Chapter 1

Home Office And Branch Accounting – General Procedures

In their effort to generate more sales, business firms usually widen the geographical area they cover.
Their services are available in more areas through their traveling salesmen or by shipments on
consignment. Frequently however, better results are achieved with new sales outlets established at
strategic locations. The creation of these outlets develops business in distant areas or improves the
company’s share of existing markets through more effective and efficient contact with the customers.
Selling activities are undertaken by the different sales offices at the direction of the home office. Hence,
customers need not deal with the far away head office but with the nearest operating sales unit. The
desired goods, services and information are made more readily available to 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.

Sales Agency and Branch Distinguished

While both the sales agency and the branch office are vehicles for enlarging sales volume, they exhibit a
number of significant operational differences. A sales agency usually carries a line of samples or
displays merchandise but does not carry stocks of it. Orders are taken from customers and sent to the
home office for approval of credit. The home office then ships the merchandise directly to the customers.
The receivable accounts are maintained in the home office which also performs the collection function. A
working fund for sales agency expenses is provided by the home office and replenished when exhausted.
No other cash is handled by the sales agency.

On the other hand, branch office normally carries stocks of merchandise, which may be obtained solely
from the home office or a portion may be purchased from outside suppliers. The branch makes the usual
warranties with respect to quality, makes collections of accounts receivable, and functions in most respect
as an independent business unit.

A branch may be restricted until it is a little more than a sales agency. A sales agency may be expended
until it resembles a branch. The accounting procedures discussed in this chapter are for strictly defined
sales agencies and branches.

ACCOUNTING SYSTEM FOR SALES AGENCIES

The accounting process for the operation of a sales agency does not introduce any new accounting
problem because a sales agency is simply an extension of existing sales territories. A sales agency neither
keeps a complete set of books nor uses a double entry system of accounts. Ordinarily, a record of sales to
customers and a list of cash payments supported by vouchers are sufficient. An imprest system is usually
adopted by the home office for the working fund of the sales agency.

The entries made by the home office depend on whether sales agency net income is determined separately
or not separately. If the home office 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 goods sold
each agency must also be determined. If the perpetual inventory system is used, shipments to customers
of the sales agencies are debited to Cost of Goods Sold – Sales Agency and credited to Merchandise
Inventory. On the other hand, if the periodic inventory system is maintained, shipments to sales agency
ACCOUNTING 10 1
customer are recorded by debiting Cost of Goods Sold – Sales Agency and crediting Shipments of
Merchandise – Sales Agency. At the end of the accounting period, the account Shipments of
Merchandise – Sales Agency is deducted from the total
total of beginning inventory and purchases to
determine the cost of goods available for sale by the home office for its own operations.

If the home office elects not to determine separately the sales agency net income, the transactions of the
sales agency are
re recorded in the home office’s own revenue and expense accounts. Upon closing the
books, the Income Summary account shows the results of both operations.

When the home office transfers fixed assets to the sales agencies, the home office debits an appro
appropriate
asset account identified with the sales agency (For example, Furniture and Fixtures – Sales Agency) and
credits the appropriate asset account.

Illustrative Entries

Assume that Manila Trader, Inc. established a sales agency in Cebu. The revenues and
and expenses of the
home office are recorded separately from those of the sales agency. Moreover, operating results of the
sales agency and the home office are determined separately at the end of each accounting period.

The accounting entries prepared by Manila Trader, Inc. as a result of the establishment of Cebu Agency
and the subsequent activities are shown in Illustration 12-1.
12 1. Assume that the home office uses the
periodic inventory system.

ACCOUNTING 10 2
From the above entries, it can be seen how the operations of the sales agency are recorded on the books of
the home office. The home office specifically designate all assets, revenues, and expenses as relating to
the sales agency. At the end of the period, the home office computes the income of the agency to evaluate
its operation.

ACCOUNTING FOR BRANCH OPERATIONS

Normally, the home office and the branch maintain separate accounting systems. Each maintains a full
set of books with a complete self-balancing set of accounts. Each records its transactions with outside
parties in its own accounting system in the usual manner. In addition, both the home office and the
branch must record transactions with one another (inter-office transactions) in their respective accounting
systems.

Even though the home office and each branch maintain separate books, all accounts are combined for
external reporting so that the external financial statements will represent the company as a single
economic enterprise. As to the preparation of combined financial statements, by just adding together the
balances of the accounts in each accounting system will not result in the presentation of a single economic
entity. Certain elimination is necessary.

