HOME OFFICE AND

BRANCH
ACCOUNTING
ACCOUNTING SYSTEM FOR A BRANCH
There are at least three methods in accounting for a branch
depending upon the home office policy:
• No set of books are carried in the branch. All of its
transactions are recorded in the home office books. The
branch renders periodic reports which are used as a
basis of recording.
• The branch maintains a complete set of accounting
records where all transactions are recorded. The home
office records also in its books all the branch
transactions based on its periodic reports.
• Branch maintains a complete sets of books where all
transactions are recorded. The home office uses the
equity method to track down its investment over the
branch.
 RECIPROCAL ACCOUNTS
The home office maintains an asset account Branch
Current to represent its right or interest over the branch
net assets. If there are two or more branches being
maintained by the home office, separate accounts should
be used for each. A reciprocal account Home Office
Current is set up on the books of the branch to
represent the ownership interest of the home office over
its net assets. It is similar to the title Owner’s Equity or
Shareholder’s Equity. The accounting equation in the
branch books will appear thus:

Assets = Liabilities + Home Office Current

Illustration of Reciprocal Accounts using
T-Accounts

Illustration 1
 Illustration 1 Explanation
Only the home office can debit or credit the Branch
account in its books and only the branch can debit or credit
the Home Office account in its books. Since the home office
and branch accounts are reciprocal, an increase to the Branch
Current (debit) account requires an increase (credit) to the
home office account and vice versa.

The Shipments to Branch is credited in the home office

books for merchandise shipped to the branch while its
reciprocal account Shipments from Home Office is debited
in the branch books. The Shipments to Branch together with
the ending inventory is shown as a deduction from the goods
available in the home office income statement while
Shipments from Home Office together with Inventory
Beginning and Purchases from part of goods available for sale
in the branch income statement.
 ILLUSTRATIVE ENTRIES FOR BRANCH
TRANSACTIONS
Assume that Smart Corporation opened a branch in
Manila. Merchandise is shipped at cost and the periodic
inventory system is used. Fixed assets are carried in the
branch books and the home office bills the branch for
expenses paid on its behalf. The following are the opening
balances of the home office on for 2016:
 The transactions of the home office and the branch show the following:

1. Transferred cash of P200,000 and merchandise costing P300,000 to the

newly opened branch in Makati.
2. Equipment amounting to P75,000 is purchased for cash by the home
office and then transferred to Makati branch.
3. Sales on credit: Home Office, P950,000 and Branch, P600,000.
4. Account purchases: Home Office, P700,000 and Branch P200,000.
5. Payment of Expenses: Home Office, P200,000 and Branch, 150,000.
6. Branch Expenses paid by Home
Office, P25,000.

7. Cash collections: Home Office, P750,000 and Branch, P500,000.

8. Branch remitted P200,000 cash to home office.
9. Payment of liabilities: Home Office, P175,000 and Branch, P90,000.
• The Brach Current will have a debit balance of P467,500
and its reciprocal account. Home Office Current will also
have the same balance but on the credit side.

• Entries 11 and 12 are adjusting entries while entries 13 to

16 are closing entries. Note that the Retained Earnings was
credited as a result of both the home office and branch net
income of P338,500 and P97,500, respectively.

• We can therefore conclude that although the branch could

operate as an independent unit, ultimately the result of its
operation is combined or brought forward to the home office
since it is merely an extension of the Home Office.
 BRANCH EXPENSES

Some branch expenses are paid by the home

office. The branch is given a memorandum for this
so it could be properly taken up in the branch books.
Sometimes these are not transmitted to the branch,
instead the home office just modifies the report
submitted by the branch and changes the reported
net income accordingly.
 BRANCH PLANT ASSETS
It is not unusual for all plant assets to be recorded only in
the home office books. This way, a standard procedure could
be carried out for acquisition, depreciation and retirement of
all plant assets. If the plant asset would be purchased by the
home office for the branch, the branch plant asset and
accumulated depreciation should be kept in the home office
books. Pro-forma entries will be:
If the plant asset was purchased by the branch, first entry above
will change as follows:

There are times the branch is allowed by the home office to

carry its own plant asset account in which case the plant assets
and its accumulated depreciation is carried in the branch books.
If the plant asset is purchased by the home office, the pro-forma
entries will be:
 Take note that the depreciation expense is always in
the branch books whatever the home office policy is because
actual utilization of the asset is by the branch. Accumulated
depreciation follows the principal account.

