Chapter Two

Accounting for Sales Agencies and Principals: Branches and Head Office

2. Accounting System for a Branch

➢ Branch is a business unit located at some distance from Home Office.
➢ Branch obtains merchandise either from H.O or through direct purchase.
➢ Usually Branch receipts are deposited in a bank account opened in the name of H.O.
➢ Branch expenses are paid from the cash made available by the H.O in the imprest cash fund.
➢ When the fund is depleted, the branches submit a list of expenses, supporting vouchers, to the
H.O and replenish the fund.

Two alternative systems:

➢ The branch does not maintain a complete set of accounting records. The home office serves
only as an accounting and control center for the branches.
➢ The branch maintains a complete set of accounting records consisting of journal entries
andledger accounts. Financial statements are prepared by the branch account and forwarded
to the home office.
2.1. Reciprocal Ledger Accounts Used by the Branch and Home Office
i. Home Office Ledger Account:

This account is used by the branch to account for all transactions with the home office. It is
credited for all cash, merchandise or other assets provided by the home office to the branch. It is
debited for all cash, merchandise, or other assets sent by the branch to the home office or to other
branches. This account represents the net investment by the home office in the branch. At the
end of a period, the balance of Income Summary account of a branch is closed to the Home
Office account.

ii. Investment in Branch Ledger Account:

This account is a reciprocal ledger account (to Home Office account) used by the home office to
account for any transactions with the branches. It is debited for cash, merchandise and services
provided to the branch by the home office and for the net income reported by the [Link] is
credited for cash, or other assets received from the branch, and for net losses reported by the
branch.

1|Page
2.2. Acquisition of Plant Assets Used in Branch

If a plant asset is acquired by the home office for a branch’s usage and the accounting record for
the plant asset is maintained by the home office, the accounting treatments are:

✓ For the home office: debit a plant asset account, credit cash or a liability account.
✓ For the branch: no entry.

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:

✓ For the branch: debit Home Office and credit cash or a liability account.
✓ For the home office: debit a plant asset account, and credit Investment in Branch
account.
2.3. Expense Incurred by Home Office and Allocated to Branches
✓ The home office may acquire plant assets and insurance for these assets. These plant
assets are carried in the home office accounting record but used by branches.
✓ The home office may pay some taxes on behalf of branches, and arrange for advertising
that benefits all branches.
✓ These expenses are usually allocated to branches in determining net income of branches.
✓ These expenses include depreciation expense for the plant assets purchased by home
office but used by branches.

If the home office chooses to allocate these expenses to branches, the accounting treatments are:

a) For the home office: debit Investment in Branch account, credit cash.
b) For the branch: debit expense account, credit Home Office account.
c)
2.4. Journal entry for H.O and Branches

Record of H.O Record of Branch

1. H.O sending cash to Br.1. Br. receiving cash from H.O

Investment in Br………….xxx Cash…………………...xxx

Cash…………………………xxx H.O…………………….xxx
2. H.O send merchandise to Br 2. Br. Receiving inventory
Investment in Br………….xxx Inventory………………….xxx
Inventory…………………..xxx H.O……………………xxx

2|Page
3. Br. Purchase equipment, record kept by HO 3. Br. Purchase equipment, record kept by HO
Equipment………………xxx H.O…………………..xxx
Investment in Br……………xxx Cash…………………..xxx
4. 4. Credit sales by Br.
No Journal A/R …………………..xxx
Sales………………………xxx
No Journal CGS………………..xxx
Inventory…………...xxx
5. 5. Operating expense paid by Br.
No Journal Operating expense ……….xxx
Cash…………………………..xxx
6. 6. Operating expense of Br paid by H.O
Investment in Br……….xxx Operating expense ……….xxx
Cash……………….....xxx H.O……………………………xxx
7. 7. Closing Sales and expenses
No Journal Sales…………………..xxx
CGS…………………….xxx
Operating expense……..xxx
Income Summery………xxx
8. 8. Transfer Income Summery to H.O
Investment in Br…………..xxx Income Summery………..xxx
Income Br………………..xxx H.O……………………………xxx
9. Transfer income Br. to I/S
Income Br………………..xxx No Journal
Income Summery……...xxx
Illustration 1

Prepare journal in HO and Br. Record.

