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Kirubel W. (MSC & MBL)
April, 2023
Chapter 3
Accounting for Sales Agencies
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and Branches Operations
By: Z
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Characteristics and principles of Agencies, Branches and Divisions
Distinguishing between Agencies, Branches and Divisions
Accounting for Branch Operations
Reciprocal accounts and their reconciliations
Billing of merchandises to branches
Transaction between branches
Combined Financial statements
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Technically, there is a distinction between sales agencies and
branches.
Sales agencies display merchandise and take customers’ orders,
but they do not stock merchandise to fill customers’ orders or pass
on customer credit.
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The sales agency is not a separate accounting or business entity.
The only accounting records required for sales agencies are for
cash receipts and disbursements, which are handled in essentially
the same manner as petty cash systems.
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The central accounting system of the business maintains records
of sales made through agency operations and related cost of sales
and other expenses.
By contrast, a branch operation stocks merchandise, passes on
customer credit, collects receivables, incurs expenses, and
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performs other functions normally associated with the operations
of a separate business enterprise.
Sales Agency Vs Branch
Degree of autonomy.
Range of services
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business entity (Branch only)
limited responsibilities (sales Agencies)
Merchandise selection (activity of Branch only)
Advertising (activity of Branch only)
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Characteristics of a Sales Agency
Carries no inventory of merchandise but only samples
Solicits (takes) customer orders and transmits to head office
Does not collect A/R
Take order from customers
Does not granting credit
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Maintains a comparative fund for payments of its operating
expenses
Characteristics of a Branch
Branch is an enterprise unit located at some distance from head
office (or home office), with given responsibility and independence
from the head office.
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Carries inventories of merchandise
Obtains stock from head office or purchases portion of its stock by
itself from outside/suppliers
Makes sales on cash or credit in its local areas
Approves customer credits and makes collection on its own
receivables
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Cash received are usually deposited in bank account opened in the
name of head office
Alternatively, a branch may maintain its own bank account
Does maintain a complete financial accounting system in most
cases (provides better control over operations)
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Cost of organization new branch and operation during the initial
period should be recognized as expenses, not as differed charges
The accounting record for a branches may be centralized in the
home office or may be decentralized
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If the accounting records are centralized in the home office, each
branch prepare daily reports and documents that are used for
records of journal entries
If the accounting records are decentralized, separate accounting
systems are maintained by individual branches
They can maintain internal report
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The accounts of the branches and the home office must be
combined in preparing external accounting reports
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2. BRANCH ACCOUNTING SYSTEMS
Branch accounting involves segmenting the accounting system of an
enterprise into separate accounting systems for home office and branch
operations.
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The home office records constitute the central accounting unit for the
enterprise, and branch records constitute adjunct accounting systems for
each branch operation
Firms use separate home office and branch systems for accounting and
internal reporting purposes,
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but the separate financial statements of the home office and
branches combine into a single set of financial statements for the
enterprise to meet external reporting requirements.
The process of combining home office and branch financial
statements is similar to the process of consolidating parent and
subsidiary statements.
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Reciprocity is established between home office and branch records
by eliminating reciprocal accounts and combining nonreciprocal
accounts.
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We eliminate unrealized profits from internal transfers
between the home office and the branches in preparing combined
financial statements for the enterprise.
Transactions Between the Home Office and the
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The home office records transactions of the home office with
external entities in its accounting records in the usual fashion.
Similarly, the branch records transactions with unrelated entities
on the branch books in accordance with established accounting
procedures.
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Thus, the unique feature of home office and branch accounting lies
in the manner of recording transactions between the home office
and its branches.
The creation of a new branch requires entries on the books of both the home office and
the branch.
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Assume that Blue Ocean Consulting & Training Corporation creates a branch in Jimma City
by transferring cash of Br. 5,000 and equipment with a cost of Br. 10,000 to the branch
manager. Entries on the books of the home office and the branch are as follows:
Home Office Books
Jimma branch …………………………..15,000
Cash ………………………………….5,000
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Equipment …………………………….10,000
To record transfer of cash and equipment to Splinter branch.
Branch Books
Cash …………………………..Br. 5,000
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Equipment ………………………10,000
Home office ………………………..Br. 15,000
To record receipt of cash and equipment from home office.
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The branch account on the home office books is an asset account
representing the investment of the home office in branch net
assets.
The home office account on the branch books is an equity account
that represents the equity of the home office in branch net assets.
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Thus, the branch and home office accounts are reciprocal, each
representing the net assets of the branch.
This reciprocal relationship between home office and branch
accounts is a continuous relationship
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Whenever the home office increases (debits) its branch account,
the branch should increase (credit) its home office account.
Similarly, any decrease (debit) in the home office account on the
branch books should be accompanied by a decrease (credit) in the
branch account on the home office books.
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The only reasons that differences between home office and branch
accounts occur are time lags in recording information on the two
sets of books and errors
A second type of transaction between home office and
branches is for merchandise transfers
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Typically, branches sell merchandise that is manufactured
or purchased through home office operations.
A branch manager may or may not have authority to
purchase from outside suppliers.
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If Blue Ocean Corporation ships merchandise to the Jimma branch at its Br. 8,000 home
office cost, the two entities make the following journal entries:
Home Office Books
Jimma branch ……………………8,000
Shipments to Jimma branch ………8,000
To record shipments at cost to Jimma branch.
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Branch Books
Shipments from home office ………………..8,000
Home office ……………………………….8,000
To record shipments received from home office.
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Two additional reciprocal accounts result from recording the
merchandise transfer from home office to branch.
The home office’s Shipments to branch account is a “contra
purchases” account on the home office books, and the Shipments
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from home office account on the branch books is essentially a
“branch purchases” or an “inventory” account.
These accounts determine the separate cost of sales for home office
and branch operations, but, because they are reciprocal, we
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eliminate them in preparing combined financial statements for the
enterprise.
Illustration of Home Office and Branch Accounting
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Assume that Key Corporation created a new branch outlet in Awassa at the
beginning of 2021 and that the transactions of the Awassa branch during 20121
are as follows:
1. Received cash of Br. 20,000 from the home office.
2. Purchased equipment with a five-year life for Br. 10,000 cash.
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3. Received merchandise shipments from home office at the Br. 16,000 home
office cost.
4. Purchased merchandise from outside suppliers for Br. 4,000 cash.
5. Sold merchandise for Br. 30,000 cash.
6. Returned Br. 1,000 of the merchandise acquired from the home office.
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7. Paid expenses as follows:
Salaries Br. 6,000, Utilities 1,000, Rent expense 3,000, Other expenses 2,000
8. Remitted Br. 15,000 to the home office.
9. Salaries payable at year-end were Br. 1,000, and depreciation for the year was Br.
2,000.
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10. Branch inventory at year-end consisted of Br. 1,000 merchandise acquired from
outside suppliers and Br. 5,000 acquired from home office.
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