Suppose the plant asset was purchased by the branch?

Then no entry is prepared by the home office. Entries to record
the purchased plant asset and its depreciation are carried in the
books of the branch in the usual manner:
 FREIGHT CHARGES ON MERCHANDISE
SHIPMENTS TO BRANCH
• Part of the BRANCH INVENTORY either by debiting:
1. Inventory
2. Freight In
• In case of returns, FREIGHT is charged to REVENUE.

ILLUSTRATION:
Home office ships merchandise worth P10,000 to the branch
and paid freight of P1,500. Half of the stock was returned to the
home office and the branch paid P500. P750 of the freight on
the shipment and P500 of the freight for returns should be
debited to a loss account for P1,250. Entries in both books
appears as follow:
 FINANCIAL STATEMENTS
Branch’s separate financial statements help the
management to:
1. Have an overview of branch’s operation
2. Know branch’s financial position

However, COMBINED FINANCIAL STATEMENTS of

BRANCH and HOME OFFICE are more useful for the
users like creditors, investors and the like.

In combined financial statements, RECIPROCAL

ACCOUNTS must be ELIMINATED.
 Using the previous illustration, the individual and combined financial
statements of the home office and branch will appear as follows:
NOTES RE: COMBINED INCOME STATEMENT —

RECIPROCAL SHIPMENT ACCOUNTS were ELIMINATED.

COMBINED net income = INDIVIDUAL final net income of Home Office.

NOTES RE: STATEMENT OF FINANCIAL POSITION OF HOME
OFFICE
Investment Account was updated for the reported branch profit of
P97,500.
Retained Earnings adjusted for the total net income of P436,000.

NOTES RE: COMBINED BALANCE SHEET

Reciprocal Accounts (Investment in Branch and Home Office Equity)
were eliminated.

COMBINED BALANCE SHEET AND HOME OFFICE INDIVIDUAL

BALANCE SHEET
HOME OFFICE net assets of P1,036,000 (P1,603,000 - P567,000)
is the same as
COMBINED net assets (P1,713,000 – P677,000)

WHY?
In Home Office’s individual report,
Investment in Branch represents equity over net assets of branch at
P467,500.
• To facilitate preparation of Combined Financial Statements,
WORKING PAPER should be prepared.
• Note that working paper adjustments are NOT FORMALLY
JOURNALIZED either in the books of Home Office or Branch.
INTERBRANCH TRANSACTIONS
• A home office may establish more than one branch in
which case it maintains as many investment accounts as
there are branches.
• These branches may be authorized by the home office to
make inter-branch transactions.
• Accounting procedure is to pass the transfer through the
home office accounts (As if the transaction was between
the home office and the branch.)
 INTERBRANCH TRANSFER OF CASH
IllUSTRATION:
A. Home office transferred cash to Cebu branch, P10,000.
B. Cebu branch was instructed by the home office to transfer P3,000 of its
cash to Davao branch.
HOME OFFICE BOOKS – BRANCH ACCOUNT
A. Cebu Branch Current 10,000
Cash 10,000

