EASTERN UNIVERSITY

CORE OF SUCRE
SCHOOL OF MANAGEMENT
ACCOUNTING DEPARTMENT
ADVANCED ACCOUNTING III
Teacher: Juana Fermín

Topic No. 2 – Branches

Definition : Extensions established by a company, in order to cover a larger geographic market and a larger
clientele.

Advantages of a branch:
 Extend sales actions.
 Get more out of your capital investments.

Differences between an agency and a branch

AGENCY
 It does not have its own inventory, only BRANCH
samples.  It has its own stock of merchandise
 It only receives orders that are then to fulfill orders.
dispatched by the headquarters.  Grants credits and makes
 It does not handle credits or collections. collections.
 It maintains only a fixed fund or petty  It keeps its own books and manages
cash. its resources.
 He is a kind of sales agent.  It resembles an independent
company

1
Branch Accounting:

Branch accounting is somewhat complex and depends on the controls that are to be established and the
autonomy granted to said branches. The operations they carry out affect both the accounting of the branch itself
and that of the Headquarters.

The procedures are an extension of administrative accounting applied to establishments that do not have their
own legal personality, but are part of a single person represented by the head office. For financial purposes, what
is interesting is the combined information that will lead to decision making.

Depending on who keeps the records of these operations, we will be dealing with Centralized or
Decentralized accounting.
 Centralized Control : in this model it is important that:
1. Branch operations must be registered and controlled by the head office.
2. The branches are considered an extension of the headquarters (a department).
3. Branches will send detailed reports and receive specific instructions.
4. Managers are watchdogs of the branches and not leaders.
5. They only keep a Cash Book - Bank to control the fixed fund provided by the headquarters for
minor expenses.
6. They cannot have the cash they collect, they deposit it at the head office
 Decentralized Control: Here the conditions are as follows:
1. Each branch operates as an independent business unit, therefore keeping its own set of books.
2. Send a summary to the Headquarters for a control in auxiliary books.
3. There is a limited number of accounts on the books of the headquarters to control the branches.
4. At the end of the year, consolidated Financial Statements are prepared.
5. Greater audit control is needed.
6. The manager is an executive with limited authority. Make decisions and manage your budget.

EASTERN UNIVERSITY
CORE OF SUCRE
SCHOOL OF MANAGEMENT
ACCOUNTING DEPARTMENT
ADVANCED ACCOUNTING III
Teacher: Juana Fermín

Accounting in the books of the Headquarters and Branch (decentralized control):

In this case, as stated, the two accounts are kept separately and all operations carried out by each office will
be recorded in them. At the end of the accounting period, everyone prepares their financial statements in order to
send the information to the main office for final combination.

It should be taken into account that the branch books must be related to those of the head office. To do this,
there will be an account called “branch” in its books for each additional office that the company has; and in the
branches, an account called “headquarters”.

These accounts are called RECIPROCAL OR LINK, and are characterized by having opposite balances;
therefore, at the end of the accounting period, when the financial statements of the offices are consolidated, these
accounts must have a zero balance.

Record of operations:
To do this, it must be taken into account that:
 Each office can carry out operations not related to the other (sales, payments for services or others)
 Each operation carried out by one office that is related to the other (transfers, shipment of merchandise,
collections in the name of...) creates a record in both accounts, using the reciprocal accounts as a means
of linking.

Purchase control:
 Most purchases are made by the head office and then distributed to the branches, in which case an
account called “Merchandise sent” is used in the Head Office and “Merchandise received” in the
branches.
 Some branches have the autonomy to purchase their own merchandise where they will simply record
them as purchases.
Valuation of inventories transferred to branch :

To register the merchandise sent to the branch, the following must be taken into account:
 The sending of inventories from the headquarters to the branches, or between them, is not considered
sales or any other type of income.
 All inventory transfers must be approved and recorded in the headquarters books.
 The valuation will be made at cost or at a value other than cost.

1. At cost: the manager is given certain authority to set prices, adjusting them to the needs of the
area where the branch is located. This method allows the branch to know its own profits.
2. At a value other than cost: it can be at the sales price or at cost plus a surcharge percentage. In
the first case, the price change implies periodic adjustments in inventories; In the second, these
adjustments are avoided. However, this method prevents the branch from knowing exactly its
profits and implies for the head office to adjust inventories before closing.

 To register the surplus, the main office can choose to register it in the same account as “Merchandise
sent” or in a new account called “Surcharge”.

Transfers between branches:

They usually occur:
 When a Branch requires merchandise in an emergency and it is more convenient to request it from
another nearest Branch.

EASTERN UNIVERSITY
CORE OF SUCRE
SCHOOL OF MANAGEMENT
ACCOUNTING DEPARTMENT
ADVANCED ACCOUNTING III
Teacher: Juana Fermín

 When the Principal decides to transfer surplus merchandise from one branch to another.
 When transfers of other types of Assets occur between branches

Record of operations:

Taking into account that there are no reciprocal accounts between branches, operations are recorded through
the Main Office:

 The Branch records the shipment as if it were sent to the Main

 The Main Office registers the situation with transfer from one branch to another.
 The receiving Branch records it as if it received it from the Main Branch.

