CHAPTER-TWO

ACCOUNTING FOR SALES

AGENCY & PRINCIPAL; HEAD
OFFICE AND BRANCH
 Objectives of this Chapter

After studying this chapter, you should be able to:

 Describe segments of a business enterprise,
primarily branches and divisions
 Prepare working paper for combined financial
statements
 Prepare combined financial statements for home
office and branches
 Understand the basic procedures for reconciliation
of reciprocal accounts
 Record transaction between branches

20-2
 Sales Agency, Branch & Division

Sales Agency
 Sales agency is a unit of an organization located at a
distance from the principal office which is used simply
to display items for sale.
 It doesn’t carry merchandise for sale, maintain
receivables or make collections
 It performs small portion of the function traditionally
associated with a branch.
 Orders are taken from customers and transmitted to the
home office which approves the customers’ credit and
ships the merchandise directly to customers.

20-3
 Sales Agency, Branch & Division
 As a business enterprise grows, it may establish one or
more branches to market its products over a large territory.
 Branches and divisions are separate economic entities from
their home office.
 However, they are not separate legal entities from their
home office.
 Branch is a business unit located at some distance from
Home Office which carries merchandise obtained from the
home office, makes sales, approves customers’ credit, and
makes collections from it’s customers.

20-4
 Sales Agency, Branch & Division
 Division is a segment of a business entity which generally
has more autonomy than a branch.
 Accounting for a division not operated as a separate
corporation is similar to that of branches.
 Accounting for a division operated as a separate
corporation is different from that of branches and will be
discussed in latter chapter (3).
 Consolidated financial statements are required for these
business organizations.

20-5
 Sales Agency, Branch & Division
Differences among Sales Agency, Branch and Division

Characteristics Sales Agency Branch Division

Degree of Autonomy No autonomy Moderate Very high

Set of accounting Not required Required by Home Required by the

records Office and Branch Division

Transactions Principal Branch Division

approved by
Accounting Entity No Yes Yes
Legal Entity No No May or May not
Management Little Higher than sales Higher than branch
decision Making agency

20-6
 Accounting for Sales Agency
 A typical sales agency is restricted to
 carrying samples of merchandise shipped by H.O for display
 taking order from customers
 forwarding customers’ orders to the H.O
 Then, the H.O effects the sale transaction, approves customer
for credit, ships the merchandise sold, maintains agency’s A/R
& performs the collection functions.
 The H.O establishes an imprest cash fund at sales agency for
payment of minor op. expenses such as rent for room, some
promotion or delivery expenses.
 Such expenses are periodically recorded in the accounting
records by the Home Office when the imprest cash fund is
replenished.

20-7
Accounting for Sales Agency

 If the H.O wants to measure profitability of a sales

agency, it may identify revenues and expenses with
each sales agency in the general ledger.
 For Ex, sales generated by Bahir Dar sales agency may be
recorded in a separate account entitled ‘Sales- Bahir
Dar Sales Agency’ and the same is true for cost of sales
& expenses.
 Under the periodic inventory system, a shipment of
goods sold through orders received from a sales agency
may be recorded by a debit to Cost of Goods Sold-
Bahir Dar Sales Agency and a credit to Shipments to
Agencies.

20-8
 Accounting for Sales Agency
 This journal entry is recorded only at the end of the year by
accumulating memorandum of cost of goods shipped to
customers through agencies.

 Equipment or other assets used at sales agency may be kept

in a separate record or may be controlled using a subsidiary
ledger with a complete record of each asset showing cost,
location, depreciation and any other relevant information.