B. Davao Branch Current 3,000

Cebu Branch Current 3,000

CEBU BRANCH BOOKS – HOME OFFICE ACCOUNT

A. Cash 10,000
Home Office Current 10,000

B. Home Office Current 3,000

Cash 3,000
DAVAO BRANCH BOOKS – HOME OFFICE ACCOUNT
A. NO ENTRY

B. Home Office Current 3,000

Cash 3,000
 INTERBRANCH TRANSFER OF MERCHANDISE
• If the merchandise is transferred from one branch to another:
• Allocate the freight
• Branch in the receiving end should only be charged for normal
freight that it will incur had the merchandise been shipped
directly from the home office.
• Excess freight - incurred because of indirect routing of
shipments.
• -absorbed by the home office as operating expense or loss on
merchandise transfers.
• Reduction in freight is treated as savings by the home office.
IllUSTRATION:
A. Home office shipped goods to Davao branch costing P5,000 and
paid freight of P200.
B. Home office instructed Davao branch to transfer merchandise to
Cebu branch. Cebu paid freight of P100 for the transfer made.
Normal freight from home office to Cebu is only P150.
HOME OFFICE BOOKS – BRANCH ACCOUNT
A. Davao Branch Current 5,200
Shipments to Davao Branch 5,000
Cash 200

B. Cebu Branch Current 5,050

Excess Freight of Interbranch Transfer 150
Davao Branch Current 5,200

Shipments to Davao Branch 5,000

Shipments to Davao Branch 5,000
 CEBU BRANCH BOOKS – HOME OFFICE ACCOUNT
A. NO ENTRY

B. Shipments from Home office 5,000

Freight In 150
Home Office Current 5,000
Cash 100

DAVAO BRANCH BOOKS – HOME OFFICE ACCOUNT

A. Shipments from Home office 5,000
Freight In 200
Home Office Current 5,200

B. Home Office Current 5,200

Shipments from Home office 5,000
Freight In 200
 SHIPMENTS TO BRANCH AT BILLED PRICE (BILLED AT
MORE THAN COST)
BRANCH BOOKS HOME OFFICE BOOKS
Home Billed Price Billed Price
office/Branch
Current
Shipments Billed price Cost
Allowance for Mark Up (To get true
overvaluation - branch income, add
in Branch the realized mark up
Inventory to branch income)
(AFOBI)
Cost of sales Higher (compared to Lower (compared to
HO) Br)
Net profit Lower (compared to Higher (compared to
HO) Br)
Ending Higher (compared to Lower (compared to
Inventory HO) Br)
ILLUSTRATION:

Smart Corporation shipped merchandise to the branch billed

at P300,000 which is 20% above cost. The branch returned
P30,000 worth of merchandise to the home office. During the
year the branch reported sales of P600,000. Purchases of
P200,000 and expenses of P182,500. The home office reported
sales of P950,000, purchases of P700,000, expenses of
P221,500 and beginning inventory worth P120,000. Inventory
at the end of the year amounted to P160,000 for the home
office and P150,000 for the branch P90,000 of which came
from the home office.
 HOME OFFICE BOOKS – BRANCH ACCOUNT
JOURNAL ENTRIES:
Branch Current 300,000

Shipments to Branch 250,000

Allowance for Overvaluation in Branch inventory 50,000

Shipments to Branch 25,000

Allowance for Overvaluation in Branch inventory 5,000
Branch Current 30,000

CLOSING ENTRIES:
Inventory, end 160,000

Sales 950.000

Shipments to Branch 225,000

Expenses 221,500

Inventory, Beginning 120,000

Purchases 700,000

Income & Expense Summary 293,500

Branch Current 97,500
Branch Income and Expense Summary 97,500

Allowance for Overvaluation in Branch inventory 30,000

Branch Income and Expense Summary 30,000

Branch Income and Expense Summary 127,500

Income and Expense Summary 127,500

Income and Expense Summary 421,000

Retained Earnings 421,000

BRANCH BOOKS – HOME OFFICE ACCOUNT

JOURNAL ENTRIES:
Shipments from Home Office 300,000

Home Office Current 300,000

Home Office Current 30,000

Shipments from Home Office 30,000
CLOSING ENTRIES:
Inventory, end 150,000
Sales 600,000
Shipments from Home Office 270,000
Expenses 182,500
Purchases 200,000
Income & Expense Summary 97,500

