Chapter 3

Accounting for Sales

Agency, Branch, and
Division

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Sales Agency:
• Sales agency is a term applied to a business unit
that performs only a small portion of the
functions associated branch. A sales agency
usually carries samples of products but does
not have an inventory of merchandise and
usually lesser degree of autonomy.

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Branch:
• The term Branch is used to describe a business
unit located at some distance from the Home
Office. Branches are economic and accounting
entities. However, branches are not legal entity.
Branches may carry merchandise obtained from
Home Office, make sales, approve customers’
credit, and make collections from its customers.

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Division:
• Division is a business segment or a business enterprise
which generally has more autonomy than a branch.
Division may be as separate company or may not be a
separate company.
• If the division is not a separate company, the
accounting procedures are the same as Branch.
• If the division is a separate company (subsidiary
company), the financial accounting requires
consolidation, which will be discussed in later topics.
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Differences between Sales Agency, Branch and Division

Characteristics Sales Agency Branch Division

Degree of Autonomy Low Moderate High

Accounting Entity No Yes Yes

Legal Entity No No Possible

Economic Entity No Yes Possible

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 Reciprocal Ledger Accounts
The accounting records maintained by a branch include a Home Office ledger account.
 Home Office account is credited for all merchandise, cash, or other assets provided by the
Home Office;
 Home Office account is debited for all cash, merchandise, or other assets sent by the branch
to the Home Office or to other branches.
The Home Office account is a quasi-ownership equity account that shows the net investment by
the Home Office in the branch. At the end of an accounting period when the branch closes it
accounting records, the Income Summery account is closed to the Home Office account. A net
income increases the credit balance of the Home Office account; a net loss decreases this
balance.

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 In the Home Office accounting records, a reciprocal ledger account with a title such as
Investment in Branch is maintained.
 Investment in Branch is a non-current asset account, which is debited for cash,
merchandise, and services provided to the branch by the Home Office, and for net income
reported by the branch.
 Investment in Branch is credited for cash or other assets received from the branch, and for
net losses reported by the branch.

Thus, the Investment in Branch account reflects the equity method of accounting. A separate
investment account generally is maintained by the Home Office for each branch. If there is only
one branch, the account title is likely to be Investment in Branch; if there are numerous branches,
each account title includes a name or number to identify each branch.

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 Expenses Incurred by Home Office and Allocated to
Branches
• Some business enterprises follow a policy of notifying each
branch of expenses incurred by the Home Office on the
branch’s behalf. Plant assets located at a branch generally
are carried in the Home Office accounting records.
 If a plant asset is acquired by the Home Office for the
branch, the journal entry for the acquisition is a debit to an
appropriate asset account such as Equipment: Branch and a
credit to Cash or an appropriate liability account.

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If the branch acquires a plant asset, it debits the
Home Office ledger account and credits Cash or
an appropriate liability account.
• The Home Office debits an asset account such as
Equipment: Branch and credits Investment in
Branch.

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 Alternative Methods of Billing Merchandise
Shipments to Branches
• Three alternative methods area available to the Home
Office for billing merchandise shipped to its branches.
The shipments may be billed:
1. At Home Office cost,
2. At a percentage above Home Office cost, or
3. At the branch’s retail selling price

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 Billing shipments to a branch at
Home Office cost
 This is the simplest procedure and is widely used. It avoids
the complication of unrealized gross profit in inventories
and permits the financial statements of branches to give a
meaningful picture of operations.
 However, billing merchandise to branches at Home Office
cost attributes all gross profits of the enterprise to the
branches,
 Under these circumstances, Home Office cost may be the
most realistic basis for billing shipment to branches.

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 Billing shipments at a percentage above
Home Office cost (such as 110% of cost)
• This may be intended to allocate a reasonable
gross profit to the Home Office. When
merchandise is billed to a branch at a price
above Home Office cost:
 the net income reported by the branch is
understated and;
 the ending inventories are over-stated for the
enterprise as a whole.

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• Adjustments must be made by the Home
Office to eliminate the excess of billed prices
over cost (intracompany profits) in the
preparation of combined financial statements
for the Home Office and the branch.

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 Billing shipments to a branch at branch retail
selling prices
• This may be based on a desire to strengthen
internal control over inventories.
• If the physical inventories taken periodically at
the branch do not agree with the amounts thus
computed, an error or theft may be indicated
and should be investigated promptly.

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 Separate Financial Statements for Branch and
for Home Office
• A separate income statement and balance sheet
should be prepared for a branch so management
of the enterprise may review the operating results
and financial position of the branch.
• However, it is important to emphasize that
separate financial statements of the Home Office
and of the branch are prepared for internal use
only; they do not meet the needs of investors or
other external users of financial statements.
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 Combined Financial Statements for Home
Office and Branch
• A balance sheet for distribution to creditors,
stockholders, and government agencies must show
the financial position of a business enterprise
having branches as a single entity. A convenient
starting point in the preparation of a combined
balance sheet consists of the adjusted trial
balances of the Home Office and the Branch.

