers
Sometimes, branch collects AR
from HO customers
Sometimes, HO collects AR from
branch customers
SALES AGENCY ACCOUNTING
does not
maintain its
own separate
accounting
book
transactions
are recorded
in home
office’s books
only maintain a
simple record
to account for
any revolving
fund
entries are the
same with that
of a regular
business
to distinguish the agency's transaction from other transactions, the home
office make set up specific account codes and account titles for the agency
AGENCY
TRANSACTION
Receipt of revolving fund
from home office
Orders sent by agency to
home office for processing
Collections by home office
of agency sales
HOME OFFICE
BOOKS
Cash - agency #1
Cash
xx
Accounts receivable
Sales - agency #1
xx
xx
xx
Cost of sales - agency #1 xx
Inventory
xx
Cash
Accounts receivable
xx
xx
Disbursements from the
revolving fund
NO ENTRY
The agency records the
disbursements in its "log book"
Replenishment of revolving
fund
Various expenses - agency #1 xx
Cash
xx
Samples were sent by the
HO to the Agent
Closing of agency income to
income summary account
Closing entry
Samples Inventory - agency #1 xx
Shipments to agency
xx
Income - agency #1
xx
Income summary - agency #1 xx
Sales - agency #1
xx
Cost of sales - agency #1
xx
Various expenses - agency #1 xx
Income summary - agency #1 xx
JOURNAL ENTRIES
Home Office Books
INITIAL
INVESTMENT
DEPRECIATION
PROPERTY
CARRIED IN
BRANCH BOOKS
DEPRECIATION
DEPRECIATION
PROPERTY
CARRIED IN
HOME OFFICE
BOOKS
DEPRECIATION
Branch Books
JOURNAL ENTRIES
Home Office Books
Branch Books
TRANSFER OF
INVENTORIES
PERIODIC
PERPETUAL
PURCHASES OF
INVENTORIES
PERIODIC
PERPETUAL
REVENUE
JOURNAL ENTRIES
Home Office Books
COLLECTION
REMITTANCE
TO HOME
OFFICE
ALLOCATION
OF EXPENSES
CLOSING
ENTRIES
NOTE:
Branch Books
FINANCIAL STATEMENTS
BRANCH
HOME OFFICE
COMBINED
ADDED
SIMILAR ITEMS
RECIPROCAL AND
OTHER INTEROFFICE
ACCOUNTS
ELIMINATED
RECONCILIATION
RECONCILING
ITEMS
HOME OFFICE
BRANCH
Shipments to branch
xx
Investment in branch xx
Shipments from HO
Freight-in
Home office
debit memo sent by
HO to BR
Investment in BR
xx
Appropriate account xx
Appropriate account xx
Home office
xx
credit memo sent by
HO to BR
Appropriate account
Investment in BR
xx
Home office
xx
Appropriate account xx
debit memo sent by
BR to HO
Appropriate account xx
Investment in BR
xx
Home office
xx
Appropriate account xx
credit memo sent by
BR to HO
Investment in BR
xx
Appropriate account
xx
Appropriate account
Home office
TRANSFER
IN-TRANSIT
xx
xx
xx
UNRECORDED
DEBIT AND
CREDIT MEMOS
ERRORS
NOTE:
xx
+/- omissions in recording, double
recording, mathematical mistakes
procedures are similar to those used
when preparing bank reconciliation
xx
xx
SHIPMENTS AT BILLED PRICE
Branch is unaware
of the mark-up
made by HO
Mark-up is not realized yet and
does not form part of the profit
of the entity, realized only
when it is sold to customers
Transfer from HO to
branch is not a sale
Investment in Branch
Shipments to branch
Allowance for overvaluation of inventory
xx
Shipments from Home Office
Home Office
xx
xx
xx
xx
WHATEVER METHOD IS USED, TRUE INCOME SHOULD BE THE SAME FOR ALL
1
MARK-UP ON THE BEGINNING INVENTORY AND ON ALL SHIPMENTS FROM THE
HOME OFFICE ARE THE SAME. NO PURCHASES FROM OUTSIDE SUPPLIERS
Beg. inventory (P100,000 cost) 50% mark-up above cost
P150,000
Shipments from HO (P200,000 cost) 50% mark-up above cost 300,000
Sales
700,000
Ending inventory (billed price)
75,000
Expenses
25,000
METHOD 1: COMPUTE BRANCH INCOME, THEN ADD REALIZED MARK-UP
Sales
Cost of Goods Sold:
Beginning Inventory
Shipments from Home Office
Ending Inventory
Gross Profit
Expenses
Net Income
700,000
150,000
300,000
(75,000)
(375,000)
325,000
( 25,000)
300,000
NOTES
Beginning Inventory
50% mark-up above cost
Billed price
Cost
Mark-up
150,000 150%
(100,000) (100%)
50,000
50%
Shipments from HO
50% mark-up above cost
Billed price
Cost
Mark-up
300,000 150%
(200,000) (100%)
100,000
50%
Ending Inventory
At Billed Price
Billed price
Cost
Mark-up
75,000
(50,000)
25,000
150%
(100%)
50%
WHAT IS THE TRUE INCOME OF THE BRANCH?.......................................................