Income & Expense Summary 97,500

Home Office Current 97,500-

TABLE SHOWING ADUSTMENT IN BRANCH PROFIT

BILLED PRICE MARK UP COST
(120%) (20%) (100%)
SHIPMENTS FROM HOME OFFICE P300,000 P50,000 P250,000
RETURNS (30,000) (5,000) (25,000)
INVENTORY, END (90,000) (15,000) (75,000)
COST OF SALES FROM SHIPMENTS P180,000 P30,000 P150,000
FROM HOME OFFICE
ILLUSTRATION:
Assume that in 2017, the home office shipped merchandise with a billed
price of P650,000, cost of P520,000 or a mark up of 20% of the billed
price. At the end of the year, the branch reported sales of P873,000,
purchases of P150,000, expenses of P100,000 including depreciation of
P7,500. Branch inventory at the end of the year amounted to P162,500
including P42,500 from outside suppliers.

HOME OFFICE BOOKS – BRANCH ACCOUNT

Branch Current 650,000
Shipments to Branch 520,000
Allowance for Overvaluation in Branch inventory 130,000

Branch Income and Expense Summary Branch Current 14,500

Branch Current 14,500

Allowance for Overvaluation in Branch inventory 121,000

Branch Income and Expense Summary 121,000

Branch Income and Expense Summary 106,500

Income and Expense Summary 106,500
 BRANCH BOOKS – HOME OFFICE ACCOUNT
JOURNAL ENTRIES:
Shipments from Home Office 650,000
Home Office Current 650,000

Cash 873,000
Sales 873,000

Purchases 150,000
Expenses 100,000
Cash 250,000

CLOSING ENTRIES:
Inventory, end 162,500
Sales 873,000
Income & Expense Summary 14,500
Shipments from Home Office 650,000
Expenses 100,000
Purchases 150,000
Inventory Beginning 150,000

Home Office Current 14,500

TABLE SHOWING ADUSTMENT IN BRANCH PROFIT
BILLED PRICE COST MARK UP

INVENTORY, BEGINNING P90,000 (120%) P75,000 (100%) P15,000(20%)

SHIPMENTS FROM HOME 650,000 (100%) 520,000 (80%) 130,000
OFFICE (20%)
TOTAL P740,000 P595,000 P145,000
LESS:INVENTORY, END 120,000 (100%) 15,000(80%) 24,000 (20%)
COST OF SALES FROM P620,000 P499,000 P121,000
SHIPMENTS FROM HOME
OFFICE

NOTE: mark up rate for current shipments is

expressed differently as compared to the
beginning inventory which is 20% of cost. From
the table, cost of sales is overstated by
P121,000 resulting in an understatement of net
income.
INITIAL EXPENSES IN A NEW BRANCH
• Operating losses may occur during the first months of operation of a
branch.
• It may be treated as a:
• A. DEFERRED COST – be spread over the years of operations of the
branch.
• B. EXPENSE (under conservative approach) – in the period it was
incurred.
RECONCILIATION OF RECIPROCAL ACCOUNTS
• Year end balances of the reciprocal accounts may not be the same
because of the following reasons:
• A. Certain transactions were not recorded by the home office or by
the branch.
• B. Errors were committed by either party
• Before combined financial statements are prepared, the reciprocal
accounts must be reconciled.
• Reconciling item is taken up by the party who was not able to record
the transaction or who committed the error.
 Debit Credit
Branch Current Account – Home office books Increase Decrease
(Asset)
Home office Current – Branch books Decrease Increase
(LIABILITY)

ILLUSTRATION:
The Branch current account has a balance of P42,500 while Home
office current has a balance of P38,000 on December 31.
Comparison of above postings show the following items:

A. A comparison of the postings on December 27 in the home office

books and December 28 in the branch books reveals a discrepancy
of P500. Assuming that the error was committed by the branch. The
error understated the shipment and the Home Office Current.
B. Branch receivable collected by the home office on December
28 was not yet recorded by the branch. The home office current
should be decreased for this item.

