A branch is a unit of a business enterprise located some distance from the home office. A branch generally caries a stock of merchandise obtained from the home office, makes sales, approves customers' credit, and makes collections on trade accounts receivable.
The merchandise of a branch may be obtained exclusively from the home office, or a portion may be purchased from outside suppliers. The cash receipts of the branch may be deposited in a bank account of the home office; branch expenses then are paid from an imprest cash fund provided by the home office. The imprest cash fund is replenished periodically by the home office. Alternatively, a branch may maintain its own bank account.
Certain units or segments of a business enterprise may be operated as divisions. A division may consist of either a series of branches or one or more corporations. When a segment is operated as a corporation, it is known as a subsidiary of the parent company.
Costs of organizing a new branch and operating losses during the initial period of operations should be recognized as expenses, not as deferred charges, per AICPA SOP 98-5.
The accounting records for branches may be centralized in the home office or may be decentralized so that each branch maintains a complete set of accounting records. If the accounting records are centralized in the home office, each branch prepares daily reports and documents that are used as sources for journal entries in the accounting records of the home office. If a branch maintains its own accounting records, some transactions or events relating to the branch may be recorded by the home office. Periodic financial statements are provided by the branch to the home office so that combined statements may be prepared.
The accounting records of a branch include a Home Office ledger account that is credited for assets and services provided by the home office, and for branch net income. The Home Office account is debited for any assets and services provided by the branch to the home office or to other branches, and for branch net losses. The Home Office account thus is an ownership equity-type account representing the net investment of the home office in the branch.
A home office maintains a reciprocal ledger account, Investment in Branch, which is debited for the assets and other services provided to a branch, and for net income of the branch; it is credited for the assets and services received from the branch, and for branch net losses.
A home office generally charges its branches for expenses (such as insurance, interest, property taxes, advertising, and depreciation) incurred for the benefit of the branch. Such expenses must be allocated to branch operations to measure the profitability of each branch.
Merchandise shipped by a home office to branches may be billed at home office cost, at home office cost plus a markup, or at branch retail selling price. A shipment of merchandise to a branch is not a sale. Billing at home office cost attributes the entire gross profit on merchandise sold by a branch to the branch. When merchandise is billed at a price above home office cost (or at branch retail selling price), the valuation assigned to branch inventory at the end of the accounting period must be reduced to cost when combined financial statements are prepared.
If merchandise is billed to a branch at a price above home office cost and the perpetual inventory system is used, the home office debits Investment in Branch for the billed price of the merchandise, credits Inventories for the cost of the merchandise, and credits Allowance for Overvaluation of Inventories: Branch for the excess of the billed price over cost. The branch debits Inventories and credits Home Office at billed prices of merchandise; sales by the branch are debited to Cost of Goods Sold and credited to Inventories at billed prices.
A separate income statement and balance sheet for each branch may be prepared for use by enterprise management. The income statement has no unusual features if merchandise is billed to a branch at home office cost. However, if merchandise is billed at a price above cost, the branch trial balance must be adjusted by the home office so that cost of the merchandise sold by the branch is stated at cost to the home office.
A combined balance sheet for home office and branch shows the financial position of the business enterprise as a single entity. In the working paper for combined financial statements, the assets and liabilities of the branch are substituted for the Investment in Branch ledger account included in the adjusted trial balance of the home office. This is accomplished by elimination of the balances of the Home Office and Investment in Branch reciprocal ledger accounts.
If a home office and branch use the periodic inventory system, the home office debits Investment in Branch for the billed price of the merchandise shipped, credits Shipments to Branch for the home office cost of the merchandise shipped, and credits any excess of billed price over cost to Allowance for Overvaluation of Inventories: Branch. The branch debits Shipments from Home Office and credits Home Office at billed price. At the end of the accounting period, the home office reduces (debits) Allowance for Overvaluation of Inventories: Branch for the amount of overvaluation applicable to the branch's cost of goods sold and credits the amount of the reduction to the Realized Gross Profit: Branch Sales ledger account.
At the end of an accounting period, the balance of the Investment in Branch ledger account may not agree with the balance of the Home Office account. In such cases the reciprocal ledger accounts must be reconciled and brought up to date before combined financial statements are prepared.
If the home office operates more than one branch, certain transactions, such as merchandise shipments, may take place between branches. Such interbranch transactions usually are cleared through the Home Office ledger account. For example, if Arlo Branch ships merchandise with a cost of $400 to Boone Branch and the periodic inventory system is used, the following journal entries (explanations omitted) are required:
Accounting records of Arlo Branch:
Home Office
400
Shipments from Home Office
400
Accounting records of Boone Branch:
Shipments from Home Office
400
Home Office
400
Accounting records of home office:
Investment in Boone Branch
400
Investment in Arlo Branch
400
The transfer of merchandise from one branch to another does not justify increasing the carrying amount of inventories by the additional freight costs incurred because of the indirect routing. Excess freight costs incurred as a result of such transfers are recognized as operating expenses of the home office because the home office makes the decision to transfer the merchandise.