1. Inventory sent to Br.A…………………..50,000

2. Cash sent to Br.A ………………………5,000
3. Credit sales by Br.A…………………….70,000 (cost 40,000)
4. Operating expense paid by Br.A…………1,000
5. Cash remittance by Br.A………………….30,000
Also prepare investment in Br. account in Record of HO and HO account in Br. record

3|Page
Solution

Record of HORecord of Br.

1. Investment in Br……..50,000 1. Inventory…………50,000

Inventory………………50,000 HO……………………50,000

2. Investment in Br……..5,000 2. Cash………………..5,000

Cash……………………5,000 HO…………………..5,000

3. No journal 3. A/R………………70,000

Sales……………….70,000

No journal CGS…………………40,000

Inventory ………..40,000

4. No journal 4. Operating expense………1000

Cash…………………1000

5. Cash…………...30,000 HO……………………..30,000

Investment in Br……30,000 Cash ………………30,000

Investment Br.A account HO account

50,000 30,000 30,000 50,000

5,000 5,000

25,000 25,000

2.5. Alternative Methods of Billing Merchandise Shipments to Branches

Three alternative methods are available to the home office in billing the merchandise shipped to
the branches:

a) Billed at the home office cost,

b) Billed at a percentage above the home office cost, and
c) Billed at the branch’s retail selling price.
A. Billed at the home office cost

4|Page
Illustration:S co. Sends merchandise to Br. X at cost and Br.X maintains compete accounting
records.

Transactions

1. Cash of 1,000 was forwarded to Br X.

2. Merchandise with cost of 60,000 was shipped to Br.X
3. Equipment was acquired by Br.X for 500 to be carried in HO
4. Credit sales by Br.X 80,000 (cost 45,000)
5. Collection of A/R by Br.X 62,000
6. Payments of operating expenses brBr.X 20,000
7. Cash remittance by Br.X to HO 37,500
8. Operating expenses incurred by HO and charged to Br.X 3,000
9. Close revenues and expense of [Link] transfer balance to I/summary
10. Transfer Br.X income to HO
11. Transfer income Br.X to HO I/summary

Required: 1. Show journal in HO and Br.X

2. Prepare investment in Br. account in Record of HO and HO account in Br. record

Solution 1

Record of H.O Record of Branch

1. Investment in Br.X...1,000 1. Cash ……….1,000

Cash …………………1,000 HO………………1,000

2. Investment in Br.X……..60,000 2. Inventory……..60,000

Inventory…………………….60,000 HO………..……60,000
3. Equipment ………..500 3. HO…………..….500

Investment in Br.X…….500 Cash……………….500

4. No Journal 4. A/R……….80,000

Sales ……………80,000

No journal CGS…………….45,000

Inventory……..45,000

5|Page
5. No journal 5. Cash…………62,000

A/R…………………62,000

6. No journal 6. Operating expense..20,000

Cash………………..….20,000

7. Cash………………37,500 7. Ho………………..37,500

Investment in Br.X………37,500 Cash………………….37,500

8. Investment in Br.X……3,000 8. Operating expense….3,000

Cash……………………...3,000 HO………………………3,000

9. No journal 9. Sales……………….80,000

CGS…………………..45,000

Operating expense…….23,000

I/summary…………….12,000

10. Investment in Br.X……12,000 10. I/summary……………..12,000

Income Br.X ……………12,000 HO………………….12,000

11. Income in Br.X ………….12,000 11. No journal

I/summary……………..12,000

Investment Br,X account HO account

1,000 500 500 1000

60,000 37,500 37,500 60,000

3,0003,000

12,000 12,000

38,000 38,000

6|Page
Illustration:Prepare journal in the record of HO wordell co. and exter Br.

a. HO transferred cash of 5,000 and merchandise at (HO cost) of 10,000 to Br. Both using
perpetual system.
b. HO paid and allocated operating expense of 1,500 to Br.
c. Br. informed the HO that it had collected 416 on notes payable to HO, principal amount of
notes was 400.
d. Br. made sales of 12,500 and incurred and paid operating expense of 2,500. The CGS was
8,000
e. Find and transfer Br. income from Br. to HO.
Solution

[Link] Br.

