11-1

Baker / Lembke / King

Accounting for Branch Operation

11
Electronic Presentation by
Rangga Handika
University of Indonesia
McGraw-Hill/ Irwin

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

11-2

What is branch ?

Branch
Branch Office
Office usually
usually has
has more
more autonomy
autonomy and
and
provides
provides aa greater
greater range
range of
of services
services than
than aa sales
sales
agency
agency does,
does, although
although the
the degree
degree differs
differs with
with
the
the individual
individual company.
company. For
For some
some companies
companies
the
the branches
branches perform
perform their
their own
own credit
credit function,
function,
while
while for
for other
other companies
companies credit
credit is
is handled
handled by
by
the
the home
home office.
office.
Sales
SalesAgency
Agencyisisaaunit
unitacting
actingon
onbehalf
behalfof
ofthe
thehome
homeoffice.
office.The
The
agency
agencymay
maydisplay
displayand
anddemonstrate
demonstratesample
samplemerchandise,
merchandise,take
take
orders,
orders,and
andarrange
arrangefor
fordelivery
delivery
McGraw-Hill/ Irwin

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Branch Operation

11-3

Intracompany
IntracompanyAccounts
Accounts

Transaction between the home office and a branch also

are treated in the normal manner that they are recorded
in intracompany accounts.
These accounts are reciprocal accounts between the
home office and the branch.

McGraw-Hill/ Irwin

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

11-4

Accounting for Branch Operation

Intracompany
IntracompanyAccounts
Accounts

Investment in branch
( Home Office Books )

xxx

Home Office
( Branch Books )

xxx

Asset transfers to branch

xxx
xxx
xxx

Asset transfer from

branch

xxx

Branch income

xxx

xxx

Branch loss

McGraw-Hill/ Irwin

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Branch Operation

11-5

Establishment
Establishment of
of Branch
Branch
A home office transfers to branch $ 20,000 in cash,
new office equipment that costs $ 5,000 and new store
equipment with a cost of $ 30,000
Home offices entries :

Branch offices entries :

Investment in Branch 55,000

Cash
20,000
Office equipment
5,000
Store equipment
30,000

Cash
20,000
Office equipment 5,000
Store equipment 30,000
Home Office
55,000

McGraw-Hill/ Irwin

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Branch Operation

11-6

Recognition
Recognition of
of Branch
Branch Income
Income
The branchs Income Summary has credit balance of
$ 63,000 at the end of the period.

Home offices entries :

Branch offices entries :

Investment in Branch 63,000

Branch Income
63,000

Income Summary
63,000
Home Office
63,000

McGraw-Hill/ Irwin

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Branch Operation

11-7

Merchandise
Merchandise shipment
shipment to
to aa Branch
Branch
The branch purchases $ 5,000 of merchandise from an
Independent wholesaler, and the branch uses a perpetual
Inventory system.

Home offices entries :

NO ENTRY

McGraw-Hill/ Irwin

Branch offices entries :

Inventory
5,000
Cash
5,000
( or Accounts Payable )

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Branch Operation

11-8

Merchandise
Merchandise Billed
Billed at
at cost
cost
Home office transfers inventory with a cost of $ 8,000
to the branch.

Home offices entries :

Branch offices entries :

Investment in Branch
Inventory

Inventory
8,000
Home Office
8,000

McGraw-Hill/ Irwin

8,000
8,000

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Branch Operation

11-9

Merchandise
Merchandise Billed
Billed at
at cost
cost
Home office transfers inventory with a cost of $ 8,000
to the branch. Furthermore, a freight cost has incurred
and been paid by Home Office for $ 100
Home offices entries :
Investment in Branch
Inventory
Cash

McGraw-Hill/ Irwin

Branch offices entries :

8,100
8,000
100

Inventory
8,100
Home Office
8,100

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Branch Operation

11-10

Merchandise
Merchandise Billed
Billed in
inexcess
excessof
of cost
cost
Home office ships a merchandise costing $ 12,000 and
bills to the branch for $ 15,000.

