Junior Philippine Institute of Accountants and Auditors – United

Home Office and Branch Accounting – General Procedures and Special

Transaction
OVERVIEW C. Agency Accounting Records and Home
Office Records
1. Definition of Agency - When there is no desire to summarize
2. Accounting for Agency agency operations separately, the home
3. Agency Accounting Records and Home office may record the agency's
Office Records transactions in the revenue and expense
4. Definition of Branch accounts used for its own transactions.
5. Accounting for Branch However, if it wishes to determine the net
6. Reconciliation of Reciprocal Accounts income of each of its agencies and the
home office, they may separate these
accounts.
A. Definition of Agency
As such, the following accounts will be
- is an organization which main purpose is utilized:
to display merchandise. They usually do
not stock large quantity of products to Not Separate
satisfy the orders of customers. - Imprest Sales – Home Office and Agency
system is commonly used in handling cash Cost of Sales – Home Office and Agency
transactions. They are normally provided Expenses – Home Office and Agency
with a working fund for their expenses.
Separate
B. Accounting for Agency Sales – Home Office
Sales – Agency
In agency, they has no separate accounting Cost of Sales – Home Office
or business entity. It is usually the home Cost of Sales – Agency Shipment to Agency
office who bear the responsibility of Income Summary - Agency
maintaining the accounts.
D. Definition of Branch
Working Fund for Agency - A branch is an organization who treats its
- This system is similar to the concept of transactions as independent business
petty cash fund wherein the home office from the home office. It also stock a large
will establish a fund for the agency at the quantity of products to satisfy the orders
beginning and then replenish it whenever of the customers.
the fund runs low. - Unlike agency, branch do have its own
- The agency will give a summary of records for its own transactions. It has a
expenses at the end of the reporting separate branch accounting system.
period, which will be documented in the
home office's records. E. Accounting for Branches
a. Intracompany transactions - These are
The following are the pro-forma entry for transactions or transfer between the
transactions of agency: home office and its agencies or the
agencies themselves.
To establish working fund, b. Intercompany transactions - These are
Working Fund – Agency XXX transactions between the home office
Cash XXX and outside parties, or between the
agencies and outside parties.
No entry is required if the agency incur expenses
out of the working fund.

To replenish agency’s working fund,

Expenses XXX
Cash XXX

Page 1 of 7
 Junior Philippine Institute of Accountants and Auditors – United
Home Office and Branch Accounting – General Procedures and Special
Transaction
Reciprocal Accounts
*If there are several branches, provide a
Home Office Records separate account from each.

❖ Investment in Branch
- Also known as Branch Current
- Is a non-current asset account

Debited:
Merchandise Shipment
- For cash, goods, or services transferred to
the branch
- For branch income

Credited when:
- For remittances and other assets received
from the branch If it purchases merchandise from outsiders.
- For branch losses

❖ Shipment to Branch - Is a deduction to

cost of goods sold in the home office
records
Accounting for PPE
Branch Records

❖ Home Office Account

- Is an equity/capital account
- Is a quasi-ownership account equity that
shows the net investment by the home
office in the branch
*If the PPE is recorded at the home office but
Debited:
it is the branch who uses the asset, the
- For remittances made by the branch to the
home office depreciation expense then should be recorded
- For losses from operations at the branch.

Credited when: Accounting for expenses

- For cash, goods, or services received from
the home office
- For income from operations
*If the home office pays for the expenses of
❖ Shipment from Home Office branch.
- Is an addition to cost of goods sold in the
branch records

General Transactions
Recognition of Branch Income or Loss
Establishment of Branch

Page 2 of 7
 Junior Philippine Institute of Accountants and Auditors – United
Home Office and Branch Accounting – General Procedures and Special
Transaction

Transfer or Assets and Liabilities

*If the home office collected the receivable of the

branch

F. Reconciliation of Reciprocal
Accounts
- By the end of the reporting period, the
balances of the reciprocal accounts should
always be equal.
- Investment in Branch = Home Office
Account

However, there are times that these accounts

are not balanced due to some errors. Therefore,
the accountant should reconcile these variances
to correct the reciprocal accounts.
formalities are concluded, mergers are approved
by the appropriate regulatory authorities.

Page 3 of 7
 Junior Philippine Institute of Accountants and Auditors – United
Home Office and Branch Accounting – General Procedures and Special
Transaction
HOME OFFICE AND BRANCH ACCOUNTING SPECIAL TRANSACTIONS

Branch Books
In addition to the general transactions Shipment from Home Office XXX
between Home Office and Branch that were Home Office Account XXX
discussed, there are additional transactions
that generate special accounting problems: *If there is a shipment returns to home office
from the branch
• Merchandise shipment to the branch
at the branch’s selling price. Home Office Books
• Merchandise shipment to the branch Shipment to Branch XXX
at a price in excess of cost, at billed AFOBI XXX
price Investment in Branch XXX
• Inter-branch transfer of cash
• Inter-branch transfer of merchandise Branch Books
Home Office Account XXX
A. Billing at a Price in Excess of Cost, Shipment from Home Office XXX
at Billed Price
• Billing by the home office may be In this case, Shipment to Branch + AFOBI =
made at some arbitrary rate above Shipment from Home Office.
cost in order to withhold from branch
officials complete information
concerning the actual earnings from B. Inter-branch Transactions
branch operations. • Sometimes, merchandise or other
• When billings to the branch is above assets are transferred from one branch
cost, the net income determined by to another. Hence, these transactions
the branch will be understated while affects the record in the Home Office.
the ending inventories will be
overstated. Hence, adjustments Inter-branch Transfer of Cash
should be made by the company to
reflect the correct balance of these Home Office Books
accounts. Investment in Branch A XXX
Investment in Branch B XXX