C. Equipment purchased by the branch on December 27 but to

be carried in the Home Office books was not yet recorded by
the home office. The branch current account should be
decreased for this item.

D. Merchandise returned by the branch on December 30, but

still in transit. The Branch Current account should be decreased
for this item.
 SMART CORPORATION – MANILA BRANCH
Reconciliation Statement of Reciprocal accounts
December 31, 2017

Branch Current account balance before adjustments P42,500

LESS: Equipment purchased by branch (not yet P8,000
recorded)
Merchandise returned by branch still in 2,000 10,000
transit
Adjusted Balance, Branch Current P32,500

Home office current balance before adjustments P38,000

ADD: Error in recording shipments from home 500
office amounting to P18,500 but recorded as
P18,000
Total P38,500
LESS: Unrecorded branch receivable collected by 6,000
the home office but not yet recorded by the
branch
Adjusted balance, Home Office Current P32,500
 HOME OFFICE BOOKS – MANILA BRANCH CURRENT ACCOUNT
Shipments to Branch – in transit 2,000
Office Equipment – Manila Branch 8,000
Manila Branch Current 10,000
To record fixed asset purchased by the
branch and the goods returned by the branch.

BRANCH BOOKS – HOME OFFICE CURRENT ACCOUNT

Shipments from Branch – in transit 500
Home office Current 500
To correct error in recording shipments
from home office.

Home office Current 6,000

Accounts Receivable 6,000
To record accounts receivable collected
by home office.
WORKING PAPER FOR COMBINED
FINANCIAL STATEMENTS
WHO NEED OBJECTIVE
To assess the
Individual performance of a
Management Financial branch as well as
Statements how its resources
have grown.
To make an
Combined economic
Stakeholders Financial judgment for the
Statements business as a
whole.
Working Paper
• used to facilitate the preparation of the combined financial
statements
CARDINAL RULE: ELIMINATE RECIPROCAL ACCOUNTS
Beginning with a Trial Balance, here are the procedures to be used to
eliminate the reciprocal accounts:
a) Eliminate the branch current account against the home office current
account.
b) Eliminate shipment from home office against the shipment to branch
and the related allowance for overvaluation in branch inventory.
c) Adjust the inventory beginning for the overstatement remaining in the
allowance for overvaluation in branch inventory.
d) Adjust the inventory end of the branch for the overstatement both in
the statement of financial position and in the income statement.
Take note of the following working paper entries:
FINANCIAL STATEMENTS
• *Note that the net income of the branch added to the net
income of the home office (HO) is not the same as what was
reported by the branch because it was adjusted for the
overstatement on the cost of sales of P121,000.00 (see
table). Also, note that the net income reported by the HO is
same net income as in the combined income statement.
• **When combining the inventory beginning of the branch
the HO, use the actual cost of P135,000.00 (P75,000.00
from shipment and P60,000.00 from purchases). The same
procedure is applicable for the ending inventory. In other
words, correct figures are what should be combined. Again,
the reciprocal accounts are eliminated.
*Note that in the statement of financial position of the HO,
the branch current account was updated for the reported
branch loss of P14,500.00 and the allowance for
overvaluation adjusted for P121,000.00 re-analysis of cost
of sales table. For combination purposes, ensure that
reciprocal accounts have been reconciled and are of the
same amounts.
ENTRIES UNDER THE PERPETUAL METHOD
The previous illustrations were under periodic method. If the perpetual
method is used, then the following entries will be affected.
ENTRIES UNDER THE PERPETUAL METHOD