HOBA - General Procedures-DLSAU

Home Office and
Branch Accounting
General Procedures
In their effort to generate more sales, business firms
usually open sales outlets.‡
The creation of sales outlets develops business in distant
areas or improves the company’s share of existing markets
through more effective and efficient contact with
the customers.‡
The new sales outlets may be organized as sales agencies
or branches.‡
Regardless of which form of operation is used, the
financial statements of each separate unit are combined
with those of the controlling unit to come up with financial
statements of the economic entity as a whole.
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Sales Agency and Branch Office
Sales Agency Branch Office
✓ Usually carries a line of samples or ✓ Carries stocks of merchandise
displays merchandise but does not which maybe obtained solely
carry stocks of it. from the home office or a
✓ Orders are taken from customers portion may be obtained from
and sent to the home office for outside suppliers.
approval of credit.
✓ Makes the usual warranties with
✓ Home office then ships the
merchandise directly to customers.
respect to quality and makes
Customers remit payments to HO collections of accounts
directly receivable, and function in most
✓ A working fund of sales agency respect as an independent
expenses is provided by the HO business unit.
and replenished when exhausted. ✓ Restricted until it is more than a
✓ No other cash is handled by the sales agency
sales agency
Accounting System for
Sales Agencies
Sales agency neither keeps a complete set of books nor uses a double-entry
system of accounts.
❖ Imprest System is used,

- Usually adopted by the home office for the working fund of the sales agency.
- Entries made by the home office depend on whether sales agency net income
is determined separately or not separately.
- If HO wants to determine the net income of each of its sales agencies
separately, it must maintain in the general ledger distinct revenue and expense
accounts in the name of the sales agency.
For example:
Sales –Sales Agency
Rent Expense –Sales Agency
The cost of good sold of each agency must also determined.

Accounting System for
Sales Agencies
❖ Perpetual Inventory System is used,
- Entry for Shipments to customers of the sales agencies are
Cost of Goods Sold – Sales Agency
Merchandise Inventory
❖ Periodic Inventory System is maintained,

- Entry to shipments to sales agency customers are recorded by,
Cost of Goods Sold – Sales Agency
Shipment of Merchandise – Sales Agency
At the end of accounting period, the account Shipment of Merchandise – Sales

Agency is deducted from the total of beginning inventory and purchases to
determine the cost of goods available for sale by the home office for its own
operation
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Accounting for
Branch Operations
o Normally, the home office and the branch maintain

separate accounting systems.
o Each maintains a full set of books with a complete self-
balancing set of accounts.
o Both home office and branch must record transactions
with one another (inter-office transactions) in their
respective accounting systems.
o All accounts are combines for external reporting so
that the external financial statements will represent
the company as a single economic enterprise.
o Certain elimination is necessary.
Reciprocal Accounts
In recording inter-office transactions, two

reciprocal accounts are used, namely, the
Investment in Branch (Branch Current) account
used by the home office which is classified as an
asset; and the Home Office (HO Current account)
used by the branch which is classified as a liability.
Reciprocal Accounts
The reciprocal nature of the Investment in Branch and

the Home Office accounts and the way in which they are
affected by various inter-office transactions are shown
below:
(Home Office Books) (Branch Books)

Investment in Branch Home Office
XX Assets transfer to branch XX
XX Assets transfer from branch XX
XX Branch profit XX
XX Branch loss XX
Establishment of Branch
When a company establishes a branch, the transfer of assets
to the branch is recorded by the home office in the Investment
in Branch account. Likewise, the branch records the transfer
with an entry to the Home Office account.
Example entry;
Home Office books
Investment in Branch XX
Cash XX
Office Equipment XX
Branch books
Cash XX
Office Equipment XX
Home Office XX
Recognition of
Branch Income or Loss
Income for each branch is computed periodically in the

normal manner.
All of the branch’s revenue and expense accounts are
closed to its Income Summary account in the usual
manner. The balance of the Income Summary account
represents the branch’s income or loss, and is closed to
the Home Office account. The Home Office account
serves in place of retained earnings and other owner’s
equity accounts on the book of the branch. When the
branch income and loss is reported to the home office,
an entry is made on the home office books to recognize
the income or loss of the branch.
Recognition of
Branch Income or Loss
For example, assume there is a credit balance of P60,000 in