Beginning, Allowance for Overvaluation of Inventory (AOI) 50,000
Shipments from HO
100,000
Less: Ending, AOI
( 25,000)
Realized Mark-up
125,000
Net Income
Realized Mark-up
True Income
300,000
125,000
425,000
METHOD 2: BRING ALL INVENTOIRES TO COST THEN COMPUTE THE BRANCH INCOME
Sales
Cost of Goods Sold:
Beginning Inventory
Shipments from Home Office
Ending Inventory
Gross Profit
Expenses
Net Income
NOTES
100,000
200,000
(50,000)
(250,000)
450,000
( 25,000)
425,000
METHOD 2: THE NET INCOME IS THE TRUE INCOME OF THE BRANCH
Shipments from HO
50% mark-up above cost
Beginning Inventory
50% mark-up above cost
Billed price
Cost
Mark-up
700,000
Billed price
Cost
Mark-up
150,000 150%
(100,000) (100%)
50,000
50%
Ending Inventory
At Billed Price
300,000 150%
(200,000) (100%)
100,000
50%
Billed price
Cost
Mark-up
75,000
(50,000)
25,000
150%
(100%)
50%
METHOD 3: COMPUTE COGS AT BILLED PRICE, THEN CONVERT IT TO COST
THIS METHOD ONLY WORKS IF THE MARK-UP PERCENTAGE IS UNIFORM AND THERE ARE NO PURCHASES FROM OUTSIDE SUPPLIERS
Beginning Inventory
Shipments from Home Office
Ending Inventory
Cost of Goods Sold (Billed Price)
150,000
300,000
(75,000)
375,000
Sales
Cost of Goods Sold
Gross Profit
Expenses
Net Income
2
Cost of Goods Sold (Billed Price)
At Cost
Mark-up
375,000
150%
(250,000) (100%)
125,000
50%
700,000
(250,000)
450,000
( 25,000)
425,000
MARK-UP ON THE BEGINNING INVENTORY AND ON ALL SHIPMENTS FROM THE
HOME OFFICE ARE THE SAME. THERE ARE PURCHASES BY THE BRANCH FROM
OUTSIDE SUPPLIERS
Beg. inventory (P100,000 cost) 50% mark-up above cost
P150,000
Shipments from HO (P200,000 cost) 50% mark-up above cost 300,000
Sales
700,000
Ending inventory (billed price)
75,000
Expenses
25,000
Purchases
100,000
METHOD 1: COMPUTE BRANCH INCOME, THEN ADD REALIZED MARK-UP
Sales
Cost of Goods Sold:
Beginning Inventory
Purchases
Shipments from Home Office
Ending Inventory
Gross Profit
Expenses
Net Income
700,000
150,000
100,000
300,000
(75,000)
(475,000)
225,000
( 25,000)
200,000
WHAT IS THE TRUE INCOME OF THE BRANCH?.......................................................
Beginning, Allowance for Overvaluation of Inventory (AOI) 50,000
Shipments from HO
100,000
Less: Ending, AOI
( 25,000)
Realized Mark-up
125,000
Net Income
Realized Mark-up
True Income
200,000
125,000
325,000
METHOD 2: BRING ALL INVENTOIRES TO COST THEN COMPUTE THE BRANCH INCOME
Sales
Cost of Goods Sold:
Beginning Inventory
Purchases
Shipments from Home Office
Ending Inventory
Gross Profit
Expenses
Net Income
700,000
100,000
100,000
200,000
(50,000)
(350,000)
350,000
( 25,000)
325,000
METHOD 3: COMPUTE COGS AT BILLED PRICE, THEN CONVERT IT TO COST
NOT APPLICABLE BECAUSE THERE ARE PURCHASES FROM OUTSIDE SUPPLIERS
3
DIFFERENT MARK-UP ON SHIPMENTS. NO PURCHASES FROM OUTSIDE SUPPLIERS
Beg. inventory (P100,000 cost) 100% mark-up above cost
P200,000
Shipments from HO (P200,000 cost) 50% mark-up above cost 300,000
Sales
700,000
Ending inventory (billed price)
75,000
Expenses
25,000
METHOD 1: COMPUTE BRANCH INCOME, THEN ADD REALIZED MARK-UP
Sales
Cost of Goods Sold:
Beginning Inventory
Shipments from Home Office
Ending Inventory
Gross Profit
Expenses
Net Income
700,000
200,000
300,000
(75,000)
(425,000)
275,000
( 25,000)
250,000
NOTES
Shipments from HO
50% mark-up above cost
Beginning Inventory
100% mark-up above cost
Billed price
Cost
Mark-up
200,000 200%
(100,000) (100%)
100,000 100%
Billed price
Cost
Mark-up
Ending Inventory
At Billed Price
300,000 150%
(200,000) (100%)
100,000
50%
Billed price
Cost
Mark-up
75,000
(50,000)
25,000
150%
(100%)
50%
WHAT IS THE TRUE INCOME OF THE BRANCH?.......................................................
