Accounting theory and practice, Volume 2 (of 3) : a textbook for colleges and…

separate results. In discussing the question of branch accounting any treatment of the problems peculiar to it is so dependent on the particular system employed that only a very general statement of principles can be made unless the comment is confined to a particular system and this might not be relevant to all systems. There are, however, certain principles which apply fundamentally to all systems. The question of the degree of control desired by the head office and the resulting information which must be given by the branch to the head office governs largely the detailed ramifications of general principles which will be necessary. Also the amount of information as to the results of the business done at each branch which it is desirable for the branch management to know has an important bearing on the manner of keeping the accounts. Sometimes it is not desirable that the branch manager should know the amount of profit which his branch is earning. While, of course, it is impossible to keep a shrewd manager in entire ignorance of the results of his management, yet the exact figure of profit earned by his branch can be kept from him if the books are handled properly. It is purposed here to develop by statement and illustration most of the problems which are peculiar to branch and agency accounting. Agency Accounts What has been said with regard to the difficulty of presenting a widely applicable statement of branch accounts is equally true of agency accounts. There is no well-marked line of distinction between agency and branch organization. What may be termed an agency by one concern will be looked upon as a branch by another concern. For the purpose of this discussion, however, the distinction stated above between these two forms of organization will be adhered to. Where, therefore, the agency is for the most part simply a sales agency, practically nothing in the way of accounts and accounting control is necessary other than what must always be used in connection with traveling salesmen. The agency must be furnished with an expense fund and must, of course, send in to the head office all its orders and sales. The expense fund is best operated under the imprest system. To keep track of the results of the various agencies it will be necessary on the head office books to keep the records of the activities of each branch separate from one another and from those of the head office. At the close of the fiscal period a comparison of agency sales with the direct costs of making those sales and with the expenses of maintaining the agency will develop the net result of the agency’s activities. The problem, therefore, of agency accounting is simply one phase of the general problem of accounting, viz., furnishing, by means of whatever analysis may be necessary, the information which will be of greatest advantage, to the management of the business. Branch Accounting Records The accounting records of the branch will be simple or complex according to the conditions to secure control over which they must give information. Sometimes a very simple set of records will furnish all the data needed. In other cases just as elaborate detailed records as are employed at the head office may be required to secure the information desired. Sometimes it may appear best for the branch to keep but few records, and for the head office to keep all the main accounting records by means of duplicate reports of all branch transactions. Again, to exercise proper control over the branch, even where it keeps a full set of records, it may be advisable to require periodic reports of all branch activities. Sometimes these are required daily, but more often a weekly or monthly summary of activities serves the purpose equally well. Illustration of Simple Branch Accounts The simplest method of keeping the branch and head office accounts can be illustrated by a short problem in summarized form. In the illustration given it is assumed that the head office furnishes the cash necessary to inaugurate the branch, and that all stock-in-trade is supplied by the head office. It is further assumed that the branch keeps a complete set of records which will furnish information as to profits and losses at the close of the fiscal period. On the branch books it will be necessary to open accounts with Merchandise (here, for the sake of brevity, carried under one title rather than as usually shown), with Cash, with Expenses (again, for the sake of brevity, carried under one head), with the Head Office, and with Profit and Loss. These accounts present no peculiarities excepting the Head Office account which stands on the branch books as the net worth or proprietorship account. It is credited with all values received from the head office and charged with all values returned to the head office or expended on head office account. The net profit for the period is closed from the Profit and Loss account into the Head Office account in order to show the present net worth or proprietorship with which the branch enters the new fiscal period. On the head office books there need be carried only an account with each branch by name or number. The charges and credits in this account are the exact reverse of those in the Head Office account carried on the branch books. At the close of the fiscal period it is necessary to receive the report of the branch profit or loss before that can be incorporated in the branch account on the head office books. The following problem will show the manner in which these accounts are kept. _Problem._ The head office sends to the branch during the year $5,000 cash and $50,000 worth of merchandise. The branch makes sales to customers on account amounting to $45,000 and cash sales of $10,000. It incurs expenses of $7,500. Its collections from customers on account amount to $25,000. It remits $37,000 to the head office. The inventory of merchandise at the close of the year is found to be $12,500. _Solution_ _Branch Books_ Cash $ 5,000.00 Head Office $ 5,000.00 Merchandise 50,000.00 Head Office 50,000.00 Customers 45,000.00 Merchandise 45,000.00 Cash 10,000.00 Merchandise 10,000.00 Expense 7,500.00 Cash 7,500.00 Cash 25,000.00 Customers 25,000.00 Head Office 37,000.00 Cash 37,000.00 Merchandise (Inventory) 12,500.00 Merchandise 12,500.00 Merchandise 17,500.00 Profit and Loss 17,500.00 Profit and Loss 7,500.00 Expense 7,500.00 Profit and Loss 10,000.00 Head Office 10,000.00 _Head Office Books_ Branch $55,000.00 Cash $ 5,000.00 Merchandise 50,000.00 Branch 10,000.00 Branch Profit and Loss 10,000.00 In making up the head office balance sheet, the Branch account as carried on the head office books will be an asset representing the property of the head office invested in the branch. Instead of carrying this property under the title “Branch,” it is sometimes desirable to include all branch values with similar values at the head office. This results in a balance sheet which is similar to the consolidated balance sheet explained in Chapter XXXIV. Illustration of More Complex Branch Accounts As an illustration of a somewhat more complex method of keeping the books, a problem is appended illustrating the sending of goods to the branch at a nominal figure or at sales price. Here it is not desired that the branch management be able to determine the profit and loss of its activities; consequently the goods from the head office are not charged to the branch at cost but at some fictitious value. Where this is done it is best to open two accounts, the one to record the merchandising transactions between the branch and the head office, and the other to record all other interactivities. _Problem._ The head office sends to the branch during the year $10,000 cash and $77,000 worth of merchandise as billed at a conventional price. The branch makes sales to customers on account, of $60,000, and for cash $25,000. The expenses of the branch are $10,000. Collections from customers amount to $45,000 and remittances to head office amount to $66,000. The inventory of the stock-in-trade at the close of the year is $14,000, this valuation being on the same basis as the original charge, i.e., at the conventional figure. _Solution_ _Branch Books_ On the branch books two accounts are opened with the head office, one entitled “Head Office General,” and the other “Head Office Merchandise.” Neither one of these accounts represents the full proprietorship of the head office in the branch, nor do both of them together represent the true proprietorship because of the fact that the merchandise is priced to the branch at a fictitious figure. The branch books cannot show the true status of relations with the head office so long as the policy, of billing goods in this way is maintained. That is the chief reason why it is best to set up the two accounts, in one of which appear the merchandise transactions at the fictitious figure, while in the other appear all other transactions correctly valued. This Head Office Merchandise account is more in the nature of a memorandum or consignment account and is offset by an account called “Purchases from Head Office.” On the branch books appear also accounts with Customers, Branch Sales, and Expenses—as in the other case. There is no Profit and Loss account because it is impossible to determine on the branch books the correct profit and loss for the period. All expense and income accounts are closed directly into Head Office General. The entries necessary to book properly the activities as set forth in the illustrative problem are as follows: Cash