20-9
Assume the ff transactions of the home office & its Royal Sales
Agency. (Home office uses the perpetual inventory system.)
 Jan. 1: the H.O shipped merchandise costing Br 2,000 to the sales agency for
use as samples
 Jan1: the H.O established an imprest cash fund for the sales agency for Br
1,800
 During the year, the sales agency forwarded customer orders to the H.O & the
H.O shipped merchandise to customers on account for SP of Br 90,000 which
have cost of Br 70,000.
 The H.O collects Br 82,000 cash from customers on a/c during the year.
 During the year, the H.O sent several checks for Br 16,000 to Royal to
replenish the imprest cash fund.
 On Dec. 31: the H.O closed the revenue and expense accounts to a separate
I/summary ledger account in the name of the sales agency
 On Dec. 31: the H.O closed the NI of sales agency to I/summary ledger
account of the H.O
 On Dec. 31: the I/summary account of the H.O is closed to REs. The H.O
incurred expenses for Br 800,000 and earned revenue of Br 1,000,000 during
the year excluding expenses and sales of agency
 Required: Record journal entries for the home office to record transactions of
Royal Sales Agency 20-10
 Home office journal entries for Royal agency transactions
Sample Inventory: Royal sales agency………..2,000
Merchandise Inventory…………….2,000
Imprest cash fund: Royal sales agency……1,800
Cash………………………………………1,800
A/R……………………………………90,000
Sales: Royal sales agency………….…………..90,000
C.G.S: Royal sales agency……………. 70,000
Merchandise Inventory……….………..70,000
Cash…………………..82,000
A/R…………….….……….82,000
Operating expenses: Royal agency……….16,000
Cash…………………………………………………16,000

20-11
Accounting for Sales Agency
Closing entry:
Sales: Royal agency………. 90,000
C.G.S: Royal sales agency…………… 70,000
Operating expenses: Royal sales agency 16,000
Income summary: Royal sales agency….. 4,000

Income summary : Royal agency……………4,000

Income summary……………………..…………………………4,000

Income summary……………..204,000
Retained Earnings………………..204,000

20-12
 Accounting System for a Branch

Accounting methods used by branches and home

office includes;
 Reciprocal ledger accounts/(home office/investment
in branch)
 Expenses incurred by home office and allocated to
branches
 Alternative methods of billing merchandise
shipments to branches
 Separate financial statements for branch and for
home office

20-13
 Accounting System for a Branch

 Combined financial statements for home office and

branch
 Journal entries for operations of a branch
 Working paper for combined financial statements
 Treatment of beginning inventories priced above cost
 Reconciliation of reciprocal ledger accounts
 Transaction between branches

20-14
 Reciprocal Ledger Accounts
Investment in Branch Account
 A non-current asset account used by the home office(HO)
to record any transactions with the branches.

Investment in Branch Account

Dr Cr
Assets provided to the branch Assets received from the
by the HO branch
NI reported by the branch NL reported by the branch

20-15
 Reciprocal Ledger Accounts
Home Office ledger account
 A quasi-ownership equity account used by the branch
to record any transactions with the home office.

Home Office Ledger Account

Dr Cr
Assets sent by the branch to the Assets provided by the HO to
HO or to other branches the branch
NL reported by the branch NI reported by the branch

 At the end of an accounting period when the branch closes

its accounting records, the Income Summary account is
closed to the Home Office account.
20-16
 Other Accounts
On the branch On the HO
Item accounting records accounting records
Dr Cr Dr Cr
Plant assets Inv’t in Plant
Plant
acquired by the HO HO account Branch Asset
Asset
for a branch’s usage account
Plant asset is HO Cash or Plant asset Inv’t in
acquired by a liability account: branch
branch for its usage account branch
Expense incurred by Expense HO account Inv’t in Expense
HO and allocated to account Branch account
Branches account
 Alternative Methods of Billing Merchandise
Shipments to Branches
 Three alternative methods are available to the home office
in billing the merchandise shipped to the branches:
a) Billed at home office cost,
b) Billed at a percentage above home office cost
(cost + mark-up), and
c) Billed at the branch’s retail selling price.
 Shipment of merchandise to a branch does not constitute a
sale because ownership title has not changed.
 Advantages and Disadvantage