Beginning, Allowance for Overvaluation of Inventory (AOI)
Shipments from HO
Less: Ending, AOI
Realized Mark-up
100,000
100,000
( 25,000)
175,000
Net Income
Realized Mark-up
True Income
250,000
175,000
425,000
METHOD 2: BRING ALL INVENTOIRES TO COST THEN COMPUTE THE BRANCH INCOME
Sales
Cost of Goods Sold:
Beginning Inventory
Shipments from Home Office
Ending Inventory
Gross Profit
Expenses
Net Income
700,000
100,000
200,000
(50,000)
(250,000)
450,000
( 25,000)
425,000
METHOD 3: COMPUTE COGS AT BILLED PRICE, THEN CONVERT IT TO COST
NOT APPLICABLE BECAUSE THERE ARE DIFFERENT MARK-UP PERCENTAGE
4
DIFFERENT MARK-UP ON SHIPMENTS. THERE ARE PURCHASES
BY THE BRANCH FROM OUTSIDE SUPPLIERS
Beg. inventory (P100,000 cost) 100% mark-up above cost
P200,000
Shipments from HO (P200,000 cost) 50% mark-up above cost 300,000
Sales
700,000
Ending inventory (billed price)
75,000
Expenses
25,000
Purchases
100,000
METHOD 1: COMPUTE BRANCH INCOME, THEN ADD REALIZED MARK-UP
Sales
Cost of Goods Sold:
Beginning Inventory
Purchases
Shipments from Home Office
Ending Inventory
Gross Profit
Expenses
Net Income
700,000
200,000
100,000
300,000
(75,000)
(525,000)
175,000
( 25,000)
150,000
NOTES
Beginning Inventory
100% mark-up above cost
Billed price
Cost
Mark-up
200,000 200%
(100,000) (100%)
100,000 100%
Shipments from HO
50% mark-up above cost
Billed price
Cost
Mark-up
Ending Inventory
At Billed Price
300,000 150%
(200,000) (100%)
100,000
50%
Billed price
Cost
Mark-up
75,000
(50,000)
25,000
150%
(100%)
50%
WHAT IS THE TRUE INCOME OF THE BRANCH?.......................................................
Beginning, Allowance for Overvaluation of Inventory (AOI)
Shipments from HO
Less: Ending, AOI
Realized Mark-up
100,000
100,000
( 25,000)
175,000
Net Income
Realized Mark-up
True Income
150,000
175,000
325,000
METHOD 2: BRING ALL INVENTOIRES TO COST THEN COMPUTE THE BRANCH INCOME
Sales
Cost of Goods Sold:
Beginning Inventory
Purchases
Shipments from Home Office
Ending Inventory
Gross Profit
Expenses
Net Income
700,000
100,000
100,000
200,000
(50,000)
(350,000)
350,000
( 25,000)
325,000
METHOD 3: COMPUTE COGS AT BILLED PRICE, THEN CONVERT IT TO COST
NOT APPLICABLE BECAUSE THERE ARE DIFFERENT MARK-UP PERCENTAGE AND THERE ARE PURCHASES FROM OUTSIDE SUPPLIERS
INTER-BRANCH TRANSFERS OF ASSETS
-accounted for “as if” the asset transferred went through the home
office and “as if” the branches were transacting with the home office
rather than with each other.
-Recording done in home office and in the transacting branches
Ex:
Home office instructs B1 to transfer 3,000 cash to B2
SETTLEMENT BETWEEN THE BRANCHES
Ex:
No further special accounting if there is a settlement between branches
Inter-branch transfers of merchandise same as cash, but problem occurs on the
accounting for freight
EXCESS FREIGHT
SAVINGS ON FREIGHT
- branch should be charged for normal freight
- home office charged as expense for the
excess freight
Ex: Home office transfers inventory
worth 150,000 to B1. Home office pays
freight of 10,000
Home office
Ex: Home office transfers inventory
worth 150,000 to B1. Home office pays
freight of 10,000
Branch 1
Shipment form ho 150k
Investment in B1 160k
Freight
in
10k
Shipment to B1
150k
Home
Office
160k
Cash
10k
Home office tells B1 to transfer merchandise
to B2. B1 pays freight of 3k. If merchandise
had been shipped directly from HO to B2 the
freight would have been 11k
excess freight
freight from home office to B1.
Freight from b1 to b2.
Total freight on indirect routing.
normal freight from HO to B2.
Excess freight.
10,000
3,000
13,000
(11,000)
2,000
______
______
Home office tells B1 to transfer merchandise to
B2. B1 pays freight of 3k. If merchandise had
been shipped directly from HO to B2 the freight
would have been 14k
excess freight
freight from home office to B1.
10,000
Freight from b1 to b2.
3,000
Total freight on indirect routing. 13,000
normal freight from HO to B2.
(14,000)
Excess freight.
(1,000)
______
______