Reciprocal (Intracompany) Accounts

Transactions with outside are recorded in the usual manner. Transactions between the home office and a
branch are recorded in intracompany accounts. These accounts are reciprocal accounts between the
home office and the branch. When the books of both the home office and the branch are completely up to
date, the balance in a reciprocal account on the home office books will be equal but opposite that of the
related reciprocal account on the branch books. For example, if a reciprocal account on the home office
books has a P50, 000 debit balance of the same amount.

The reciprocal account on the books of the home office often is called Investment in Branch or Branch
Current, while the reciprocal account on the branch books may be labeled Home Office or Home Office
Current. When a company has several branches, a separate investment account for each branch is
maintained on the home office books.

The balance of the Investment in Branch account shows the extent of the home office’s investment in a
particular branch. The reciprocal Home Office account on the books of the branch represents the home
office’s equity in the branch and the balance is shown in place of owner’s equity in the separate financial
statements of the branch.

The balances of the two reciprocal accounts are adjusted for the same inter-company transactions. The
account balances are increased for asset transfer from the home office to the branch and decreased for
asset transfers from the branch to the home office. Adjustments to the accounts are also made for profits
and losses of the branch, with branch profits increasing the account balances and branch losses leading to
a decrease. Note that increases in the home’s Investment in Branch account are accomplished with debit
entries and decreases with credit entries. The opposite is true with respect to the Branch’s Home Office
account.

The reciprocal nature of the Investment in Branch and the Home Office accounts, and the way in which
they are affected by various transactions, can be shown as follows:

ACCOUNTING 10 3
Establishment of Branch

When a company
pany 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. To illustrate, assume that AMG Corporation
Corporation of Makati, establishes a branch in Cebu.
The home office transfers to the branch P100, 000 in cash, new office equipment that cost P20, 000. The
home office records the transfer with the following entry:

H(1) Investment in Cebu Branch 120, 000

Cash 100, 000
Office Equipment 20, 000

Note: Journal entries are numbered consecutively throughout the chapter so that each entry is identified.
Those entries made on the home office books are designated in this chapter by H,, while those on the
branch books are identified with B.

Cebu branch records the transfer of assets from the home office with the following entry:

B(2) Cash 100, 000

Office Equipment 20, 000
Home Office 120, 000

Note that after both the home office and the branch have recorded the transfer, the Investment in Cebu
Branch account on the home office books and the Home Office account on the branch books have
reciprocal balances of P120, 000.

Recognition of Branch Income or Loss

Income for each branch is computed periodically in the normal manner. Branches seldom compute
income taxes on individual income or record income tax expense on their books. Because the home
office and its branches are separate legal entities, income taxes are computed for the company as a whole.

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 Hoe Office account serves in place of retained earnings and
other owners’ equity accounts on the book of the branch. When the branch income or loss is reported to
the home office, an entry is made on the home office books to recognize the income or lloss of the branch.

For example, assume there is a credit balance of P60, 000 in the Cebu branch’s Income Summary account
at the end of the Cebu branch:
ACCOUNTING 10 4
B(3) Income Summary 60, 000
Home Office 60, 000
Close income summary

Upon receiving a report of Cebu branch’s income for the period, the home office records the following
entry:

H(4) Investment in Cebu Branch 60, 000

Cebu Branch Income 60, 000
Record Cebu branch income

These entries maintain the reciprocal relationship of the Investment in Cebu Branch account and the
Home Office account.

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 f merchandise from outside parties, and he branch
uses a periodic inventory system, the branch records the transaction as follows:

B(5) Purchases 10, 000

Cash or Accounts Payable 10, 000
Record purchase of merchandise from outsiders

Under the perpetual inventory system account is debited instead of Purchases. When merchandise is
transferred from the home to a branch, both the home office and the branch must record the transfer.
Merchandise is transferred from the home office to a branch either at the original cost to the home office
or at some amount in excess of that cost. In this chapter only merchandise transfer at original cost will be
discussed.

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 AMG’s home office transfers
merchandise with a cost of P80, 000 to its Cebu branch and the home office use periodic inventory
system. The transfer is recorded on the home office books with the following entry.

H(6) Investment in Cebu Branch 80, 000

Shipments to Branch 80, 000
Transfer of merchandise to Cebu branch.