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• Similar accounts are combined to produce a single
total amount for cash, trade accounts receivable,
and other assets and liabilities of the enterprise as
a whole.
• In the preparation of a combined balance sheet,
reciprocal ledger accounts are eliminated because
they have no significance when the branch and
Home Office report as a single entity.

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• Any receivables and payables between the Home
Office and the branch (or between two branches)
are eliminated.
• Any intracompany profits or losses are eliminated.

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 Illustrative Transactions and Financial Statements for the
Branch and HO
1. Cash of Br 1,000 was forwarded by the Home Office to AGARO Branch.
2. Merchandise with a Home Office cost of Br 60,000 was shipped by the Home Office to
AGARO Branch.
3. Equipment was acquired by AGARO Branch for Br 500, to be carried in the Home Office
accounting records. (Other plant assets for AGARO Branch generally are acquired by the
Home Office.)
4. Credit sales by AGARO Branch amounted to Br 80,000; the branch’s cost of the
merchandise sold was Br 45,000.
5. Collections of trade accounts receivable by AGARO Branch amounted to Br 62,000.
6. Payments for operating expenses by AGARO Branch totaled Br 20,000.
7. Cash of Br 37,500 was remitted by AGARO Branch to the Home Office.
8. Operating expenses incurred by the Home Office and charged to AGARO Branch totaled
Br 3,000.
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Typical Home Office and Branch Transactions and .Events under Perpetual Inventory System
Home Office Accounting Records AGARO Branch Accounting Records
Journal Entries Journal Entries
1. Investment in AGARO Branch ................ 1,000 Cash .................................................1,000
Cash ................................................ 1,000 Home Office a/c ........................ 1,000
2. Investment in AGARO Branch ................ 60,000 Inventories ........................................60,000
Inventories ........................................ 60,000 Home Office .............................. 60,000
3. Equipment: AGARO Branch ................... 500 Home Office .....................................500
Investment in AGARO Branch ............. 500 Cash ........................................... 500
4. None Trade Accounts Receivables.............80,000
Sales ........................................... 80,000
Cost of Goods Sold ...........................45,000
Inventories ................................. 45,000
5. None Cash ..................................................62,000
T/Accounts Receivables ............ 62,000
6. None Operating Expenses ..........................20,000
Cash ........................................... 20,000
7. Cash .........................................................
37,500 Home Office .....................................37,500
Investment in AGARO Branch ............. 37,500 Cash ........................................... 37,500
8. Investment in AGARO Branch ............3,000 Operating Expenses ..........................3,000
Operating Expenses .......................... 3,000 Home Office .............................. 3,000
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 Investment in AGARO Branch Account
Date Explanation Debit Credit Balance
2005 Cash sent to branch ................................................... 1,000 1,000 Dr
Merchandise billed to branch at Home Office cost... 60,000 61,000 Dr
Equipment acquired by branch, account by HO ....... 500 60,500 Dr
Cash received from branch ....................................... 37,500 23,000 Dr
Operating expenses billed to branch ......................... 3,000 26,000 Dr

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 Home Office Account
Date Explanation Debit Credit Balance
2005 Cash received from the office ................................... 1,000 1,000 Cr
Merchandise received from Home Office ................. 60,000 61,000 Cr
Equipment Acquired ................................................. 500 60,500 Cr
Cash Sent to Home Office......................................... 37,500 23,000 Cr
Operating expenses billed by Home Office .............. 3,000 26,000 Cr

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 Working Paper for Combined Financial
Statements

A working paper for combined financial statements has three purposes:

1. To combine ledger account balances for like revenue, expenses, assets, and liabilities,
2. To eliminate any intracompany profits or losses, and
3. To eliminate the reciprocal accounts

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 JIMMA TRADING COMPANY
WORKING PAPER FOR COMBINED FINANCIAL STATEMENTS OF HO AND
AGARO BRANCH .

