ACCOUNTING FOR BRANCH AND AGENCY TRANSACTIONS
As a means of achieving marketing objectives, selling units in form of agency or a branch may be established.
SIMILARITIES
-
DIFFERENCES
-
-
-
SALES AGENCY
vehicle for enlarging sales volume.
carries samples but not stocks.
Take orders & send to HO for approval of
Credit (HO ships directly to customers)
A/R is maintained at the HO
Working fund is provided & replenished
Under imprest system. No other cash is
Handled.
Does not keep complete set of books nor
Uses double entry accounting system.
Record of sales to customers & list of
Cash payments supported by vouchers.
-
BRANCH
vehicle for enlarging sales volume
carries stocks of MDSE from HO & outsider
makes usual warranties with respect to
quality
makes collections of A/R
Functions as an independent business unit
but subject to control by the HO
Agency an organization that merely takes orders for goods, carries no stock other than samples, and that operates
under the direct supervision of the home office.
ACCOUNTING FOR AGENCY OPERATIONS
•
The entries made by the home office depend on whether sales agency net income is determined separately or not
separately
SEPARATELY
NOT SEPARATELY
-
general ledger accounts to be maintained
SALES – AGENCY
RENT EXPENSE – AGENCY
COST OF SALES – SALES AGENCY (Perpetual)
SHIPMENTS TO SALES AGENCY (Periodic)
-
The purpose is to evaluate an agency’s performance.
- No separate GL accounts. The transactions
are recorded in the HO’s own revenue and
expense accounts.
ILLUSTRATION:
Myra Trader, Inc. established a sales agency in Cebu. The revenues and expenses of the home office are recorded separately from
those of the sales agency. The following transactions occur for Manila Trader, Inc.:
1.)
2.)
3.)
4.)
5.)
6.)
A working fund of P20,000 is established.
Shipped merchandise to Cebu agency for use as samples, P4,000.
Fill sales orders from Cebu Agency, P180,000.
Replenishment of working fund of the agency, P16,000.
Close revenue and expense accounts of the agency.
Close Cebu Agency income to Income Summary account.
Prepare entries in the home office books.
ACCOUNTING FOR BRANCH OPERATIONS
Branch an organization that sells goods out of a stock that it maintains and that possesses the authority to engage in
transactions as an independent unit.
•
HO & branch maintain separate accounting systems.
•
Outside party transactions are recorded in the usual manner, while Inter company transactions in their respective
accounting systems.
•
All accounts are combined for external reporting in recognition of “sinle economic enterprise”
•
Elimination entries required for consolidated FS preparation.
•
RECIPROCAL ACCOUNTS
o Home Office Current
takes the customary capital/equity account in the branch
books (credit balance)
o Branch Current/Investment in Branch represents investment of home office in the branch (debit
balance)
o Shipments to branch
represents merchandise shipped to the branch (credit
balance); shown as a deduction in computing cost of sales of the home office.
o Shipments from home office
merchandise received by the branch from the home office
(debit balance); shown as addition in computing cost of sales of the branch.
PROFORMA JOURNAL ENTRIES
TRANSACTIONS
HOME OFFICE
1.) Establishment of Branch.
Investment in Branch
2.) Recognition of branch income.
XX
Cash
XX
Office Equipment
XX
Investment in Branch
4.) Merchandise shipments to branch at
cost with freight.
5.) Merchandise shipments to branch
with profit.
6.) The home office purchased office
equipment for its branch. Branch keeps
records of its plant assets.
Cash
XX
7.) The home office purchased office
equipment for its branch. Home office
keeps records of branch plant assets.
XX
Allow. For overvaluation
XX
XX
Home Office
Office Equipment
XX
XX
XX
Home Office
XX
No entry
Office Equipment - Branch
XX
Office Equipment - Branch
XX
XX
Investment in Branch
Investment in Branch
expenses
Home Office
XX
XX
Cash
XX
Cash
10.) apportionment of expenses
XX
Home Office
XX
Investment in branch
9.) Expenses incurred by the branch but
paid by the home office.
XX
Shipments from Home Office XX
Shipments to branch
Cash
8.) The branch purchased plant assets
that are recorded on the books of the
home office.
XX
Freight In
XX
Cash
XX
Shipments from Home Office XX
XX
Investment in Branch
XX
Home Office
XX
Shipments to branch
Investment in Branch
XX
Shipments from Home Office XX
XX
Investment in Branch
Office Equipment
Home Office
XX
Shipments to branch
XX
Income Summary
XX
Investment in Branch
Cash
Home Office
XX
Branch Income
3.) Merchandise shipments to branch at
cost.
BRANCH
Expenses
XX
XX
XX
Home Office
XX
Expenses
XX
Home Office
XX
XX
XX
PREPARATION OF COMBINED FINANCIAL STATEMENTS
•
Elimination of reciprocal accounts
elimination entries do not appear in HO nor branch books. It appears
only in consolidated working paper to facilitate the preparation of combined F/S/
o
Home office
XX
Investment in Branch
XX
(note: amount is the balance before recognizing the branch income)
o
Shipment to branch
Shipment from home office
(if billed at cost)
XX
XX
o
o
o
o
Shipment to branch
XX
Allowance for overvaluation of branch inventory XX
Shipment from home office
(if there is mark up)
XX
Allowance for overvaluation of branch inventory XX
Merchandise Inventory, beg.