The balance of the Shipments to Branch account is subtracted from the total of beginning inventory and
purchases in the computation of the home office’s cost of goods sold for the period. This reduces the total
goods available for sale and avoids an overstatement of cost of goods sold.

The branch records the merchandise received with the following entry:

B(7) Shipments from Home Office 80, 000

Home Office 80, 000
Transfer of merchandise from home office.

ACCOUNTING 10 5
The Shipments from Home Office account on the branch books is included in the computation of the
branch’s cost of goods sold as an addition to purchases; it increases the branch’s total goods available for
sale.

The office’s Shipments to Branch account and the branch’s Shipments from Home Office account are
nominal accounts and therefore closed at the end of the period to Income Summary account together with
the other revenue and expense accounts.

Freight Charges on Merchandise Shipments. Freight costs incurred in sipping merchandise from the
home office to a branch become part of the cost of the branch inventory. For example, assume that
AMG’s home office pays P5, 000 to transport P80, 000 of merchandise to the Cebu branch. The transfer
is recorded by the home office with the following entry:

H(8) Investment in Cebu Branch 85, 000

Shipments to Branch 80, 000
Cash 5, 000
Transfer of merchandise to Cebu branch .

Cebu branch records the transfer as follows:

B(9) Shipments from Home Office 80, 000

Freight-In 5, 000
Home Office 85, 000
Transfer of merchandise from home office.

Accounting for Branch Plant Assets

The procedures to be used in accounting for branch plant assets will depend on whether branch plant
assets are recorded in the branch books or in the home office books.

If branch plant assets are recorded in the books of the branch, and plant assets are purchased by the home
office for the branch, an entry is required on the books of both the home office and the branch. As an
illustration of this, assume that the home office purchases P30, 000 of office equipment for its Cebu
branch. The home office records the purchase with the following entry:

H(10) Investment in Cebu Branch 30, 000

Cash 30, 000
Transfer of equipment for Cebu branch .

The purchase is recorded by the branch with the following entry:

B(11) Office Equipment 30, 000

Home Office 30, 000
Purchase of equipment by the home office.

If branch plants assets are recorded in the books of the home office rather than on the books of the branch,
no entry is needed on the books of the branch if the home office makes the purchase. For example, if the
home office purchases P30, 000 of office equipment for the Cebu branch, the home office records the
purchase as follows:

ACCOUNTING 10 6
H(12) Office Equipment – Cebu Branch 30, 000
Cash 30, 000
Purchases of equipment for Cebu branch.

On the other hand, if the branch purchases plant assets that are recorded on the books of the home office,
entries are needed by both the home office and the branch. As an example, assume that Cebu branch
purchases P30, 000 of office equipment to be used by the branch. The branch records the purchase with
the following entry:

B(12) Home Office 30, 000

Cash 30, 000
Purchase of equipment.

The home office records the purchase as follows:

H(13) Office Equipment – Cebu Branch 30, 000

Investment in Branch 30, 000
Purchase of branch equipment by Cebu branch.

When the branch purchases an asset that is carried on the home office books, the balance of both the
reciprocal accounts is reduced. The transaction is treated as if the branch had purchased equipment for
the home office.

Apportionment of Expenses

Branch expenses incurred and paid by the branch are recorded directly on the books of the
branch in the usual manner. However, the home office may allocate expenses to a branch. These
allocated expenses might be of several types:

a. Expenses incurred by the branch but paid by the home office.

b. Expenses incurred by the home office on behalf of the branch; for example, depreciation
on branch equipment carried on the home office books.
c. Allocations of expenses incurred by the home office; for example, a portion of the cost of
general advertising.

Illustration

As an illustration of the treatment of the allocated home office expenses to the branch, assume
that the home office incurs the following expenses assigned to its Cebu branch:

Utilities expense (expenses incurred by Cebu branch

and billed to home office account P 15, 000
Depreciation expense (on Cebu branch fixed assets carried
on home office books. 5, 000
Advertising expense (allocated to Cebu branch 10, 000
Total P30, 000

ACCOUNTING 10 7
The home office already has recorded these expenses in the usual manner, as if they are related
to the home office. Periodically, the home office notifies the branch of the allocated expenses.
The home office records the following entry upon notifying the branch of the P30, 000 of
allocated expenses:

H(14) Investment in Cebu branch 30,000

Utilities Expense 15, 000
Depreciation Expense 5, 000
Advertising Expense 10, 000
Allocated expenses to Cebu branch.