Advantages Disadvantage
Billed at the home Widely used because of Attributes all gross
office cost its simplicity profits of the business to
the branches
Billed at a Able to allocate a Branch NI understated
percentage above reasonable gross profit and the ending
inventories overstated
home office cost to the home office
Billed at the Increase internal No gross profit assigned
branch’s retail control over to the branches
selling price inventories at
branches
 Separate Financial Statements for Branch and
for Home Office (for internal use only)
 To review the operating results and financial
position of the branch, management of the
enterprise may prepare a separate income statement
and balance sheet.
 Combined financial Statements for Home Office
and Branch (for external use)
 Combined financial statements should be prepared
for external users.
 A starting point in preparation of a combined
balance sheet would be the adjusted trial balances of
the home office and of the branch.
 The reciprocal ledger accounts are eliminated because
they have no significance when the branch and
home office report as a single entity.
 Cont.…

 In preparing the combined financial statements, the

following accounts should be eliminated:
a) Reciprocal ledger accounts
b) Any intra-company profits or losses
c) Any receivables and payables between the home office
and the branch (or between two branches).
 The rest of accounts are just summed together for
the combined financial statements.

20-22
 Example I
Assume that Garad PLC bills merchandise to Hawassa
Branch at home office cost and that Hawassa Branch
maintains complete accounting records and prepares
financial statements. Both the home office and the branch
use the perpetual inventory system. Equipment used at
the branch is carried in the home office records.
Expenses, such as advertising and insurance, incurred by
the home office on behalf of the branch, are billed to the
branch.
Transactions and events during the first year (2013) of
operations of Hawassa Branch are summarized below:

20-23
 Cont.….
1. Cash of Br.1,000 was forwarded by the home office
to Hawassa Branch.
2. Merchandise with a home office cost of Br.60,000
was shipped by the home office to Hawassa
Branch.
3. Equipment was acquired by Hawassa Branch for
Br.500, to be carried in the home office accounting
records. (Other plant assets for Hawassa Branch
generally are acquired by the home office.)
4. Credit sales by Hawassa Branch amounted to
Br.80,000; the branch’s cost of the merchandise
sold was Br.45,000.
5. Collections of trade accounts receivable by
Hawassa Branch amounted to Br.62,000.
20-24
 Cont.…
6. Payments for operating expenses by Hawassa
Branch totaled Br.20,000.
7. Cash of Br.37,500 was remitted by Hawassa
Branch to the home office.
8. Operating expenses incurred by the home office
and charged to Hawassa Branch totaled Br.3,000.

20-25
 Example

Home Office Accounting Hawassa Branch Accounting

Records Journal Entries: Records Journal Entries:
1.Inv’t in HB……… 1,000 Cash…………. 1,000
Cash……………….............. 1,000 Home Office………. 1,000

2. Investment in HB…. 60,000 Inventories……. 60,000

Inventories…............... 60,000 Home Office……… 60,000
3. Equipment-HB……..500 Home Office…… 500
Investment in HB…..……... 500 Cash………………..… 500
4. None A/R…… 80,000
CGS……. 45,000
Sales………………... 80,000
Inventories……….. 45,000
20-26
 Example
Home Office Accounting Hawassa Branch Accounting
Records Journal Entries: Records Journal Entries:
5. None Cash…………...... 62,000
A/Receivable…………… 62,000
6. None Op/Expenses…….. 20,000
Cash…………….. 20,000
7. Cash……….. 37,500 Home Office…… 37,500
Investment in HB... 37,500 Cash……………… 37,500
8. Investment in HB…. 3,000 Op/Expenses…… 3,000
Op/Expenses…..…….. 3,000 Home Office………. 3,000

20-27
 Example
 Two Reciprocal Ledger Accounts (prior to
adjusting and closing entries):
Investment in Hawassa Branch
Date Explanation Debit Credit Balance
2013  Cash sent to branch 1,000 1,000 Dr
 Merchandise billed to
branch at HO cost 60,000 61,000 Dr
 Equipment acquired by
branch, carried in home
office accounting records
 Cash received from 500 60,500 Dr
branch
 Operating expenses 37,500 23,000 Dr
billed to branch 3,000 26,000 Dr