Reciprocal Account Reconciliation:

Sometimes it happens that reciprocal accounts do not present equal balances because the information
between offices was not sent on time. In the closing process this must be resolved through adjustments, and
using suspense accounts such as Merchandise in transit.

Of course, these situations become normal as soon as information is exchanged and to avoid this, appropriate
measures must be taken.

Book Closing:
As you already know:
 The “Branch” account represents in the books of the principal the investment that it has in each of its
branches.
 The “Main Office” account represents the capital of the branch in its books.

Taking this into account, the seats would be:

For Branch:
_x_
 Final inventory xx
Sales xxx
Mcía. received from Suc xx
Shopping xx
Expenses xx
Loss and Gain xx
_xx_

Loss and Gain xx

Main Office xx

For Main Office:

_x_

Branch xx
Profit or Loss of Suc xx

EASTERN UNIVERSITY
CORE OF SUCRE
SCHOOL OF MANAGEMENT
ACCOUNTING DEPARTMENT
ADVANCED ACCOUNTING III
Teacher: Juana Fermín

_xx _

Final inventory xx
Sales xxx
Mcía. Sent to Suc xx
Profit or Loss of Suc xx
Initial invention xx
Shopping xxx
Expenses xx
Loss and Gain xx

_xxx_

Loss and Gain xx

Net profit xx

Surcharge adjustment for the closing process:

When the surcharge applies only to the merchandise sent in this period :

 Final inventory surcharge is calculated

 Branch profit increases due to the overestimation of the cost of sales.

_x_
Surcharge xx
Surcharge on invent Suc x
Profit or Loss of Suc x

When the surcharge includes, in addition to the merchandise sent in this period, the unsold items from
the previous period (Initial branch inventory:
  The final inventory surcharge is calculated and the pending surcharge is subtracted (Surcharge
on Branch inventory)
 The branch profit increases due to the overestimation of the cost of sales, the same as in the
previous case.

Preparation of Financial Statements for Branches:

 It only varies in terms of the presentation of the reciprocal accounts, for which certain important aspects
must be taken into account in both the Income Statement and the Balance Sheet.
 Any other Financial Statement is prepared by the Principal with the information already combined.

Statement of income :
 You must separately present the merchandise received from the Principal and your own accounts.
 Then both accounts are added for the cost of sales.
 The result of the period is transferred to the Principal through the reciprocal account.

Balance Sheet :
 It presents in its content the Reciprocal Account called Main Office, which we know represents the
Capital of the main office invested in that office

EASTERN UNIVERSITY
CORE OF SUCRE
SCHOOL OF MANAGEMENT
ACCOUNTING DEPARTMENT
ADVANCED ACCOUNTING III
Teacher: Juana Fermín

Preparation of Combined Financial Statements:

 Prepared by the Main Office, after receiving information from its Branches.
 A worksheet is created whose number of columns will depend on the number of branches.
 One or two columns are included for the elimination of “Reciprocal Accounts”.
 And two columns for the results obtained by proceeding to algebraically add the account balances.
 With these final data the classifieds are presented.

EXERCISES

1. The company MATERIALS M. H. CA, located in Cumaná, is dedicated to the sale of construction
materials and has decided to open a Branch in the city of Carúpano, under the name Materiales M. H
Carúpano.
Since its opening, the operations carried out between the main company and its branch are the
following:

a) Materials M. H, CA has carried out the following operations, which must be recorded
separately:
Purchases of merchandise on credit Bs. 25.600
Freight in Bs purchases. 2.100
Cash Sales of Merchandise Bs. 34.800
Salaries paid Bs. 3.200
Administration expenses Bs. 2.400
Sales Expenses Bs. 1.800
Depreciation Expenses Bs. 2.500
b) MATERIALS M. H sent merchandise to the Carúpano branch for an amount of Bs. 6.800
c) MATERIALS H. M Carúpano bought merchandise on credit for Bs. 5.000
d) Materials H. M Carúpano sold merchandise in cash, worth Bs.15,000
e) Materials H. M Carúpano paid the following expenses; Local rental Bs. 5000,
Salaries and Salaries Bs.2,500, Administration Expenses Bs. 3.000
 f) Materials H. M sent a second shipment of merchandise to the Carúpano branch for an amount
of Bs.5,000
g) Materials H. M received a Bs bank transfer. 3,500 from the Carúpano branch.
h) Materials H. M Carúpano returned merchandise to the principal for an amount of Bs.1,000
i) Materials H. M Carúpano sold Bs.13,000 worth of merchandise for cash.
j) The depreciation of the branch's fixed assets for the period is Bs.1,300 and the principal
records all assets, including those of the branch.

REQUESTED:
a. Record all transactions in the principal and branch books. Present the balances of the general
ledger accounts at the end of the period and prepare the closing entries to know the results of
the operations.
b. Materials H. M, CA has a recorded initial inventory of Bs. 4,000 and the final inventory is
bs.3,500
c. The final inventory of the branch is Bs. 5.600.