Allowance for Overvaluation of Branch A Books

Branch Inventory (AFOBI) Home Office Account XXX
• Is the unrealized profit in branch Cash XXX
inventory
Branch B Books
Merchandise Shipment at Above Cash XXX
Cost Home Office Account XXX
The pro-forma entry will be as follows:

Home Office Books

Investment in Branch XXX

Shipment to Branch XXX
AFOBI XXX

Page 4 of 7
 Junior Philippine Institute of Accountants and Auditors – United
Home Office and Branch Accounting – General Procedures and Special
Transaction

Inter-branch Transfer of Merchandise

Freight costs on merchandise shipped between

home office and branch locations should be
included in branch inventory and cost sold
measurements.

• Inter-branch transfer of merchandise

does not justify increasing the carrying
amount of inventory because of indirect
routing
• The amount of freight cost included in the
inventory is limited to the cost of shipping
merchandise directly from Home Office
to present location
• Excess freight costs are recognized as
expense of the home office.
-

Page 2 of 7
 Junior Philippine Institute of Accountants and Auditors – United
Home Office and Branch Accounting – General Procedures and Special
Transaction

Sample Problems:

1. The Maniago Branch of Infante Corporation submitted the following trial balance as of June
2022:

Debit Credit
Cash ………………………………………………… P 28, 600
Accounts Receivable ……….……………………… P173,800
Shipments from home office ………………………… 462,000
Home office – Current …………………………………… 324,500
Sales ……………………………………………………… 369,600
Expenses ………………………………………….……… 29,700
Total ……………………………………………………… P684,100 P694,100

Maniago reported an ending inventory of P138,600. Shipments are billed at a mark-up of 40%
on cost. What is the real net income of Maniago branch? (ADAPTED)

2. The Tidy Sales Company established a branch in Angeles City early last year. It shipped
merchandise and billed the branch for P300,000 prior to its opening. For the year, it made
additional shipments at billed price of P120,000. Within the year, the branch shipped back
P7,500 inventory and got the credit memo for said returns. On the last working day of the year,
an inventory count was made. Ending inventory of P185,000 was established consisting of
purchases from third parties at P20,000, with the balance coming from home office shipments
at billed price. The home office billed the branch at 20% above cost. The total purchases of the
branch from outside suppliers amounted to P72,500.

What is the total cost of goods available for sale by the branch at cost (net of overvaluation and
return)? (ADAPTED)

3. The Coronel Co. bills merchandise shipments in its Quezon City branch at 125% of cost. The
branch, in turn, sells the merchandise it receives from the home office at 25% above the billing
price. On August 1, 2022, all of the branch’s merchandise stock was destroyed by fire. The
branch records that were recovered showed the following:

Inventory, January 1, 2023 (at billed price) ………………………….. P165,000

Shipments received from home office,
January to July (at billed price) ………………………………… 110,000
Purchases, at cost, from outside sources,
All re-sold at a 20% mark-up ………………………………..…….. 7,500
Sales …………………….…………………………………………………… 169,000
Sales returns and allowances ...............…………………………………… 3,750

The Coronel Co. will file an insurance claim. How much is the estimated cost of the merchandise
destroyed by the fire? (ADAPTED)

Page 3 of 7
 Junior Philippine Institute of Accountants and Auditors – United
Home Office and Branch Accounting – General Procedures and Special
Transaction
SOLUTIONS:

1. Sales P369,600
Less: COGS
Shipments from home office, at cost
(P462,000 x 100/140) P330,000
Less: Ending Inventory, at cost
(P138,600 x 100/140) 99,000 231,000
Gross Profit 138,600
Less: Expenses 29,700
Real Net Income of the Branch P108,900

2. Cost of goods available for sale, at cost:

Shipments from home office P300,000
Additional shipments 120,000
Returns to home office ( 7,500 )
Shipments from home office at billed price (net of returns) P412,500
Multiply by: Cost Ratio 100 / 120
Shipment from home office at cost P343,750
Purchases from outsiders at cost 72,500
Cost of goods available for sale, at cost P416,250

3. Inventory, January 1, at billed price P165,000

Shipments received from home office at billed price 110,000
COGAS at billed price 275,000
Less: COGS, from home office at billed price:
Sales 169,000
Less: Sales returns and allowances 3,750
Sales price of merchandise purchased
From outsiders (7,500 x 120%) 9,000
Net Sales of merchandise acquired from HO 156,250
Multiplied by: Intercompany cost ratio 100 / 125 125,000
Inventory, August 1, 2022, at billed price
150,000
Multiplied by: Cost Ratio 100 / 125
Merchandise Inventory at cost destroyed by fire P120,000

Page 2 of 7