20-28
 Example
Home Office
Date Explanation Debit Credit Balance
2013  Cash received from HO 1,000 1,000 Cr
 Merchandise received
from HO 60,000 61,000 Cr
 Equipment acquired 500 60,500 Cr
 Cash sent to HO 37,500 23,000 Cr
 Operating expenses
billed by HO 3,000 26,000 Cr

20-29
Working Paper for Combined financial Statements

 A working paper for combined financial statements

has three distinct purposes:
1) To eliminate any intra-company profits or losses,
2) To eliminate the reciprocal accounts, &
3) To combine ledger accounts balances for like revenues,
expenses, assets, and liabilities.

Elimination Entry
Home office account……….26,000
Investment in Hawassa branch…………26,000

20-30
 Cont.…

 Assume that the Hawassa Branch’s ending

inventories of Br.15,000 at the end of 2013 had been
verified by a physical count.
 All the year-end adjusting entries had been made.
 The working paper begins with the adjusted trial
balance of the home office and Hawassa Branch.
 Income taxes are ignored in this illustration.
 The following working paper is based on the transactions
illustrated earlier and additional assumed data for the
home office trial balance.

20-31
 Cont…
GARAD PLC
WORKING PAPER FOR COMBINED FINANCIAL STATEMENTS OF HO AND
Hawassa BRANCH
FOR YEAR ENDED DECEMBER 31, 2005
(PERPETUAL INVENTORY SYSTEM: BILLINGS AT COST)
Adjusted Trial Balance
Home Office Branch Elimination Combined
Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)
Income Statement
Sales............................................... (400,000) (80,000) (480,000)
Cost of Goods Sold........................ 235,000 45,000 280,000
Operating Expenses ....................... 90,000 23,000 113,000
Net Income .................................... 75,000 12,000 87,000
Statement of Retained Earnings
Retained Earnings, Jan.1, 2005 ..... (70,000) (70,000)
Net Income from above ................. (75,000) (12,000) (87,000)
Dividends Declared ....................... 40,000 40,000
Retained Earnings, Dec.31,2005 ... (117,000)
Balance Sheet
Cash ............................................... 25,000 5,000 30,000
Trade Accounts Receivables ......... 39,000 18,000 57,000
Inventories ..................................... 45,000 15,000 60,000
Investment in Hawassa Branch ..... 26,000 (a) (26,000)
Equipment ..................................... 150,000 150,000
Accumulated Depreciation ............ (10,000) (10,000)
Totals 287,000
Trade Accounts Payable ................ (20,000) (20,000)
Home Office .................................. (26,000) (a) 26,000
Common Stock, Br 10 par ............. (150,000) (150,000)
Retained Earnings from above ...... (117,000)
Totals ............................................. 287,000

20-32
 Combined Financial Statements -Example I
Garad PLC
Income Statement
For Year Ended December 31, 2013

Sales $480,000
Cost of goods sold 280,000
Gross margin on sales $200,000
Operating expenses 113,000
Net Income $87,000

20-33
 Cont.…
Garad PLC
Statement of Retained Earnings
For Year Ended December 31, 2013

Retained earnings, beginning of year $70,000

Add: Net income 87,000
Subtotal $157,000
Less: Dividends 40,000
Retained earnings, end of year $117,000

20-34
 Cont….
Garad PLC
Balance Sheet
December 31, 2013
Assets
Cash $30,000
Trade accounts receivable (net) 57,000
Inventories 60,000
Equipment $150,000
Less: Accumulated depreciation (10,000) 140,000
Total assets $287,000
20-35
 Garad PLC
Balance Sheet
Liabilities & Stockholders’ Equity
Liabilities
Trade accounts payable $20,000
Stockholders’ equity
Common stock, Br.10 par,
15,000 shares authorized, issued,
and outstanding $150,000
Retained earnings 117,000 267,000