a. Investment in Exter Br…15,000 a. Cash………………..5,000

Cash……………………….5,000 Inventory…………10,000
Inventory…………………10,000 HO…………………..15,000
b. Investment in Exter Br……1,500 b. Operating expense….1,500
Cash …………………..…..1,500 HO…………………….1,500
c. Investment in Exter Br…416 c. Cash……………………416
Notes receivable……....…400 HO……………………..416
Interest income………….…16
d. No journal d. A/R…………12,500
Sales……..….12,500
No journal Operating exp….2,500
Cash…………….…2,500
No journal CGS…………8,000
Inventory………8,000
e. Investment in Exter Br……500 e. I/summery……..500
Income Exter Br…………500 H.O…………500
Income Exter Br…………500 No journal
Income Summery……...500

B. Billing Merchandise to Branch Above cost to H.O (Perpetual inventory)

Illustration:

7|Page
 1. H.O sent merchandise costing 100,000 to Branch at 50%above cost.
2. Branch sold ½ of merchandise for 100,000
3. Collection of A/R 50,000
4. Operating expense paid by Branch10,000
5. Close revenue and transfer Branch income to HO.

Solution

Record of [Link] of Branch

1. Investment in Br…150,000 1. Inventory….150,000

Inventory……………………100,000 H.O…………..150,000
Allowance on Inventory acc..50,000
2. No journal 2. A/R…………..100,000
Sales………….100,000
No journal CGS……………….75,000
Inventory …………75,000
3. No journal 3. Cash……………50,000
A/R………………50,000
4. No journal 4. Operating expense…10,000
Cash………………..10,000
5. No Journal 5. Sales……………….100,000
CGS…………………….75,000
Operating exp…………10,000
I/Summery…………….15,000
Investment in Branch….15,000 When closed
Income in Branch……..15,000 I/Summery…………15,000
H.O…………15,000
Allowance on inventory……25,000 No journal
Income Branch…………25,000
Income Branch…………….40,000 No journal
I/Summery……………….40,000

Illustration:HO. Sent merchandise to Branch 50% above cost

1. Sent cash 5,000 to Branch

2. Merchandise costing 80,000 was shipped to Br.
3. Credit sales by Branch 100,000 ( ¾ of goods sent)
4. Collection of A/R 70,000
8|Page
5. Operating expense paid by Branch 15,000
6. Cash remitted by Branch 50,000
7. Find income of Br. and transfer to HO
Show: 1, Journal on HO and Br
2, Ledger i, investment in Br

ii, HO account

iii, Allowance on inventory account

iv, Income Br account

1. Record of HORecord of Br.

1. Investment in Br……5,000 1. Cash ……………..5,000
Cash…………………..5,000 HO………………..5,000

2. Investment in Br….120,000 2. Inventor………120,000

Inventory……….………80,000 HO…………..…120,000
Allo. On the inventory….40,000

3. No journal 3. A/R………………100,000
Sales……………..100,000
CGS…………….90,000
Inventory…….90,000

4. No journal 4. Cash………………70,000
A/R…………………70,000

5. No journal 5. Operating Expense……15,000

Cash…………………15,000

6. Cash……………50,000 6. HO………………….50,000
Investment in Br…..50,000 Cash ………………50,000

7. No Journal 7. Sales ……………..100,000

I/Summery……………..5,000
CGS………………….90,000
Operating expense…..15,000
Br loss……………..5,000 HO……………….5,000
Inv’t in Br…………….5,000 I/Summery………5,000
Allowance on Inventory…30,000
Income in Br………………..30,000

9|Page
2. i. Investment in Br ii,HO account

5,000 50,000 50,000 5,000

120,000 5,000 5,000 120,000

70,000 70,000

iii, Allowance on Inventory iv. Income Br.

30,000 40,000 5,000 30,000

10,000 25,000

Which is 40,000*3/4=30,000

Income Br……25,000
I/summery……..25,000
[Link] Financial Statements for Branch and for Home Office (for internal use only)

Separate financial statements for branches should be prepared so that management can evaluate
the performance of each branch. The branch’s financial statements may be revised by the home
office to include the allocated expenses incurred by the home [Link], the financial
statements of branches should be revised to eliminate any intercompany profits on merchandise
shipments or interest charge on capital investments.

