HOME OFFICE AND BRANCH ACCOUNTING

Home Office
● Investment in BR (IIB) / Branch Current Account (BCA)
● Year-end: Combined Financial Statements (HO-BR combined)
○ A, L, E, Inc, Exp
○ Eliminate Reciprocal Accounts:
■ IIB
● b/s of HO
■ HOCA
● b/s of BR

■ Shipments to BR (STB)- always @cost

● i/s of HO
■ Shipments from HO (SFHO)- always @billed price
● 1/s of BR
Branch
● Has own set of books
○ A, L, E, Inc, Exp

Home Office Current Account (HOCA)

SALES AGENCY VS BRANCH

● Inventory
○ SA- samples
○ BR- Own inventory
● Sales
○ SA- Supplied by the HO --- sends sales order to HO
○ BR- Own sales
● Resources
○ SA- Revolving cash fund
○ same with Petty Cash (imprest method)
■ Disbursements (expenses) not recorded at incurrence;
recorded at replenishment
○ BR- own assets
● Records
○ SA- not maintain own books
○ BR- has own books
■ Internally a separate entity
■ Externally under HO

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PatDen
2 PROBLEMS
1. Reconciliation of IIB and HOCA
2. Combined Financial Statements

Reconciliation of Reciprocal Balance Sheet Accounts

● Ideally, IIB = HOCA
○ Reasons of ≠ :
■ Unrecorded items
■ Errors

IIB (Asset) HOCA (Equity)

Normal Bal: Debit Normal Bal: Credit

Increase: Debit Increase: Credit

Decrease: Credit Decrease: Debit

How to reconcile?
● Record unrecorded items
○ Sender- record transactions upon shipment
○ Recipient- record transactions upon receipt
■ If in transit, recipient did not yet record
● Correct errors
When to increase/decrease?
● Increase:
○ Asset transfer (HO to BR)
○ BR generates NET INCOME
● Decrease
○ Asset transfer (BR to HO) --- return of investment or cash remittance
○ BR incurred NET LOSS

Journal Entries
*AFOBI- Allowance for overvaluation of BR Inventory (unrealized profit)
TRANSACTIONS HO books BR books
(IIB) (HOCA)

CASH TRANSFER

1. Cash transfer HO to BR IIB xx Cash xx

(initial investment) Cash xx HOCA xx

2. Cash transfer BR to HO Cash xx HOCA xx

(Cash remittance) IIB xx Cash xx

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PatDen
 COST OF GOODS SOLD Beg Inv xx Beg Inv xx
(STB and SFHO are “inventories”) Net Purch xx Net Purch xx
Ship to BR (xx) Ship fr BR xx
TGAS xx TGAS xx
End Inv xx End Inv xx
COGS xx COGS xx

3. Shipment of inventory IIB xx SFHO xx

HO to BR @cost STB xx HOCA xx

4. Shipment of Inventory IIB(100 x 120%) 120k SFHO 120k

HO to BR @billed price STB 100k HOCA 120k
AFOBI* 20k
Cost = 100k
Mark up = 20% above cost

SHIPMENT TERMS ● Freight prepaid- seller (HO) paid

(Always shipping point) ● Freight collect- buyer (BR) paid
Meaning dapat si Branch
magbayad

5. #4 plus IIB(100 x 120%) 125k Freight in 5k

freight prepaid 5k STB 100k SFHO 120k
AFOBI* 20k HOCA 125k
Cash 5k

6. #4 plus IIB(100 x 120%) 120k FI 5k

freight collect 5k STB 100k SFHO 120k
AFOBI* 20k HOCA 120k
Cash 5k

7. RETURN OF Reverse shipment of inventory

MERCHANDISE
BR to HO

8. SALES to customers AR or cash xx AR or cash xx

Sales xx Sales xx

COLLECTION OF AR ● Collected by: the one who will debit cash

● Owned by: the one who will credit AR

9. Collected by:HO Cash xx

Owned by: HO Sales Dis xx No entry
AR xx

12. Collected by: HO Cash xx HOCA xx

Owned by: BR IIB xx SD xx
AR xx

11. Collected by: BR Cash xx

Owned by: BR No entry SD xx
AR xx

10. Collected by: BR IIB xx Cash xx\

Owned by: HO SD xx HOCA xx

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PatDen
 AR xx

13. PURCHASES from Purch xx Purch xx

outsiders Cash of AP xx Cash of AP xx

PAYMENT OF AP ● Liable: the one who will debit AP

● Paid by: the one who will credit cash

14. Liable: HO AP xx No entry

Paid by: HO Cash xx

14. Liable: HO AP xx HOCA

Paid by: BR IIB xx Cash xx

14. Liable: BR No entry AP xx

Paid by: BR Cash xx

14. Liable: BR IIB xx AP xx

Paid by: HO Cash xx HOCA xx

EXPENSES

15. Expenses incurred Exp xx Exp xx

Cash or Liab xx Cash or Liab xx

16. HO allocates exp to BR IIB xx Exp xx

● Expenses already paid by HO Exp xx HOCA xx
● Portion of the expenses of HO
will be shared to BR
● BR will now incur expenses