Total liabilities & stockholders’

equity $287,000
 Cont.…
Home Office Adjusting and Closing Entries and
Branch Closing Entries Performed on 12/31/2013
(Perpetual Inventory System):
HO: Adjusting and Closing Hawassa Branch : Closing
Entries: Entries:

Sales……………….. 80,000
CGS…….............................. 45,000
None Op/Expenses……………. 23,000
Income Summery……… 12,000
Investment- HB….. 12,000 Income Summery….. 12,000
Income-HB…..….............. 12,000 Home Office…………….. 12,000
Income: HB…………. 12,000
None
Income Summery……… 12,000
20-37
 Example II: Billing of Merchandise to Branches at Prices
above Home Office Cost
 Similar information as in the previous example, except that
the home office bills merchandise shipped to Hawassa branch at
50% markup of the cost, or 331/3% of billed price.
GP = NS-CGS….GP=0.5 CGS= CGS=2GP
GP=NS-2GP…..NS=3GP----GP=0.333NS or GP=33.33% OF NS.
Thus, 50% Above home office cost means 33.33% above billed price.
Exercise: Find the billed price, If the home office bills
merchandise shipped to branch at 40% markup of the cost?
 Thus, the shipment of merchandise costing $60,000 will be
recorded at the home office and branch as follows:
 60,000 + (0.5*60,000) = 90,000
 Cont.…
Journal entries for shipments to branch at prices above home
office cost
(Perpetual inventory system):

HO: Adjusting and Closing Hawassa Branch : Closing

Entries: Entries:
Investment- HB….. 90,000 Inventory……….. 90,000
Inventories…..…............. 60,000 Home Office…………….. 90,000
AFOVI……………….……... 30,000
 Thus, the balances of both the Investment in Hawassa
Branch account and Home Office account will be $56,000,
instead of $26,000 due to the inventory mark up of $30,000.
 AFOVI=Allowance For Over Valuation of Inventory. It is
Unrealized gain.
20-39
 Working paper when billings to branches are at
cost plus mark-up
 When the home office bills merchandise shipments to
branches at prices above home office cost, preparation
of working paper for combined financial statement is
facilitated by an analysis of the flow of merchandise to
a branch, such as the following for Hawassa Branch of
Garad PLC.

20-40
 Under this assumption, the journal entries for the first year’s
events and transactions by the Home Office and Hawassa
Branch are the same as those presented on the journal
entries for shipments of merchandise from the Home Office
to Hawassa Branch. These shipments (Br 60,000 Cost +
50% markup on cost = Br 90,000) are recorded under the
perpetual inventory system as follows:
Home Office Accounting Records Hawassa Branch Accounting Records
Journal Entries Journal Entries
Investment in Hawassa Branch …..90,000 Inventories ..................... 90,000
Inventories......................... 60,000 Home Office ................. 90,000
AFOVI .............................. 30,000

20-41
 In the accounting records of the Home Office, the Investment
in Hawassa Branch ledger account below now has a debit
balance of Br 56,000 before the accounting records are
closed and the branch net income or loss is entered in the
Investment in Hawassa Branch account.
 This account is Br 30,000 larger than the Br 26,000 balance
in the prior illustration. The increase represents the 50%
markup over cost (Br 60,000) of the merchandise shipped to
the Hawassa Branch.
Investment in Hawassa Branch a/c
Date Explanation Debit Credit Balance
2005 Cash sent to branch................................................... 1,000 1,000 Dr
Merchandise billed to branch at 50% over cost........ 90,000 91,000 Dr
Equipment acquired by branch, carried in HO......... 500 90,500 Dr
Cash received from branch....................................... 37,500 53,000 Dr
Operating expenses billed to branch ........................ 3,000 56,000 Dr