[Link] financial Statements for Home Office and Branch (for external use)

For investors, the home office and branches are a single business entity. Thus, combined
financial statements should be prepared for external users.A four-column work sheet paper is
used to facilitate the preparation of the combined financial statement.

In preparing the combined financial statements, the following accounts should be eliminated:

a) Reciprocal ledger accounts

b) Any intercompany profits or losses.
c) Any receivables and payables between the home office and the branch (or between two
branches). The rest of accounts are just summed together for the combined financial
statements.

10 | P a g e
2.7.1. Working Paper for combined Financial Statement
➢ Working paper for combined financial statements are prepared to combine the ledger account
balances, like assets, liability, expenses, revenues etc and eliminate reciprocal account, like
investment in branch, HO account etc.

Illustration: The following are the Trial balance of S co. and its branch for the year ended Dec.
31, year 4

Debit balances Credit balances

Account HO Branch Account HO Branch
Equipment 150,000 -- C/S @ 10 par 150,000 ---
Cash 25,000 5,000 HO account --- 26,000
A/R 39,000 18,000 A/P 20,000 ---
CGS 235,000 45,000 Acc. Depn. Equip. 10,000 ---
Operating expense 90,000 23,000 Retained ear. (Jan.) 70,000 ---
Inventory (end) 45,000 15,000 Sales 400,000 80,000
Inv’t in branch 26,000 --
Dividend 40,000 ---
Balance 650,000 106,000 650,000 106,000
1. Prepare a working paper for combined financial statement of HO and Branch for the year
ended Dec.31,year 4
2. Combined financial statements consisting of
a. Income statement for the year ended Dec 31,year 4
b. Statements of retained earning
c. Balance sheet on Dec31, year 4

Solution S Co.

1. Working paper for combined financial Statement

For the year ended Dec31 year 4

Trial Balance Elimination Combined

HO Branch
Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)
I/S Items
Sales (400,000) (80,000) ----- (480,000)
CGS 235,000 45,000 ----- 280,000
Operating exp. 90,000 23,000 ----- 113,000
N/I( transfer to Retain earning) 75,000 12,000 ----- 87,000
0 0 ------ 0
Retain earning Item
Retain earning beginning (70,000) --- ---- (70,000)
N/I for the year (75,000) (12,000) ------ (87,000)
Dividend 40,000 ---- ---- 40,000
Retained earnings end 105,000 12,000 --- 117,000
11 | P a g e
 0
Balance sheet Item
Cash 25,000 5,000 ---- 30,000
A/R 39,000 18,000 ---- 57,000
Inventory 45,000 15,000 ----- 60,000
Inv’t in Branch 26,000 --- (26,000) ---
Equipment 150,000 ---- ---- 150,000
Acc. Depn (10,000) ------ ---- (10,000)
A/P (20,000) ----- --- (20,000)
H.O ------ (26,000) 26,000 ----
C/S (150,000) ----- ---- (150,000)
Retained earnings end 105,000 12,000 --- (117,000)
0 0 0 0

2. a. S Co.
Income Statement
For the year ended Dec.31, year 4
Sales………………………………………………….480,000
Less: CGS………………………………..…………..280,000
GP……………………………………………..200,000
Less : Operating expense……………………………..113,000
N/I……………………………………………………..87,000
o EPS=87,000/15,000=$ 5.8

b. S Co.
Statement of retained earnings
For the year ended Dec.31,year 4
Retained earning Beginning…………………….…70000
Add: N/I for the period…………………………….87,000

12 | P a g e
Less: Dividene……………………………………..(40,000)
Retained earning end………………………………117,000
o DPS= 40,000/15,000=2.67
c .S Co.
Balance sheet
On Dec.31,year 4
Assets Liability
Cash…………………...30,000 A/P…………………20,000
A/R……………………57,000 S.H.E
Inventories……………60,000 C/S………………….150,000
Equipment……………150,000 R.E………………….117,000
Less: [Link]……….(10,000)Total liability & S.H.E…287,000
Total assets……………287,000
2.8. Method of recording Inventory
Perpetual inventory system Periodic inventory system
Entry is made in the record each time added to the beginning inventory and
the inventory is moved. Purchase is closing.

13 | P a g e