Home offices entries :

Investment in Branch
15,000
Inventory
12,000
Unrealized Inventory Profit
3,000

McGraw-Hill/ Irwin

Branch offices entries :

Inventory from HO
Home Office

15,000
15,000

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Branch Operation

11-11

Merchandise
Merchandise Billed
Billed in
inexcess
excessof
of cost
cost
The unrealized profit will be recognized when the
branch has sold the inventory externally. For instance,
the branch has sold 80% externally . . .
Home offices entries :

Branch offices entries :

Unrealized Inventory Profit 2,400

Realized Profit
2,400

NO ENTRY
( Just looks like normal sale entries )

McGraw-Hill/ Irwin

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

11-12

Accounting for Branch Operation

Branch
Branch Fixed
FixedAssets
Assets
Home Office purchases $ 30,000 store equipment
for branch.

Home offices entries :

Branch offices entries :

Investment in Branch
Cash

Store Equipment
Home Office

McGraw-Hill/ Irwin

30,000
30,000

30,000
30,000

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Branch Operation

11-13

Branch
Branch Fixed
FixedAssets
Assets
Home Office purchases $ 30,000 store equipment
for branch. However, the equipment is recorded
on the home office books.
Home offices entries :
Store Equipment Branch 30,000
Cash
30,000

McGraw-Hill/ Irwin

Branch offices entries :

NO ENTRY

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

11-14

Accounting for Branch Operation

Branch
Branch Fixed
FixedAssets
Assets

Branch purchases $ 30,000 of store equipment to be

used by branch but carried on the home office books.

Home offices entries :

Branch offices entries :

Store Equipment Branch 30,000

Investment in Branch
30,000

Home Office
Cash

McGraw-Hill/ Irwin

30,000
30,000

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Branch Operation

11-15

Apportionment
Apportionment of
of expenses
expenses
Home office incurs the costs assigned to its branch
as follows : Utilities expenses $ 14,000 ; Depreciation
expenses $ 3,000 and General overhead $ 18,000
Home offices entries :

Branch offices entries :

Investment in Branch 35,000

Utilities exp
14,000
Depreciation exp
3,000
General Overhead exp
18,000

Utilities exp
14,000
Depreciation exp
3,000
General Overhead exp 18,000
Home Office
35,000

McGraw-Hill/ Irwin

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

11-16

Accounting for Branch Operation

Eliminating
Eliminating Entries
Entries
Eliminating entries needed are :
( E1 )
Branch Income
Home Office, pre-closing balance
Investment in Branch
( E2 )
Realized profit on Branch Shipments
COGS
( E3 )
Unrealized intracompany profit
Inventory from Home Office
( E4 )
Inventory
Inventory from Home Office
McGraw-Hill/ Irwin

63,000
70,000
133,000
1,400
1,400
1,600
1,600
6,400
6,400

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Branch Operation

11-17

Transactions
Transactions between
between branches
branches
Branch A transfers $ 5,000 cash and $ 10,000 cost of
inventory to Branch B
Branch As entries :

Branch Bs entries :

Home Office
15,000
Cash
5,000
Inventory
10,000

Cash
5,000
Inventory
10,000
Home Office
15,000

Home Offices entries :

Investment in Branch B
Investment in Branch A
McGraw-Hill/ Irwin

15,000
15,000

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Branch Operation

11-18

Unrealized
Unrealized profit
profit in
in beginning
beginning Branch
Branch Inventory
Inventory
Intracompany profits included in a branchs beginning
inventory are recognized on the home office books as
being realized whenever the merchandise is sold
externally by branch.
In the period in which the branch sells the inventory to
external parties, the home office reduces its Unrealized
Intracompany Profit account and increases its Realized
Profit on Branch Shipment account.
McGraw-Hill/ Irwin

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Branch Operation

11-19

Unrealized
Unrealized profit
profit in
in beginning
beginning Branch
Branch Inventory
Inventory

When financial statements are prepared for the company

as a whole, the balance of the Realized Profit on Branch
Shipment account is eliminated against COGS and any
remaining Unrealized Intracompany Profits are eliminated
against the carrying amount of the inventory

McGraw-Hill/ Irwin

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Branch Operations

11-20

The
End
McGraw-Hill/ Irwin

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.