Upon notification of the expenses by the home office, the branch records the expenses as
follows:

B(15) Utilities Expense 15,000

Depreciation Expense 5,000
Advertising expense 10,000
Home Office 30,000
Allocated expenses from the home office.

Without the entries, the home office income would be understand and the branch income
overstated.

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 or intracompany account balances must be
eliminated because they relate to activities within the company rather than activities between the
company and outside parties.

To facilitate the preparation of combined financial, statements, a working paper normally is used
to combine the accounts of the home office and its branches, and to eliminate the reciprocal
accounts. All eliminators are only made in the working paper, not on the separate books of the
units being combined.

Illustration

As an illustration of the basic elimination entries needed to prepare combined financial

statements for a company with branch operations, assume the following balances of the
reciprocal account on December 31, 2013 after adjusting and closing entries have been prepared:

Investment in Branch P 295, 000

Home Office 295, 000
Shipments to Branch 85, 000
Shipments from Home Office 85, 000

ACCOUNTING 10 8
To facilitate the preparation of combined financial statements on December 31, 2013, working
paper is to be used. The following working paper elimination entries (E) are needed:

E(16) Home Office 295, 000

Investment in Branch 295, 000
Eliminate reciprocal accounts
E(17) Shipments to Branch 85, 000
Shipments from Home Office 85, 000
Eliminate shipments of merchandise

These entries do not appear on the books of either the home officer or the branch. A
working paper for combining the accounts of a home office and a branch is illustrated in the
next section.

ACCOUNTING FOR BRANCH OPERATIONS ILLUSTRATED

As comprehensive illustration of accounting for branch operations, assume that MCG, Inc.
of Quezon City, a distributor of computer equipment, establishes a branch sales office in
Cebu City. Both the home office and the branch use the periodic inventory system. Branch
fixed assets are recorded on the home office books. Transactions during 2013, the first year
of branch operations, are summarized below:

a. Cash is sent to Cebu branch, P10, 000.

b. Merchandise is shipped to the branch at cost, P 100, 000.
c. Store equipment is purchased by the branch and carried and carried in the home
office books, P5, 000.
d. Credit sales:
Home office, P450, 000.
Branch, P120, 000.
e. Collection of accounts receivable:
Home office, P500, 000
Branch, P110, 000.
f. Operating expenses paid:
Home office, P76, 000.
Branch, P30, 000.
g. Cash remittance by Cebu branch to home office, P50, 000.
h. Operating expenses charged by home office to branch, P6, 000.

The journal entries to record the 2013 transactions on the books of MCG’s home office and the
Cebu branch are shown in Illustration 12-2. The necessary closing entries on December 31, 2013
are presented in Illustration 12-3. In the journal entries recording inter-office transactions, take
note the reciprocal relationship of the reciprocal accounts.

ACCOUNTING 10 9
Illustration 12-2

Home Cebu Branch Books

(a)Investment in Cebu Branch 10, 000 Cash 10,000
Cash 10, 000 Home Office 10, 000
transfer of cash to Cebu Transfer of cash from
Branch. Home office.

(b) Investment in Cebu Branch 10, 000 Shipment from HO 10, 000
Shipment to branch 10, 000 Home Office 10, 000
Transfer of merchandise Transfer of merchandise
to branch from home office.

(c) Store equipment- Cebu Home Office 5, 000

Branch 5, 000 Cash 5, 000
Investment in Cebu Office equipment purchase
Branch 5, 000 by the Home office
Store equipment purchase
for the branch.

(d) Accounts receivable 450,000 Accounts receivable 450, 000

Sales 450,000 Sales 450, 000
Sales of merchandise Sale of merchandise.

(e) Cash 500, 000 Cash 110, 000

Accounts Receivable 500, 000 Accounts Receivable 110, 000
Collections on account. Collection on account.

(f) Operating Expenses 76, 000 Operating Expenses 30, 000

Cash 76, 000 Cash 30, 000
Operating expenses paid. Operating expense paid.

(g) Cash 50, 000 Home Office 50, 000

Investment in Cebu Cash 50, 000
Branch 50, 000 Cash remittance to home
Cash remittance from office
Cebu branch.

(h) Investment in Cebu Branch 6, 000 Operating Expenses 6, 000

Operating Expenses 6, 000 Home office 6, 000
Operating expenses Operating expenses
allocated to Cebu branch. allocated by the home office.

