12. How branch accounts handle goods from home office.—Sometimes the practice is to treat the branch as a customer; the amount due from the branch will then be taken up in the balance sheet of the under taking as an account receivable. This method is de cidedly incorrect and should never be adopted.
The net amount due to the branch, or from the branch, must be stated under a caption clearly ear marked so as to indicate its true character. A better method would be to consolidate the individual assets and liabilities of the branch with the individual assets and liabilities of the home office, in preparing a bal ance sheet of the business as a whole. This is the. method which has been employed in the solution of this problem.
13. Closing the branch books.—An examination of the trial balance of the branch shows that this branch makes purchases of merchandise on its own account, in addition to receiving goods from the home office. When the inventory of merchandise is not carried upon the branch books, there is no object in opening a profit-and-loss account upon the branch books be cause a profit-and-loss account cannot be properly prepared by it from the information in its possession.
It is therefore customary to close the branch books thru the home office account, debiting the home office account with nominal accounts showing debit bal ances, and crediting the home office account with nominal accounts having credit balances. At the end
of the fiscal period the branch will send a copy of its final trial balance, before and after closing, to the main office, as well as its closing journal entry. This entry will be taken up on the home office books in the manner indicated in the solution.
When the books at the home office are closed, the depreciation upon the real property of the branch will be charged to the branch profit-and-loss account, in order that the net profit from the operation of the branch may be shown in that account.
14. Pro fit-and-loss account; the branch office.— The following problem and solution illustrate the method employed in determining profit-and-loss of the branch when it is customary to charge the branch a price greater than the cost of the merchandise to the home office. The principal point to be noted in this solution is, that in the preparation of the final ac• counts, a reserve must be set up on the home office books to take care of the profit appropriated by the home office in the original charge of the goods to the branch, as regards those goods which have not yet been sold by the branch.