(to eliminate mark up on Inventory beg.)
XX
Merchandise Inventory, end (I/S)
Merchandise Inventory, end (B/S)
(to present inventory end at its cost)
XX
XX
Inter branch receivables and payables
PROBLEM 1
MCG, Inc. of Quezon City, a distributor of computer equipment, establishes a branch sales office in Cebu City. Both the home office
and the branch uses the periodic inventory system. Branch fixed assets are recorded on the home office books. Transactions
during 2012, the first year of branch operations, are summarized below:
Cash
a. Cash is sent to Cebu branch, P20,000 IIB
Cash
b.
H/O
Merchandise is shipped to the branch at cost, P200,000. IIB
STB
c.
SFHO
H/O
Store equipment is purchased by the branch and carried in the home office books, P10,000. Equipment
IIB
d.
Credit sales:
Home office, P900,000; branch, P240,000
e.
Collection of accounts receivable:
f.
Operating expensed paid:
g.
Cash remittance by Cebu branch to home office, P100,000
h.
Operating expenses charged by home office to branch, P12,000
AR
Sales
H/O
Cash
AR
Sales
Home office, P1,000,000; branch, P220,000
home office, P152,000; branch, P60,000
Requirement:
1.) Prepare journal entries for the home office and the branch.
2.) Closing entries in the home office and branch books.
3.) Determine the combined amount for sales, cost of sales, operating expenses, and net income.
PROBLEM 2
The same data in problem 1 except that the home office bills merchandise shipments to the branch at 30% above cost.
1.) Prepare journal entries for the home office and the branch.
2.) Closing entries in the home office and branch books.
3.) Determine the combined amount for sales, cost of sales, operating expenses, and net income.
RECONCILIATION OF RECIPROCAL ACCOUNTS
TRANSACTIONS
Debits in the branch account without
corresponding credits in the home office
account. (shipment of merchandise in
transit)
example. The home Office shipped
merchandise to the branch in the amount
of P20,000. The shipment has not yet
reached the branch as of December 31.
2.) Credits in the branch account without
corresponding debits in the home office
account. (branch receivable collected by
the home office)
example. On December 28, an accounts
receivable of the branch was collected by
the home office from a branch customer.
3.) Debits in the home office account
without corresponding credits in the
branch account. (cash remittance of the
branch to home office in transit)
example. On December 29, the branch
purchased office equipment for P8,000.
Assets used by the branch are carried in
the home office records.
4.) Credits in the home office account
without corresponding debits in the
branch account. (correction of account for
the understatement of net income for the
preceding period)
example. On December 28, the branch
collected for the home office an accounts
receivable amounting to P6,000 from a
home office customer.
5.) Bookkeeping or mechanical errors on
either set of books.
HOME OFFICE
BRANCH
Shipments from Home Office
Home Office
Home Office
Accounts Receivable
Office Equipment - branch XX
Investment in branch
XX
Investment in Branch
Accounts Receivable
XX
XX
XX
XX
XX
XX
example. A debit of P1,450 in the
Investment in branch account was
erroneously recorded by the branch in the
home office account as P1,540.
(representing apportionment of expeses)
Home Office
Expenses
90
90
PROBLEM 3
A reconciliation of the Investment in Branch account in the home office of Makati company and the home office account carried on
the branch books showed the following discrepancies at December 31, 2012:
a. Collection of branch accounts receivable by the home office, P16,000. The branch was not notified. Cash H/O
IIB
AR
SFHO
IIB
b. Shipment in transit to branch on December 31, 2012, P64,000. STB
H/O
c. Acquisition of furniture by the branch, P24,000. The fixed asset accounts is to be maintained on the home office books.
H/O
The home office had not been notified of such acquisition. F&F
Cash
IIB
H/O
d. Return of excess merchandise by the branch but not received yet by the home office, P30,000. STB
Cash H/O
IIB
SFHO
e. Cash remittance by the branch on December 31, 2012 was in transit, P10,000. IIB
Cash
f. The balance of the home office account in the books of the branch on December 31, 2012 is P880,000
Compute the Unadjusted and adjusted balance of Investment in Branch account.
PROBLEM 4
On December 31, 2012, the Investment in branch account on the home office’s books has a balance of P170,000. In analyzing the
inter-company transactions recorded in each of these accounts for December, you discover the following discrepancies:
a. A, P20,000 branch remittance to the home office initiated on December 27, 2012 was recorded on the home office books
Cash
H/O
on January 4, 2013. IIB
Cash
b. A home office merchandise shipment to the branch on December 29, 2012 was recorded by the branch on January 5,
IIB
SFHO
2013. The cost of this merchandise is P40,000. STB
H/O
c. The home office incurred P24,000 of advertising expenses and allocated P10,000 of this amount to the branch on
OPEX
OPEX
December 15, 2012. The branch has not recorded this transaction. IIB
H/O
d. A branch customer erroneously remitted P6,000 to the home office.Cash
The home office recorded this cash collection on
December 23, 2012. Meanwhile, back at the branch, no entry has been made yet.
e. Merchandise costing P86,000 was sent to the branch by the home office on December 10, 2012. The billing was at cost,
but the branch recorded the transaction at P68,000.
Determine the unadjusted and adjusted balance of the home office account.