CHAPTER FIVE

BRANCH AND CONSIGNMENT ACCOUNTING

Introduction
Accounting for the operations of a business can become complicated whenever
geographical separation is encountered between the various facets of the organization.
This chapter examines the special procedures necessary to record transactions occurring
at significant distances from a central office. Branch accounting is analyzed first. This
initial section of the chapter describes reporting systems designed to accumulate the
financial data generated by operations in widely dispersed locations.

Following the coverage of branches, accounting for consignment sales is investigated.

Companies use this marketing technique to place their inventory in retail outlets owned
by other parties, an approach intended to achieve a wider distribution of merchandise
than might otherwise be possible. Thus both branch and consignment accounting systems
must be capable of gathering information despite the great distance frequently involved.
4.1. Branch Accounting
4.1.1. Principles of Decentralization
A completely centralized business organization is one in which all major planning and
operating decisions are made by the top management. For example, a one – person,
manager - owner –operated business is centralized because all plans and decisions are
made by one person.

In a decentralized business organization, responsibility for planning and controlling

operations is delegated (distributed) among managers. These managers have the
authority to make decisions without first seeking the approval of higher management.
Advantages of Decentralization
1. Low level managers closest to the operations may anticipate and react to operating
information more quickly. Having full information, they have a better chance of
sound decision making.
2. As a company diversifies in to a wide range of products and services,
decentralization allows management to concentrate on acquiring expertise in their
areas of responsibility.
3. The delegation of responsibility for day-to-day operations from top management
to middle management frees top management to concentrate more on strategic
planning. (process of identifying long-term goals for an enterprise)
4. Decentralized decision making provides excellent training for managements,
which may be a factor in enabling a company to retain quality managers.
5. The delegation of responsibility also serves as a positive reinforcement for
managers, in that they may view such delegation as an indication of top
management’s confidence in their abilities.

Disadvantages of Decentralization

1. Decisions made by one manager may affect other managers in such a way that the
profitability of the entire company may suffer.
2. Decentralized operations may cause the duplication of various assets and costs in
the operating division.

Decentralization in Branches and Departments

In order to market its product over large territory and to have an effective and efficient
retailing, a business is generally split in to branches or departments. In case the various
divisions of the business are located under the same roof, they are known as
Departments. If the various divisions of the business are located in different places
either in the same town or in different towns, they are known as Branches.
A branch is different from a department. First a branch is situated in other locality while
a department is located in the same building where head office is located. Secondly,
through a branch sales can be increased while departments can increase the efficiency of
business. Thirdly, accounting records are kept at one place under department system
while accounting records are kept at branch, though they are also kept at Head office.
4.1.2 Accounting for Branches
A Company may establish branches for a variety of reasons. Branches provide a way to
decentralize operations without conferring a high level of autonomy on the branches.
Further, branches may be used to expand the firm’s sales efforts in to new markets.
Branches are frequently seen as alternatives to the establishment of a traveling sales force
operated from a corporate head quarters or to the acquisition of firms already operating in
the new market.