2. The ABC company opened a branch in Cabimas, from which the information presented later was
obtained for you to make your accounting entries.
 Branch receives from the Main Office Bs. 1,500 in cash and Bs. 200 in merchandise.
 Cabimas sells merchandise on credit for Bs. 860 and transfers the commitment received to the
Main Office.

EASTERN UNIVERSITY
CORE OF SUCRE
SCHOOL OF MANAGEMENT
ACCOUNTING DEPARTMENT
ADVANCED ACCOUNTING III
Teacher: Juana Fermín

 Receives payroll information canceled by the Headquarters for its workers, for a total of
Bs.1,540.
 Branch sends Bs. 3,000 in cash to Central House.
 Branch collects debt from Headquarters for Bs. 70 plus 10% interest.
 If during that accounting period the Branch obtained a net profit of Bs. 215, what would be the
seat of the Central House?

3. The MIMOSA company has several branches, and during the period that ended on 06-30-02 it carried
out the following operations related to them that you must account for:
 Central House bought merchandise for Bs. 5,830 sending 25% to Branch A (at cost) and 30%
to Branch B (with a 40% surcharge).
 Headquarters transferred collection invoices for Bs to Branch A. 288.
 She received information that Branch B had canceled a Bill of Exchange of Bs for her. 85.70
which included Bs. 5 interest.
 Received transfer from Branch A for Bs. 1,200 and a note of Bs. 50 for canceled Advertising
Expenses that correspond to the Headquarters.
 Headquarters cancels payroll withholdings from branches A and B for Bs. 100 and 72,
respectively. These withholdings had been made by the branches themselves.

4. The SPT company has a Branch to which it sent merchandise for Bs. 2,850 during the financial year.
According to the results received, the Branch had a loss of Bs. 875 and a sales cost of Bs. 1,705
Likewise, a Final Inventory of Bs. 120.
 Make the final adjustment that must be prepared by the Headquarters, if the merchandise had
been sent with a 35% surcharge.

5. The Trial Balances of the RAMCO company and its branches in Barcelona and Maturín appear below.
Likewise, its Final Inventories are: Main Office, Bs. 57.50; Branch Barcelona, Bs. 59.80; and Maturín
Branch, Bs. 52. With this information it is required:
 Prepare working papers for the company and its branches.
 Prepare consolidated (classified) Financial Statements.
 Make the closing entries for the Branches and those corresponding to them in the books of the
Headquarters.
 6. A certain company called PALAZON, domiciled in Caracas, has a branch in Barquisimeto, and during
the month of July 2008 it carried out the following operations:
 Bought merchandise for Bs. 2,100 accepting money transfers for Bs. 1,500 and for the rest he
created a 30-day commitment. Of that merchandise he sent 35% to the Branch.
 Canceled transfers for Bs. 1,900 and various outstanding accounts for Bs. 230 that correspond to
the Branch.
 Received bank transfer from Barquisimeto for Bs. 3,000 and payment information received by
them (in their name) for Bs. 400.
 Paid advertising expenses for Bs. 2.400. Of that amount he charged Barquisimeto 25%.
 He sent two (2) used typewriters to the Branch, valued in his accounting as follows:
Cost .............................................. Bs. 215 each
Accumulated depreciation ................ Bs. 22c/u
 They were invoiced to the Branch at their book value.
It is requested to record the operations in the books of both offices.

EASTERN UNIVERSITY
CORE OF SUCRE
SCHOOL OF MANAGEMENT
ACCOUNTING DEPARTMENT
ADVANCED ACCOUNTING III
Teacher: Juana Fermín

RAMCO Company and Branches

Trial Balances
as of 05-31-01

OFFICE MAJOR SUC. BARCELONA SUC. MATURIN

ACCOUNTS HAS TO TO HAVE HAS TO TO HAVE HAS TO TO HAVE

Cash and Banks 25.500,00 7.200,00 10.900,00
Accounts receivable 19.200,00 5.300,00 57.500,00
Prov. for bad accounts 400,00 100,00 200,00
Initial inventory 214.000,00 69.000,00 71.200,00
Barcelona Branch 237.500,00
Maturín Branch 240.700,00
Central House 237.500,00 240.700,00
Land 150.100,00
Building 722.400,00
Deprec. Accum. Building 137.900,00
Furniture and fixtures 41.700,00 54.700,00 59.300,00
Deprec. Accum. Furniture
and appliances 20.700,00 3.500,00 5.300,00
Accounts payable 415.200,00 2.900,00 1.700,00
Documents to pay 257.500,00 5.200,00
Capital 246.400,00
Retained earnings 159.000,00
Sales 443.000,00 42.000,00 173.000,00
Shopping 192.000,00 25.000,00 89.000,00
Merchandise sent to Suc. 231.000,00
Merchandise received Cent 117.000,00 114.000,00
House
Bills 65.000,00 13.000,00 19.000,00
Dividends 3.000,00
Totals 1.432.900,00 1.911.100,00 291.200,00 53.700,00 420.900,00 180.200,00

Cumaná, July 2016