Practical Accounting 2

Advance Financial Accounting Vol. 2

 Advance Accounting Vol. 2
1. Home Office and Branch Accounting
General Procedures
2. Home Office and Branch Accounting Special
Problems
3. Business Combinations
4. Consolidated Balance Sheet Date of
Acquisition
5. Consolidated Financial Statements
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6. Intercompany Profit Transactions
Inventories
7. Intercompany Gain Transactions Plant
Assets
8. Accounting For Foreign Currency Transactions
9. Translation of Foreign Entity Statements
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1. Home Office and Branch Accounting
General Procedures

Accounting for Sales Agency

1. Determine NOT Separately the Net Income
2. Determine Separately the Net Income
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1. Sales Agency - Determine NOT Separately
the Net Income
The transactions of the Sales agency are
recorded in the Home Office's own revenue
and expense accounts.
When the Home Office transfers fixed assets
to Sales Agency.
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1. Sales Agency - Determine Separately the
Net Income
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Observation
At the end of accounting period, the account Shipments
of Merchandise - Agency is deducted from the total of
Beginning Inventory and Purchases to determine the
GAS by the home office for its operations.
Sales Agency neither keeps a complete set of books nor
uses a double entry systems accounts. An Imprest
System is usually adopted by the Home Office for the
working fund of the sales agency.

THEY MAINTAIN SAMPLES INVENTORY

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Accounting for Branch
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TRANSACTIONS
Established of Branch

Recognition of Branch Income or Loss

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Merchandise Shipments to a Branch:
From Outside Parties:

From Home Office Billed at Cost with Freight Charges:

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Branch PPE
Case A: Plant Assets are recorded in the books of the
Branch but purchased by the Home Office for the
Branch

Case B: Plant Assets are recorded in the books of the

Home Office but purchased by the Home Office for
the Branch
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Case C: Plant Asset are recorded in the books of the
Home Office but purchased by the Branch for the
Branch
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Observation
1. Freight Costs incurred in shipping merchandise
from the HO to Branch become part of the cost of
the branch inventory.
2. Shipments to Branch is subtracted from the total of
beginning inventory and purchases in the
computation of home office's COGS for the period.
3. Shipments from Home Office account on the
branch books is included in the computation of the
branch's COGS as an addition to purchases.
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Observation
4. The HO Shipments to Branch and branch Shipments
from HO account are nominal accounts and
therefore closed at the end of the period to
Income Summary account together with the
revenue and expense accounts.
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TRANSACTIONS
Apportionment of Expenses:
Utilities Expenses (Expenses incurred by branch and billed to HO
account)
Depreciation Expenses (Branch Plant Assets carried on HO books)
Advertising Expenses (Allocated to Branch)
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Observation

Not Only Assets can be transferred BUT ALSO the

allocated expenses.

Elimination Entries:
RECONCILIATION OF RECIPROCAL ACCOUNTS
(Common Errors)
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2. SPECIAL PROBLEMS - BRANCH ACCOUNTING
1. Merchandise Shipments to Branch at price in
excess of cost, @ billed price
2. Inter-branch Transfers of Cash
3. Inter-branch transfer of Merchandise.
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2. SPECIAL PROBLEMS - BRANCH ACCOUNTING
1. Merchandise Shipments to Branch at price in
excess of cost, @ billed price
When billings to the branch exceed cost, the
profits determined by the branch will be less than
actual profits.
Inventories reported by the branch are overstated
in as much as they were valued based on the billed
price, NOT THEIR COST.
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Observation

Home Office records the overvaluation.

Allowance for Overvaluation of Branch Inventory is also called Unrealized Profit in

Branch Inventory.

Branch Income is NOT CLOSE to Investment in Branch; might result to unbalanced

amount.

Only the reported income or loss of branch is closed to Investment in Branch.

Allowance for Overvaluation will remain until the shipment is shifted is reshipped or
sold by the branch to outsiders. (Unrealized Realized Profit)
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Observation
On the 1st year, the elimination of the intercompany
shipments requires the complete elimination of
Unrealized Profit account, because there's NO
Beginning Inventory.
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TREATMENT OF BEGGINNING BILLED ABOVE COST
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Observation
Realized Profit is the amount that Branch Net Income
is Understated

Concern means TRUE

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TRANSACTIONS BETWEEN BRANCHES
Inter-branch Transfers of Cash
Accounting Rule: The Branch will clear such transfer
through its Home Office Account
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Inter-branch Transfers of Merchandise
Accounting Rule:
Branches SHOULD NOT CARRY an account with another
branch but should be clear the transfer through its Home
Office account.
Freight on Goods received by the branch directly from HO are
properly included in the cost of branch inventory, but the
transfer of merchandise from one branch to another does
not justify increasing the inventory value by the additional
freight costs incurred because of the indirect routing
Excess freight costs should be absorbed by the Home Office
and treated as Expense.
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Explanation to the Accounting Rule:
Recording as an expense the excess freight cost on
merchandise transferred from one branch to
another is a manifestation of the accounting
principle that losses should be given prompt
recognition.
The excess freight cost arising from such shipments
generally is a result of inefficient planning of
original shipments and therefore should not be
included in inventories.
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Branch True Income Statement (T-account)
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End Of Home and Branch Accounting