Cebu branch’s Income Summary account at the end of the
Cebu branch:
Branch books
Income Summary 60,000
Home Office 60,000
Close income summary.
Home Office books
Investment in Cebu Branch 60,000
Cebu Branch Income 60,000
Record Cebu branch income.
Merchandise Shipments
to a Branch
Merchandise sold by the branch may be obtained entirely
from the home office or it may be allowed to acquire some
merchandise from outside parties. Purchases of
merchandise from outsiders are recorded in the normal
manner.
If Cebu branch purchases P10,000 of merchandise from
outside parties, and the branch uses a periodic inventory
system, the branch records the transaction as follows:
Purchases 10,000
Cash or Accounts Payable 10,000
Record purchase of merchandise from outsiders.
Merchandise Billed at Cost
Both the home office and the branch treat the transfer of
merchandise in the same way as the transfer of any other asset.
To illustrate, assume that Gerber’s home office transfer merchandise
with a cost of P80,000 to its Cebu branch and the home office use
periodic inventory system.
Home Office books
Investment in Cebu Branch 80,000
Shipments to Branch 80,000
Transfer of merchandise to Cebu branch.
Branch books
Shipments from Home Office 80,000
Home Office 80,000
Transfer of merchandise from home office.
Freight Charges on
Merchandise Shipments
Freight costs incurred in shipping merchandise from the home
office to a branch become part of the cost of the branch inventory.
For example, assume Gerber’s home office pays P5,000 to
transport P80,000 of merchandise to Cebu branch.
Home Office books
Investments in Cebu Branch 85,000
Transfer of merchandise to Cebu Branch
Branch books
Freight-In 5,000
Home Office 85,000
Transfer of merchandise from home office.
Preparation of Combined Financial Statements
In the preparation of combined financial
statements for the company, the accounts of the
home office and its branches are combined.
Reciprocal and intra-company account balances
must be eliminated because they relate to
activities within the company rather than activities
between the company and outside parties.
Working paper normally is used to combine the
accounts of the HO and its branched, and to
eliminate the reciprocal accounts
All eliminations are only made in the working
paper, not on the separate books of the units
being combined. zip
Preparation of Combined Financial Statements
Assume the following balances of the reciprocal
accounts on December 31, 2014 after adjusting and
closing entries have been prepared:
Investment in Branch P295,000
Home Office 295,000
Elimination entries:
(1)Home Office 295,000
Investment in Branch 295,000
Eliminate reciprocal accounts.
(2)Shipment to Branch 85,000
Shipments from HO 85,000
Eliminate shipments of merchandise. zip
Separate Financial Statements
Normally, the branch prepared its own financial

statements so that the management of the home
office can review and evaluate the operating results
and financial position of the branch.
The home office also prepares its own financial

statements so that it may appraise independently the
results of its own operation and its own financial
position.
The separate financial statements for the branch and
the home office are presented to the next slides.
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Combined Financial Statements
❑Combined financial statements of the home office

and the branch are prepared to show the effects of
business transactions must be eliminated.
❑To facilitate the preparation of combined
statements, working papers are usually prepared.
❑Two formats of working paper may be used, the
trial balance working paper (normally used in
accounting for branch operations) and the three-
section working paper (used in parent-subsidiary
accounting)
Working Paper for Combined
Financial Statements
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Thank you!
“Always bear in mind that your own resolution
to succeed is more important than any other.”
-Abraham Lincoln
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REFERENCES
Dayag, A. J. (2021). Advanced Financial Accounting (A Comprehensive:

Conceptual & Procedural Approach) Manila, Philippines: Pixeplate
Publishing and Printing
Guerrero, P. P and Peralta, J. F. (2017). Advanced Accounting: A Procedural

Approach Volume I. Manila, Philippines: GIC Enterprises & Co., Inc
Halsey, Robert F. and Hopkins, Patrick E. Advanced Accounting 4th ed.

Cambridge Business publishers.
“Always bear in mind that your own resolution

to succeed is more important than any other.”
-Abraham Lincoln zip

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Home Office and

❖ Imprest System is used,

The cost of good sold of each agency must also determined.

❖ Periodic Inventory System is maintained,

At the end of accounting period, the account Shipment of Merchandise – Sales

o Normally, the home office and the branch maintain

In recording inter-office transactions, two

The reciprocal nature of the Investment in Branch and

(Home Office Books) (Branch Books)

Income for each branch is computed periodically in the

For example, assume there is a credit balance of P60,000 in

Normally, the branch prepared its own financial

The home office also prepares its own financial

❑Combined financial statements of the home office

Dayag, A. J. (2021). Advanced Financial Accounting (A Comprehensive:

Guerrero, P. P and Peralta, J. F. (2017). Advanced Accounting: A Procedural

Halsey, Robert F. and Hopkins, Patrick E. Advanced Accounting 4th ed.

“Always bear in mind that your own resolution

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