When a company is composed of a home office and branches, a distinct accounting

system is frequently maintained for each branch as well as for the home office. Such
accounting systems are characterized by two levels of financial reporting. Reports may
be prepared to reflect the records of the home office or branch as separate entities, or
reports may be prepared to reflect the aggregate of all records for the entire company.
Sales Agencies
Sales agencies represent a special class of branches whose authority to enter transactions
is so restricted that a complete double – entry accounting system is not required to record
them. A typical sales agency is restricted to caring samples of the merchandise
inventoried by the home office to taking orders, which are forwarded to the home office
for delivery to customers. Thus, the home office collects all cash from customers and
approves all customer credit. The home office provides cash to the agency for operating
expenses. This cash is replenished when necessary, sometimes on an impress basis.
Accounting for Receivables
The role of the branch in credit sales and collections on account may be restricted in a
variety of ways. Some branches must secure home office approval for each credit sale,
and all collections on account are made by the home office. In such cases, the branch
does not maintain accounts receivable records. Other branches may be authorized to sell
and collect on account, provided that customers’ names are on an approved – customer
list, such branches must maintain accounts receivable records.
Accounting for Inventories
The role of the branch in transfers of merchandise may also be restricted. Some branches
carry a line of samples but are precluded from carrying an inventory of merchandise. In
such cases, merchandise is shipped to branch customers directly from the home office
and the branch does not maintain inventory records. Other branches may carry an
inventory of merchandise for shipment to customers. In that case, the branch must
maintain inventory records.
Accounting for fixed Assets
A branch may or may not be authorized to purchase fixed assets: Further, a branch may
or may not be authorized to maintain fixed asset accounts. A highly autonomous branch
will have authority both to purchase fixed assets and to maintain fixed asset accounts. On
the other hand if the home office dominates the acquisition of fixed assets, then branch
fixed assets are not to be maintained by the branch. Instead, the branch fixed assets are
recorded in the fixed assets accounts of the home office.
Branch Transactions
A branch and its home office represent two accounting systems but just one accounting
entity. All transactions entered in the accounting system of the branch are also entered, at
least in summary form in the accounting system of the home office. Further, although
separate financial statements can be prepared for the home office and its branch for
internal management purposes, only the combined financial statements of the entire entry
are issued to parties outside the company.
Branch and home office records are linked together by two accounts: the investment in
branch account, which appears on the home office records, and the home office
account, which appears on the branch records. The home office accounts, on the branch
records is like an owner ship equity account in that it represents the equity of the home
office in the net assets of the branch. The home office account reflects all transfers from
the branch to the home office and vice versa. In addition, branch net income (net loss) is
closed to the home office account. The investment in branch account, on the home office
records, is an asset account that is reciprocal to the corresponding home office account on
the branch records.
Transfer of monetary or physical assets, like cash or merchandise, from the home office
to the branch are recorded by both accounting systems as the transfers occur. The branch
upon notification from the home office usually records transfers of services or other
intangible benefits, like insurance coverage and depreciation expense.
Recording Branch Transactions on Branch and Home Office Records

 Transfers from home office to branch

Home office Branch
1. Home office sends $ 3000 cash to branch:
Investment in branch -----3000 Cash -------- 3000
Cash --------------------3000 Home office -------3000
2. Home office ships merchandise with a cost of $ 12000 to branch, the merchandise is
billed at cost:
Investment in branch --------12000 Inventory--------- 12000
Inventory----------------12000 Home office -------------12000
3. Home office purchases equipment for $ 3600 cash and transfers it to the branch;
branch does not maintain fixed asset accounts:
Equipment----------- 3600 No entry
Cash-------------------3600
4. Home office incurs and notifies the branch of operating expenses totaling $900 to
benefit the branch $ 250 represents depreciation on branch equipment and the
remainder represents cash out lays for various operating expenses:
Investment in branch 900 Depreciation expense 250
Accumulated depreciation 250 other expense 650
Cash 650 Home office 900
 Operating transactions of branch
5. Branch sells merchandise for $16000 on account, merchandise costs branch $ 8000:
No entry Accounts Receivable 16000
Sales 16000
Cost of goods sold 8000
Inventory 8000
6. Branch collects $ 11,000 on account
No entry Cash 11,000
Accounts Receivable 11,000

7. Branch pays operating expenses of $2500 in cash:

No entry Other expenses 2,500
Cash 2,500
8. Branch purchases equipment, for $800 and notifies HO of purchase, branch does not
maintain fixed asset accounts
Equipment 800 Home office 800
Investment in branch 800 Cash 800