20-42
 In the accounting records of Hawassa Branch, the Home
Office ledger account now has a credit balance of $56,000;
before the accounting records are closed and the branch net
income or loss is entered in the Home Office account, as
illustrated below:
Home Office a/c
Date Explanation Debit Credit Balance
2005 Cash received from the office..................... 1,000 1,000 Cr
Merchandise received from Home Office ......... 90,000 91,000 Cr
Equipment Acquired ............................ 500 90,500 Cr
Cash Sent to Home Office................... 37,500 53,000 Cr
Operating expenses billed by Home Office ...... 3,000 56,000 Cr

 Hawassa Branch recorded the merchandise received from

the Home Office at billed prices of Br 90,000; the Home
Office recorded the shipment by credits of Br 60,000 to
Inventories and Br 30,000 to AFOVI: Hawasa Branch.
20-43
 Use of the allowance account enables the Home Office to
maintain a record of the cost of merchandise shipped to
Hawassa Branch as well as the amount of the unrealized
gross profit on the shipments.
 At the end of the accounting period, Hawassa Branch reports
its inventories (at billed prices) at Br 22,500. The cost of
these inventories is Br 15,000 (Br 22,500/1.50 = Br 15,000).
 In the Home Office accounting records, the required balance
of the AFOVIs: Hawassa Branch ledger account is Br 7,500
(Br 22,500 – Br 15,000 = Br 7,500); thus, this account
balance must be reduced from its present amount of Br
30,000 to Br 7,500.
 The reason for this reduction is that the 50% markup of
billed prices over cost has become realized gross profit to the
Home Office with respect to the merchandise sold by the
branch.
20-44
 Cont.…
Garad PLC
Flow of Merchandise for Hawassa Branch
During 2013
Billed Home Markup
Price Cost
Beginning
inventories 0 0 0
Add: Shipments
from home office 90,000 60,000 30,000
CGAS 90,000 60,000 30,000
Less: Ending
inventories 22,500 15,000 7,500
Cost of goods
sold 67,500 45,000 22,500
20-45
 GARAD PLC & HAWASSA BRANCH
Working Paper for Combined Financial Statements
For The Year Ended December 31, 2005
(Perpetual Inventory System and Billings Above Cost)
Adjusted Trial Balances
Home Office Branch Elimination Combined
Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)
Income Statement
Sales .................................................... (400,000) (80,000) (480,000)
Cost of Goods Sold ............................. 235,000 67,500 (a) (22,500) 280,000
Operating Expenses............................. 90,000 23,000 113,000
Net Income (loss) ................................ 75,000 (10,500) (b) 22,500 87,000
Statement of Retained Earnings
Retained Earnings, Jan.1, 2005 ........... (70,000) (70,000)
Net Income from above....................... (75,000) 10,500 (b) (22,500) (87,000)
Dividends Declared............................. 40,000 40,000
Retained Earnings, Dec.31,2005......... (117,000)
Totals................................................... 187,000
Balance Sheet
Cash..................................................... 25,000 5,000 30,000
Trade Accounts Receivables 39,000 18,000 57,000
Inventories........................................... 45,000 22,500 (a) (7,500) 60,000
AFOVI ................................................ (30,000) (a) 30,000 0
Investment in Hawassa Branch ........... 56,000 (c) (56,000) 0
Equipment ........................................... 150,000 150,000
Accumulated Depreciation.................. (10,000) (10,000)
Trade Accounts Payable...................... (20,000) (20,000)
Home Office........................................ (56,000) (c) 56,000
Common Stock, Br 10 par................... (150,000) (150,000)
Retained Earnings from above ............ (117,000)
Totals................................................... 187,000
20-46
Elimination Journal Entries:
a) To reduce ending inventories and cost of goods sold of branch to cost, and to eliminate
unadjusted balance of Allowance of Overvaluation of Inventories: Hawassa Branch ledger account.
AFOVI .............................................................. 30,000
Cost of Goods Sold ............................ 22,500
Inventory ............................................ 7,500
(a) To increase income of Home Office by portion of merchandise markup that was realized by
branch sales.
Unrealized Gross Profit................................... 22,500
Realized Income: Hawassa Branch.......... 22,500
(b) To eliminate reciprocal ledger account balances
Home Office.................................................... 56,000
Investment in Hawassa Branch ................ 56,000
20-47
 HO and Branch adjusting and closing entries