Closing Entries. Assume that the branch inventory on December 31, 2013 amounts to P40, 000.
The closing entries on the books of the Cebu branch and the home office are presented below:

ACCOUNTING 10 10
Illustration 12-3
Home Office Books Cebu Branch Books
(1) Sales 450, 000 Sales 120, 000
Income Summary 450, 000 Income Summary 120, 000
Close sales. Close sales.

(2) Income Summary 290, 000 Income Summary 60, 000

Inventory. 12/31 90, 000 Inventory. 12/31 40, 000
Shipments to Branch 100, 000. Shipment from HO 10,000
Inventory. 1/1 80, 000 Close cost of sales.
Purchases 400,000
Close of costs of sales.

(3) Income Summary 70, 000 Income Summary 36, 000

Operating Expenses 70, 000 Operating expenses 36, 000
Close operating expenses. Close operating expenses

(4) Investment in Cebu branch 24, 000 Income Summary 24, 000
Cebu Branch Income 24, 000 Home Office 24, 000
Record income from Cebu Close income summary.
branch.

(5) Cebu branch Income 24, 000

Income Summary 24, 000
Close Cebu branch income.

(6) Income Summary 114, 000

Retained Earnings 114, 000
Close income summary.

Note: Some of the amounts in closing entry (2) are assumed.

After the entries in Illustration 12-2 and 12-3 have been posted, the Investment in Cebu Branch
account on the books of the home office will have a debit balance of P85, 000. The balance of
the account is determined as follows:

Illustration 12-4:

(Home Office Books)

Investment in Cebu Branch

Cash sent to branch P 10, 000 Equipment purchased by

branch recorded on home
Merchandise shipped to office books P 5,000
Cebu branch 10, 000 Cash received from Cebu

ACCOUNTING 10 11
Operating expenses charged branch 50, 000
to Cebu branch 6, 000
Cebu branch income 24,000 Balance forwarded 85, 000
P 140,000 P140, 000

Balance P 85, 000

On the other hand, the Home Office account on the books of the branch will have a credit
balance of P85, 000, determined as follows:

(Branch Books)
Home Office

Equipment purchased, recorded Cash received from home

in home office books P5, 000 office P10, 000
Cash sent to home office 50, 000 Merchandising received
from home office 100, 000
Operating expenses charged
by home office 6,000
Balance forwarded 85, 000 Net income 24, 000
P140, 000 P140,000

Balance P85, 000

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 result and financial statements so that it may the
branch. The home office also prepares its own operation and its own financial position.

Based on the data in Illustration 12-2, 12-3 and 12-4, the separate financial statements for the
branch and the home office are presented below and in the next page.

Illustration 12-5

Financial Statements- Cebu branch:

MCG Company-Cebu Branch

Statement of Financial Position
December 31, 2013

ACCOUNTING 10 12
Assets
Cash P 35, 000
Accounts receivable 10, 000
Inventory 40, 000

Total P 85, 000

Liabilities and Equity

Home Office P85, 000

MCG Company-Cebu Branch

Statement of comprehensive Income
For the Year Ended December 31, 2013

Sales P120, 000

Cost of sales:
Shipment from home office P100, 000
Inventory, December 31 40, 000 60, 000

Gross income 60, 000

Operating expenses 36, 000

Comprehensive Income P 24, 000

Financial Statements-Home Office:

MCG Company-Home Office

Statement of Financial Position
December 31, 2013

Assets
Cash P 54, 000
Accounts receivable 60, 000
Inventory 90, 000
Store equipment P195, 000
Less: Accumulated depreciation 20, 000 175, 000

Store equipment-Cebu branch 5, 000

Investment in branch 85, 000

Total P 469, 000

ACCOUNTING 10 13
Liabilities and Equity
Accounts payable P 85, 000
Capital stock 200, 000
Retained earnings 184, 000

Total P 469, 000

MCG Company- Home Office

Statement of Comprehensive Income
For the Year Ended December 31, 2013

Sales P450, 000

Cost of Sales:
Inventory, January 1 P 80, 000
Purchases 400, 000

Merchandise available for sale 480, 000

Shipments to branch 100, 000

Merchandise available for own sale 380, 000

Inventory, December 31 90, 000 290, 000

Gross income 160, 000

Operating expenses 70, 000

Net income from own operation 90, 000

Cebu branch income 24, 000

Comprehensive income P114, 000

Combined for Financial Statements

Combined financial statements of the home office and the branch are prepared to show the
effects of business transactions of the business entity with outsiders. To achieve this,
intercompany 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 and the three-section working paper. In accounting for branch
operations the trial balance working paper is normally used. The other format will be used in
parent-subsidiary accounting.