9. Branch determines that ending inventory has a cost of $4000.

No entry No entry
  Transfers from branch to home office
10. Branch transfers $10,000 cash to home office:
Cash 10,000 Home office 10,000
Investment Branch 10,000 Cash 10,000
 End-of-period reporting by branch to home office and closing entries
11. Branch reports operating income of $4600 for the period to the home office:
Investment in branch 4600 Sales 16,000
Income from branch 4600 Cost of goods sold 8,000
Department expense 250
Other expense 3,150
Income Summary 4,600
Income summary 4,600
Home office 4,600
Freight on Transferred Merchandise
Transfers of merchandise from the home office to the branch frequently occasion freight
costs. These costs are reported among the expense.
Example: Incur freight cost of $500 while transporting the merchandise from HO to
branch.
Home office Branch
Investment in branch 500 Freight in 500
Cash 500 Home office 500
Fixed asset Transfers
If a branch does not maintain fixed asset accounts, then the transfer of the equipment to
the branch occasions no entry by the branch. If a branch maintains fixed asset accounts,
however, then the transfer of equipment to the branch occasions entries by both the Home
office and its branch.
Example: suppose that a home office acquires new equipment for its branch that
maintains fixed asset accounts. The equipment is purchased for $22000 cash, and the
following entries are appropriate.
Home office Branch
Investment in branch 22,000 Equipment 22,000
Cash 22,000 Home office 22,000
If a home office transfers used rather than new equipment to its branch, then the
entries are somewhat different.
Example: Suppose that a home office transfers used equipment with a cost of $10,000
and accumulated depreciation of $4000 to its branch. The following journal entries
record the transfer:
Home office Branch
Investment in Branch 6,000 Equipment 10,000
Accumulated depreciation 4,000 Accumulated depreciation 4,000
Equipment 10,000 Home Office 6,000
In some cases, a branch that does not maintain fixed asset accounts may be authorized to
purchase equipment.
Example: suppose that such a branch purchases equipment for $9200 cash and notifies
its home office of the purchase. The following entries are appropriate:
Home office Branch
Equipment 9,200 Home office 9,200
Investment in branch 9,200 Cash 9,200
Now let’s assume that the branch maintained fixed asset records. For the purchase of
$9200 by the branch the entries would be:
Home office Branch
No entry Equipment 9,200
Cash 9,200
3.1.3 Financial Reports for Branches
X Company (Home Office)
Adjusted Trial Balance for Home Office and B Branch
December 31, 2004

Home office Branch

Debit Credit Debit Credit
Cash--------------------- 2,100 700
Account Receivable -- 9,800 5,000
Inventory -------------- 15,000 4,000
Investment in Branch. 5,100
Other assets ------------ 131,000
Liabilities -------------- 25,000
Common Stock-------- 100,000
Retained earnings ------ 30,000
Home office ------------ 5,100
Sales --------------------- 120,000 16,000
Cost of goods sold 70,000 8,000
Depreciation------------ 12,400 250
Other expenses -------- 19,600 3,150
Dividends -------------- 10,000
Totals ------------- 275,000 275,000 21,100 21,100
 Financial Statements
X company (Home Office)
Separate Income Statements for Home Office and B Branch
For the year ended December. 31, 2004
Home office Branch
Sales ----------------------------------------120,000 16,000
Cost of goods sold----------------------- (70,000) (8,000)
Gross margin--------------------------------50,000 8,000
Depreciation expense ------------------ (12,400) (250)
Other expenses ---------------------------(19,600) (3,150)
Income from Home office ---------------18,000
Income from Branch --------------------- 4,600
Net Income ------------------------22,600 4,600

X company (Home Office)

Separate Balance Sheets for Home Office and B Branch
December 31, 2004
Assets Home office Branch
Cash -----------------------------------------2,100 700
Account Receivable-----------------------9,800 5,000
Inventory ----------------------------------15,000 4,000
Investment in Branch (5100+4600) ----9,700
Other assets -----------------------------131,000
Total Assets------------------------------167,600 9,700
Equities
Liabilities ---------------------------------- 25000
Home office (5100+4600) ------------- 9,700
Common Stock ---------------------------100,000
Retained earnings ------------------------ 42,600
Total liabilities and SHE ----------------167,600 9,700
Preparation of combined Financial Statements
Since home office records do not reflect branch records in full detail, the account
balances of the branch and its home office must be combined to produce fully detailed
financial statements for the single accounting entity. Combined (corporate) financial
statement are used by both internal management and interested parties outside the entity –
stockholder’s, creditors, bankers and governmental agencies – to answer questions related
to the entity as the whole. Although the separate financial statements of the home office
and its branches are not issued to outsiders, they are useful to internal management in
evaluating the progress and position of the individual components that form the entity.