 Branch Closing Entries-The closing entries for

the branch at the end of 2013 are as follows:
Sales…………………………………....80,000
Income Summary……………………...10,500
Cost of Goods Sold…………………………..67,500
Operating Expenses………………………….23,000
To close revenue and expense ledger accounts
Home Office……………….................10,500
Income Summary……………………………10,500
To close the net loss in the Income Summary account to the Home
Office account

20-48
 Cont.…
 After the closing entries, the Home Office ledger
account should have a balance of Br.45,500.
 Note: Home Office balance prior to the closing
entries equals Br.56,000. Br.56,000-net loss of
Br.10,500 = Br.45,500 (net loss decreases Home
Office credit balance).

20-49
 Cont.…
Home Office Adjusting and Closing Entries
Income- HB………........................ 10,500
Investment in HB………………………… 10,500
To record net loss reported by branch

AFOVI- HB………………………….. 22,500

Realized Gross Profit- HB…................... 22,500
To reduce allowance to amount by which ending inventories of branch
exceed cost.

Realize Gross Profit: HB…………… 22,500

Income: HB…………................................ 10,500
Income Summary……….......................... 12,000
To close branch net loss and RGP to Income Summary ledger account
(Income tax effects are disregarded.)
20-50
 Cont.….
After posting the above entries, the account balance
for the following accounts is:
Investment in HB =45,500(debit)*
AFOVI- HB =7,500(credit)**
Realized Gross Profit: HB =0
Income: HB =0
* Balance prior to the above entries equals Br.56,000. Br.56,000- 10,500
(net loss of the branch reduces the debit balance of the Investment
account) = Br.45,500.
** Br.30,000-22,500 = Br.7,500.

20-51
 Periodic Inventory System

 When a periodic inventory system is adopted,

inventory account cannot be used for the shipments
of merchandise between the home office and the
branch.
 Accounts such as “Shipments to Branch” (used by
the home office) and “Shipments from Home Office”
(used by the branch) are used.

20-52
 Transactions between Branches
 Occasionally operations require that merchandise or other
assets be transferred from one branch to another.
 Usually, a branch does not carry a reciprocal ledger a/c with
another branch.
 The transfer can be recorded in H.O ledger a/c and H.O credits
the inventories (assuming perpetual inventory system is
used).
 On receipt of the inventories, the branch debits inventories
and credits H.O.
 Home office records the transfer b/n branches by a debit to
Inv’t in recipient branch & credit to Inv’t in delivering branch.

 Excess freight costs are recognized as expenses of the H.O .

20-53
 Transactions between Branches
 Illustration: Excess freight costs on inter-branch transfers
of merchandise.
 The H.O shipped mdse costing Br 6,000 to Branch D and paid
freight costs of Br 400.
 Subsequently, the H.O instructed branch D to transfer these
Mdses to branch E.
 Freight costs of Br 300 were paid by branch D to carry out this
order. If the mdse had been shipped directly from the H.O to
branch E, the freight cost would have been Br 500. Assume
that the H.O & its branches use perpetual inventory system.
Make all the necessary journal entries in the three sets of
accounting records.

20-54
 Home Office
Investment in Branch D 6,400
Inventories 6,000
Cash 400
To record shipment and payment of freight costs

Investment in Branch E 6,500

Excess Freight Expense- Interbranch TTs 200
Investment in Branch D 6,700
To record TTs of merchandise from D to E under instruction of the H.O

Branch D
Inventories (6000+400) 6,400
Home Office 6,400
To record receipt of merchandise plus freight cost

Home Office 6,700

Inventories 6,400
Cash 300 20-55
 Branch E

Inventories 6,500
Home Office 6,500

20-56
 END OF
CHAPTER
2