FOR YEAR ENDED DECEMBER 31, 2005

(PERPETUAL INVENTORY SYSTEM: BILLINGS AT COST)
Adjusted Trial Balance
Home Office Branch Elimination Combined
Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)
Income Statement
Sales ................................................ (400,000) (80,000) (480,000)
Cost of Goods Sold ......................... 235,000 45,000 280,000
Operating Expenses ........................ 90,000 23,000 113,000
Net Income ..................................... 75,000 12,000 87,000
Totals .............................................. -0- -0- -0- -0-
Statement of Retained Earnings
Retained Earnings, Jan.1, 2005 ...... (70,000) (70,000)
Net Income from above .................. (75,000) (12,000) (87,000)
Dividends Declared ........................ 40,000 40,000
Retained Earnings, Dec.31,2005 .... (117,000)
Totals .............................................. -0-
Balance Sheet
Cash ................................................ 25,000 5,000 30,000
Trade Accounts Receivables .......... 39,000 18,000 57,000
Inventories ...................................... 45,000 15,000 60,000
Investment in AGARO Branch ....... 26,000 a (26,000)
Equipment ....................................... 150,000 150,000
Accumulated Depreciation ............. (10,000) (10,000)
Trade Accounts Payable ................. (20,000) (20,000)
Home Office ................................... (26,000) a 26,000
Common Stock, Br 10 par .............. (150,000) (150,000)
Retained Earnings from above ....... (117,000)
Totals .............................................. -0- -0- -0- -0-

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 Home Office Accounting Records AGARO Branch Accounting Records
Adjusting and Closing Entries Closing Entries
None Sales ........................................... 80,000
Cost of Goods sold.............. 45,000
Operating Expenses ............ 23,000
Income Summary ................ 12,000
Investment in AGARO Branch .......... 12,000 Income Summary ....................... . 12,000
Income: AGARO Branch ........... 12,000 Home Office ....................... 12,000
Income: AGARO Branch ................... 12,000 None
Income Summary ........................ 12,000

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 Reconciliation of Reciprocal Ledger
Accounts
• At the end of an accounting period, the balance of
the Investment in Branch ledger account in the
accounting records of the Home Office may not
agree with the balance of the Home Office account in
the accounting records of the branch because certain
transactions may have been recorded by one office
but not by the other office.

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 Illustration
Investment in Arvin Branch
Date Explanation Debit Credit Balance
2003
Nov. 30 Balance (BBF) .......................................................... 62,500 Dr
Dec. 10 Cash received from branch ....................................... 20,000 42,500 Dr
27 Collection of branch trade accounts receivable ........ 1,000 41,500 Dr
29 Merchandise shipped to branch................................ 8,000 49,500 Dr

Home Office Account

Date Explanation Debit Credit Balance
2003
Nov. 30 Balance (BBF) .......................................................... 62,500 Cr
Dec. 10 Cash sent to Home Office ........................................ 20,000 42,500 Cr
27 Acquired equipment ................................................3,000 39,500 Cr
29 Collection of HO trade accounts receivable ............. 2,000 41,500 Cr

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 There might be a number of reconciling items between Investment in Branch and Home Office
accounts. These are: -
 Inventories may be in-transit
 Trade Accounts Receivables of Branch may be collected by Home Office
 Branches may acquire plant assets to be maintained by HO without the knowledge of HO
 Trade Accounts Receivables of the Home Office may be collected by the Branches

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1. On December 29, the Home Office shipped
merchandise costing Br 8,000 to the branch.
Inventories in Transit . . . . . . . . . . . . . . . . . . . . . . . . . 8,. 000
Home Office . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
2. On December 27, trade accounts receivables of the
branch were collected by the Home Office.
Home Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Trade Accounts Receivable . . . . . . . . . . . . . . . . . 1,000

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3. On December 28, the branch acquired equipment
for Br 3,000.
Equipment: Arvin Branch.......................................................3,000
Investment in Arvin Branch...................................... 3,000

4. On December 30, trade accounts receivables of

the Home Office were collected by Arvin Branch.
Investment in Arvin Branch.................................................... 2,000
Trade Accounts Receivable ...................................... 2,000
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 MERCY COMPANY-HOME OFFICE AND ARVIN BRANCH
Reconciliation of Reciprocal Ledger Accounts
December 31, 2003
Investment in Arvin Home Office
Branch Account Account
Balances before adjustments...................................... Br 49,500 Dr Br 41,500 Cr
Add: (1) Merchandise shipped to branch by HO ....... 8,000
(4) HO trade A/Rec collected by Branch ........ 2,000
Less: (2) Branch A/Rec collected by HO ................ (1,000)
(3) Equipment acquired by branch ................. (3,000)
Adjusted balances .................................................... Br 48,500 Dr Br 48,500 Cr

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 Transactions between Branches
Efficient operations may on occasion require that
merchandise or other assets be transferred from one
branch to another.
• For example, if MODJO Branch ships merchandise to
ADAMA Branch:
 MODJO Branch debits Home Office and credits
Inventories. On receipt of the merchandise,
 ADAMA Branch debits Inventories and credits Home
Office.

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 The Home Office records the transfer between
branches by a debit to Investment in ADAMA
Branch and a credit to Investment in MODJO
Branch.

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 End of This Chapter

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