The combined statements working paper using the trial balance approach for MCG Company for
2013 appears in Illustration 12-6.

ACCOUNTING 10 14
The following elimination entries are required in the working paper:

E(1) Home Office 85, 000

Investment in Cebu Branch 85,000
Eliminate Home Office account against Investment
in Branch account

E(2) Shipments to Branch 100,000

Shipments from Home Office 100,000
Eliminate Shipments to Branch and shipments
from Home Office accounts.

The following points should be noted in the working paper:

1. Accounts having debit balances are first listed follow by accounts with credit balances.
Beginning inventories are reported in the adjusted trial balances as debits; these are to be
recognized in arriving at cost of sales. Ending inventories are presented as debits so that
they may be recognized as assets in the preparation of the balance sheet. Accordingly,
they are also presented under the credits so that they may be recognized as deductions
from cost of merchandise available for sale in arriving at the cost of sales. Retained
earnings presented under the credits should be beginning balance.

2. The Home office account is eliminated against the Investment in Branch account
(elimination entry no. 1)

3. Shipments to Branch account is eliminated against the Shipments from Home Office
account (elimination entry no. 2).

The combined financial statements for MCG Company prepared from the working paper
in Illustration 12-6 are shown in Illustration 12-7.

ACCOUNTING 10 15
ACCOUNTING 10 16
Combined Financial Statements Illustrated

The formal combined statements are easily prepared using the data found in the working paper.
The combined statements of MCG Company are presented below:

Illustration 12-7

MCG Company
Combined Statement of CI
For Year ended December 31, 2013

Sales P570, 000

Cost of goods sold:
Inventory, January 1 P 80, 000
Add Purchases 400, 000

Cost of goods available for sale 480, 000

Inventory, December 31 130, 000 350, 000
Gross profit 220, 000
Operating expenses 106, 000

Comprehensive income P114, 000

MCG Company
Combined Statement of Financial Position
December 31, 2013

Assets P 89, 000

Cash 70, 000
Inventory, December 31 130, 000
Store equipment P200, 000
Less Accumulated depreciation 20, 000 180, 000

Total Assets P469, 000

Liabilities and Stockholders’ Equity

Liabilities:
Accounts payable P85, 000
Stockholders’ equity:
Capital stock, P100 par value P200, 000
Retained earnings 184, 000 384, 000

Total Liabilities and Stockholders’ Equity P469, 000

ACCOUNTING 10 17
RECONCILIATION OF RECIPROCALACCOUNTS

The Investment in Branch account on the home office books and the Home Office account on the
branch books are reciprocal accounts and theoretically, should have the same balance at the end
of the accounting period. However, this condition seldom exists in practice because of
bookkeeping or mechanical errors such as duplication of entries, slides and transpositions on
either set of books that have occurred, or certain transactions may already have been recorded by
one office and not yet by other, or there is a time lag between the recording of the same
transaction on the home office and branch books.

The home office, for example, debits Investment in Branch account immediately upon the
shipment of merchandise to the branch, The branch, on the other hand, credits Home Office
account only at a later time when the merchandise are received, which may be several days after
the shipment by the home office. Another example of a transaction which causes different
balances in the two accounts is the remittance of cash by the branch to the home office. Entry on
the branch books of the cash remittance is not recorded by the home office while the cash is still
in transit The lack of agreement between the reciprocal accounts pesos no problem during the
accounting period. However, at the end of the accounting period, the reciprocal accounts must be
brought into agreement before combined financial statements are prepared.

The data to be considered in reconciling the two accounts may be classifies as follows:

1. Debits in the Investment in Branch account without corresponding credits in the Home
Office account.
2. Credits in the Investment in Branch account without corresponding debits in Home
Office account.
3. Debits in the Home Office account without corresponding credits in the Investment in
Branch account.
4. Credits in the Home Office account without corresponding debits in the Investment in
Branch account.
5. Bookkeeping or mechanical errors on either set of books.