17. BR allocates exp to HO Exp xx HOCA xx

● Expenses already paid by BR IIB xx Exp xx
● Some of the exp paid by BR is
charges to HO
● HO will now incur expenses

ACQUISITION OF PPE ● Acquired by: debits PPE

● Carried by: credits cash
PPE xx ● Used by: debits dep’n exp
Cash xx
The one who carries the PPE will be the one to record
Dep’n exp xx accumulated depreciation
Accum Dep’n xx ➔ Cost - Accum Dep = CA
The one who uses the PPE will be the one to record
depreciation

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PatDen
 NET INCOME/ LOSS INCOME SUMMARY ACCOUNT (BR)
● Income- credit side (to close, debit)
Sales xx ● Loss- debit side (to close, credit)
COGS (xx)
Gross Profit xx
OPEX (xx)
NI/L xx

34. BR generated NI IIB xx Inc Sum xx

Inc Sum xx HOCA xx

35. BR generated NL Inc Sum xx HOCA xx

IIB xx Inc Sum xx

36. Realization of AFOBI* AFOBI xx

● SFHO is @billed price Inc Sum xx No Entry
● Occurs if the branch sold the
inventory to outsiders
● Assume NI

ELIMINATION OF After elimination, IIB = HOCA

RECIPROCAL ACCOUNTS

37. IIB and HOCA HOCA xx

IIB xx

38. STB- always @cost AFOBI xx

SFHO- always @billed price STB xx
AFOBI- diff of the two SFHO xx

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PatDen
*Billed price is based on sales

Combined Financial Statement

Home Office

Branch

*branch is not aware of the “true” cost of the shipments, thus:

● SFHO is overstated
● TGAS is overstated
● COGS is overstated
● Gross profit is understated
● Net income is understated

PatDen😉
*AFOBI- the understatement in the Net Income of the Branch
AFOBI, beg inventory xx
AFOBI, SFHO xx
AFOBI, beg (TGAS) xx
AFOBI, end (xx)
Realized AFOBI xx

COST OF GOODS SOLD -- BRANCH

*AFOBI only comes from HO

➔ if from outsiders, no AFOBI (Billed Price = Cost)
◆ Beg Inv from outsiders
◆ Purchases (only from outsiders)
◆ Freight in (no AFOBI, no billed price)
**In transit SFHO
➔ STB = 100k; Billed price = 20% above cost
➔ SFHO = 115k
➔ Correct amount of SFHO = 100k x 120% = 120k
➔ 120k - 115 = 5k in transit inventory

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PatDen
 SAMPLE EXERCISES

A. SALES AGENCY

1. Cash Fund 20,000

Cash 20,000

2. Samples Inventory 3,000

Ship to SA 3,000

3. AR- SA 150,000
Sales- SA 150,000

4. COGS 90,000
Ship to SA 90,000

5. Cash Fund 5,000

Expenses 20,000
Cash 25,000

6. Sales - AR 150,000
COGS 90,000
Expenses 20,000
SA - Income 40,000 ---- NET INCOME

7. SA - Income 40,000
Income Summary 40,000

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PatDen
B. HOME OFFICE AND BRANCH BOOKS

1. Journal Entries

HO books (IIB) BR books (HOCA)

1/1 IIB 488,000 Cash 488,000

Cash 488,000 HOCA 488,000

IIB 12,000 SFHO 12,000

STB 12,000 HOCA 12,000

a. Purch 200,000
AP 200,000

IIB 100,000 AP 100,000

AP 100,000 HOCA 100,000

b. No entry Equip 120,000

Cash 120,000

c. IIB 60,000 Equip 60,000

Accum dep 300,000 HOCA 60,000
Equip 360,000

d. No entry Cash 600,000

Sales 600,000

COGS 192,000
Inventory 20,000
Purch 200,000
SFHO 12,000

BI 12,000
Purch 200,000
TGAS 212,000
EI 20,000
COGS 192,000

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PatDen
 e. Cash 80,000 HOCA 80,000
IIB 80,000 Cash 80,000

f. Expenses 150,000
Cash 150,000

Dep’n Exp 10,000

Accum Dep 10,000

IIB 25,000 Expenses 25,000

Expenses 25,000 HOCA 25,000

12/31 Sales 600,000

COGS 192,000
Expenses 175,000
Dep’n Exp 10,000
Inc Sum 223,000

IIB 223,000 Inc Sum 223,000

Inc Sum 223,000 HOCA 223,000

2. Reconciliation

3. Statement of financial position and profit/loss statement

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PatDen