7. Complex type—branches keeping their own financial records.—When sales are made upon credit, the transactions are necessarily somewhat more in volved. In some cases, branches may deal in mer chandise other than the line handled by the concern, in which event the purchases will usually be made on credit. Two methods are commonly employed when this situation prevails. According to the first plan, the branch will keep its own financial records, mak ing its own sales and passing on its own credits. The branch manager will usually be allowed considerable freedom in handling the affairs of the branch. Ac cording to the second method, a comprehensive system of daily reports for the use of the branch is installed. From the information thus supplied, a separate set of financial records for the branch will be constructed in the home office.
Whether the first or the second method is employed, a controlling account will be kept for each branch in the main office ledger. When the second method is adopted, copies of all the records of original entry are forwarded to the home office. The cash record, the purchase record and the sales record are in du plicate and the original record is forwarded to the home office as soon as each page is completed, and at the end of each month the last page is forwarded, whether it has been entirely filled or not. The dupli cate is retained at the branch, which keeps its own ledger. At the end of every month the branch will send to the home office a copy of the trial balance of each ledger.
8. Duplicate records.—The home office will recon struct the ledger accounts from the original records received from the branch, and will check its trial bal ance against that forwarded by the branch. This plan involves duplication of work. it is not em ployed to any extent by American houses, but is used by many foreign houses that operate American branches. The advantage of keeping duplicate rec ords at the home office consists principally in the fact that those records may be the means of saving many thousands of dollars if the branch records are de stroyed by fire.
The following problem illustrates the method of handling branch accounts under the first general plan mentioned above.
The trial balance given below was taken from the general ledger of the Smith Wire Goods Company of New York on June 30, 191-: The inventory on hand on June 30, was as follows : New York, $18,000; Chicago, $3,000. Provide for depreciation: on New York realty $5,000 ; Chicago realty $500; plant and machinery $1,000.
Prepare a consolidated balance sheet and profit and-loss statement; furnish journal entries to close both ledgers.
9. Solution of the problem—general comments.— An examination of the trial balance at the home of fice discloses the fact that the real property of the branch is carried on the home office ledger instead of on the branch ledger; this is not an uncommon prac tice. It will also be seen that the inventory at the be ginning of the period, at the branch, is carried on the home office books. It is evidently the intention not to inform the branch manager as to the profits of the branch. Obviously, if he is not informed as to the inventory, it will not,be possible for him to determine accurately the profit on trading. Altho he will of course know what the home office is charging him for the merchandise, he will not know what the goods cost the home office.
The next account to consider is the account, "Ship ments to Chicago Branch, $15,000." There is a cor responding account found in the trial balance of the branch, entitled "Goods Received from New York Office, $15,000." When the home office shipped goods to the branch, the amount of the bill was charged to the branch account on the home office books, and credited to the account, "Shipments to Chicago Branch." 10. Relations with branches in consolidated balance sheet.—Both of these accounts have been eliminated from the consolidated trial balance. Since transfers of merchandise from the home office to the branch are not to be considered as sales by the former, or as pur chases by the latter, the transaction constitutes merely a shifting of the inventory. Tho it may be the cus tom of the home office to bill the goods to the branch at an arbitrary price, or at a price above cost, no ac tual profit is realized until the branch has sold the merchandise to its customers. Therefore, when a consolidated profit-and-loss account is prepared, show ing the operations of both the home office and the branch, both of these accounts should be eliminated.
11. How the home office treats shipments to branches.—But it should be carefully noted that, on the other hand, when the home office is considered as a separate unit for the purpose of determining its profit, as separate and distinct from the branch profit, it will be necessary to treat as sales the shipments to the branch. Also, when the branch records are an alyzed for the purpose of arriving at the profit of the branch, it will be necessary to consider deliveries from the home office as purchases. The important point is, that when a consolidated statement is prepared, inter branch transactions must be eliminated, while if the individual-income accounts are treated, inter-branch transactions should be included.