Work sheet for Combined Financial Statement

The combined financial statements are prepared with the aid of a worksheet, based on the
separate financial statements of the home office and branch. The work sheet facilitates the
preparation of combined financial statement by providing a systematic format for the
combination of like accounts and the making of required adjustments.

Adjusting entries
1. Work sheet adjustment to eliminate branch investment and home office accounts.
Home office 5100
Investment in branch 5100

2. Work sheet adjustment to eliminate current year’s branch income:

Income from branch 4,600
Investment in branch 4,600
 X Company (Home Office)
Combination Work Sheet for Home Office and B Branch
For the Year ended Dec.31, 2004
Separate Adjustment Combined
Financial Statements Financial Statements
Income statement Home Office Branch Debit Credit
Sales 120,000 16,000 136,000
Income from branch 4,600 (1)4,600
Cost of good sold (70,000) (8,000) (78,000)
Depreciation (12,400) (250) (12,650)
Other expenses (19,600) (3150) _ (22750)
Net Income 22,600 4,600 4,600 22,600
Retained earnings and Home office
Retained earnings,
1, 1, 2004 30,000 30,000
Home office, Pre closing 5,100 (2)5,100
Net Income 22,600 4,600 4,600 22,600
Dividends (10,000) ____ ____ (10,000)
RE, Home office,
12, 31, 2004 42,600 9,700 9,700 42,600
Balance sheet
Cash 2,100 700 2,800
Accounts Receivable 9,800 5,000 14,800
Inventory 15,000 4,000 19,000
Investment in Branch 9,700 (1)4,600
(2)5,100
Other Assets 131,000 _____ 131000
Total assets 167,600 9,700 167600
Liabilities 25,000 25000
Common Stock 100,000 100,000
RE, Home Office 42,600 9,700 9,700 _____ 42,600
Total liabilities &
Stockholders’ equity 167,600 9,700 9,700 9,700 167,600
 X Company
Income statement
For the year ended Dec.31, 2004

Sales ---------------------------------------------------------- 136,000

Cost of goods sold ------------------------------------------ (78,000)
Gross margin -------------------------------------------------- 58,000
Depreciation ------------------------------------------------- (12,650)
Other expenses ----------------------------------------------- (22,750)
Net Income 22,600

X Company
Statement of Retained earnings
For the year ended Dec. 31, 2004

Retained earnings, 1,1,2004 --------------------------------- 30,000

Net Income ----------------------------------------------------- 22,600
Subtotal --------------------------------------------------- 52,600
Dividends -------------------------------------------------------(10,000)
Retained earnings , 12,31,2004 ------------------------------ 42,600
X Company
Balance sheet
Dec, 31,2004
Assets
Cash ------------------------------------------------------------- 2,800
Account Receivable -------------------------------------------14,800
Inventory ------------------------------------------------------ 19,000
Other Assets ------------------------------------------------- 131,000
Total assets -------------------------------------------- 167,600
Liabilities and Stock holder’s equity
Liabilities ----------------------------------------------------- 25,000
Common Stock --------------------------------------------- 100,000
Retained earnings ------------------------------------------ 42,600
Total Liabilities and Stock holder’s equity 167,600
Work sheet adjustment to record merchandise, in transit from home office to branch, that
has not been recorded by branch:
Inventory xxx
Home office xxx
Work Sheet adjustment to record cash, in transit from branch to Home Office, which has not
been recorded by home office:
Cash xxx
Investment in Branch xxx