As an illustration of the procedures of reconciling account balances at year-end, assume that the
home office and the branch accounting records of Sweet Company contain the following data on
December 31, 2013:

ACCOUNTING 10 18
 Investment in Branch (Home Office Books)

Nov. 30 Balance P 50, 000 Dec. 9 Cash received from

branch P30,000
Dec. 1 Expenses paid chargeable 28 Collection of branch
to branch 1,450 accounts receivable 5, 000
30 Merchandise shipped
to branch 20, 000 Balance forwarded 36, 450
P71, 450 P71, 450

Balance, December 31 P36, 450

Home Office (Branch Books)

Dec. 8 Cash sent to home Nov. 30 Balance P 50, 000

office P30, 000
29 Purchased office Dec. 1 Expenses 1, 540
equipment 8, 000 28 Collection of home
Balance forwarded 19,540 office account receivable 6, 000
P57, 540
P 57, 540 Balance, December 31 P 19, 540

An analysis of the accounts shows the existence of five reconciling items, which are discussed
below:

1. A debit of P20, 000 in the Investment Branch account without a corresponding credit in
the Home Office account.

On December 30, the home office shipped merchandise to the branch in the amount of
P20, 000. The shipment has not yet reached the branch as of December 31 and, therefore,
no entry for the shipments appears on its books. The required adjustment at year-end for
this type of reconciling item will be an entry on the branch books as follows:

Shipments from Home Office-In Transit 20, 000

Home Office 20, 000

The account Shipments from Home Office-In transit is closed to the Income Summary account.
In the preparation of the statement of comprehensive income for the branch, the P20, 000
balance in the account Shipments from Home Office-In Transit is added to the balance of the
account Shipments from Home Office. The total of these two accounts is now equal to the
amount shown in the home office records as its shipments to branch. Therefore, the reciprocal
accounts can now be eliminated for the purpose of preparing a combined statement.

ACCOUNTING 10 19
In addition, the branch in determining its ending in inventory, must add to its inventory on the
hand the P20, 00 worth of merchandise in transit. This lot of merchandise will appear in the
branch statement of financial position and will also be a part of the total inventory in the
combined financial statement.

2. A credit of P5, 000 in the Investment Branch account without a corresponding debit in
the Home Office account.

On December 28, an accounts receivable of the branch was collected by the home office
from a branch customer. The collection was recorded by the home office by a debit to
Branch Current account. No entry has been made by the branch, therefore, the following
entry is required on the branch books:

Home Office 5, 000

Accounts Receivable 5, 000

3. A debit of P8, 000 in the Home Office account without a corresponding credit in the
Investment in Branch account.

On December 29, the branch purchased office equipment for P8, 000. Since assets used
by the branch are carried in the home office records, the entry made by the branch for the
purchase was a debit to Home Office and a credit to Cash. No entry has been made by the
home office, therefore, the following entry should be made in home office books:
Office Equipment-Branch 8, 000
Investment in Branch 8, 000

4. A credit of P6, 000 in the Home office account without a corresponding debit the
investment in branch account.

On December 28, the branch collected for the home office an accounts receivable
amounting to P6, 000 from a home office customer. The collection was recorded by the
branch by a debit to Cash and a credit to Home Office account.

No entry has been made by the home, office, therefore, the following entry is required on
the home office books:

Investment in branch 6, 000

Accounts receivable 6, 000

5. A debit of P1, 450 in the Investment in Branch account was erroneously recorded by the
branch in the Home office account as P1, 540, resulting to a difference of P90 (P1, 540-
P1, 450). The home office entry is assumed to be correct. The following entry is required
on the books of the branch:

ACCOUNTING 10 20
 Home Office 90
Expenses 90

The effect of these five end-of-period adjusting entries is to bring the reciprocal accounts
into agreement, as shown by the following reconciliation statement.

Illustration 12-8

Sweet Company-Home Office and Branch

Reconciliation of Reciprocal Accounts
December 31, 2013

(Home Office Books) ) (Branch Books)

Investment in Branch Home Office
Account Account

Balances before adjustments P36, 450 (Dr) P19, 540 (Cr)

Additions:
(1) Merchandise shipped
to branch still in transit 20, 000
(4) Receive of home office
,
collected by branch
,
39, 540
Total
Deductions:
(2) Receivable of branch
by home office ( 5, 000)
(3) Office equipment
purchased by branch ( 8, 000)
(5) Error made by branch
recording expenses ( 90)

Adjusted balances P34, 450(Dr) P34, 450 (Dr

ACCOUNTING 10 21