Advantages of Branch and Agency System

The branch and agency forms of increasing sales in large enterprises are an outgrowth of the policy of “service” combined with economy of management which dominates all present-day capitalistic enterprises. The tendency of a successful business is to absorb other businesses in the same line through combinations and amalgamations, and thus the policies of apparently independent units in a single district or throughout the entire country may be controlled by the central management at a head office.

Where a business serves consumers direct by means of retail stores, as for instance, the chain tea stores, the chain cigar stores, the 5c and 10c stores, the system offers one of the best means of bringing the business into close personal touch with customers. It gives customers an opportunity to examine the wares at their convenience, and at the same time it gives the local branch manager an opportunity to build up good-will for the distant proprietor.

By these means also, stocks of merchandise can be better selected for local needs, and the buying power of each territory and the quantities carried on hand can be better adjusted to secure the greatest possible turnover of stock during an operating year.

There is no doubt that a campaign of education to introduce new goods or appliances can be more successfully conducted through local branches or by personal visits of local agents residing in the territory. Illustrations of this are the present methods of selling sewing machines, phonographs, pianos, electric and gas appliances, etc. When branches are given authority to sell on credit and collect their own accounts, credits can be more intelligently extended and collections can be more carefully watched by a local branch manager.

Agency and Branch Differentiated

There is a great deal of difference between the organization and management of agencies and of branch houses. An agency simply acts as a local salesman for a certain territory. It secures orders and forwards them to the head office. The head office passes on the credit of the purchaser and assumes the risk of refusing or accepting the order. If it accepts the order it also collects the account when it is due. Naturally it must keep a memorandum of sales, either to pay a commission to the agent, or to ascertain whether or not the agency is a paying venture, or for both reasons. A branch, on the other hand, has a much higher degree of self-management. It may receive at least the greater part of its stock of merchandise from the head office, but it usually makes its own sales. It may pass on its own credits and may collect its own accounts receivable; and sometimes it pays all its own expenses.

There are many modifications of the self-management of branches, especially in the matter of financial control. Some branches deposit all their receipts to the credit of the head office and have no authority to withdraw money for any purpose. In such cases the branch is supplied with a separate petty cash fund kept at a fixed sum on the imprest cash system. Other branches receive and pay money and simply make periodic remittances of surplus amounts to the head office as if they were entirely independent units. Various policies of control have been formulated to suit the nature of the business and the degree of self-management granted to the local branches.

Degree of Control Desired

The question of the particular kind of branch or the size of the agency or branch which it is desired to establish depends entirely on the peculiar needs of the business under consideration, and the degree of head office control which is necessary to secure the maximum results with the minimum of expense. An agency by its very nature is completely under the control of the central office. The agent has no powers other than those granted by his principal.

If the business is such that a large stock of merchandise is necessary, and a high degree of discretion and executive ability must be exercised, or if it is desirable to establish practically independent units with only central executive control over the entire purchasing and financial systems, branch stores may best serve the purpose.

The same system, however, will not meet the needs of every business, or even of every branch in the same business. Changes must be made for diversified local conditions which are peculiar to each establishment.

Factors of Successful Management

Certain points must be watched in all systems and under all conditions. Since the total net profits or losses are determined largely by the average turnover of circulating capital invested in the merchandise, the control of the quantity of merchandise, as well as the price, is a question which must have very careful attention and intelligent supervision. The stock on hand must be that quantity which will insure a supply adequate at all times to meet the demands of the trade, and which at the same time will be the minimum necessary to accomplish such a result. Each article turns in accordance with certain fixed principles. Certain goods turn faster than others, but there is a general relation between the rate of turnover and the profit per turn which should be carefully watched.

In the last analysis the success of every branch store system depends upon three things:

• 1.  A fair gross profit on sales, augmented by
• 2.  A proper rate of turnover on the merchandise carried, and
• 3.  Economical management.

Since expenses are a more or less fixed item, their relation to the total volume of business transacted must have the constant attention of the manager. Statistical charts made up from the reports sent in by the various branches, with summaries of total results, compared either by territories or by branches or by product will show to the manager the past history and also the present trend of the business as a whole or in parts. From these charts he is able to form an intelligent basis for inaugurating future policies of control.

Main Principles of Branch Accounting

The underlying principles upon which branch store accounting is based are very simple, but the superstructure will be simple or complex according to the nature of the business and the information which the head office requires for its accounts and records.

The main points to be kept in view in installing a system of accounts are to insure:

• 1.  Control or supervision by the head office.
• 2.  Separate results for the trading of each branch.
• 3.  Facilities for centralizing and comparing such 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.

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.

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:

In closing the branch books the inventory is brought into the Purchases from Head Office account which by its balance shows at billed price the goods disposed of by sale. The latter figure is taken into the Head Office Merchandise account so that its balance will also be the amount of goods still on hand as shown by the inventory. Purchases from Head Office and Head Office Merchandise are memorandum accounts calling attention to the fact that the merchandise on hand at the branch is not carried at its correct valuation but must be adjusted before incorporation with the head office accounts. The entries to effect this adjustment on account of the inventory and to close the branch books are as follows:

These entries close the books of the branch so far as is possible in view of the fact that accurate results as to profit and loss cannot be shown from the way in which merchandise is billed to the branch. There is perhaps no objection to using a Profit and Loss account as a summary account for income and expense items rather than the Head Office General account as shown here; though a Profit and Loss account is somewhat of a misnomer since profits and losses cannot be determined. In the problem given all expenses are grouped under one Expense account. This is done for the sake of brevity, and it is to be understood that as detailed an expense record will be kept on the books of the branch as may be necessary to give the information desired.

Head Office Books

Where the head office bills merchandise to the branch at any other figure than cost, the record of such shipments is best made in much the same way as with consignments. Memorandum accounts are set up to indicate that goods have been shipped to the branches. This is necessary because of the fact that shipments should not be entered in the regular merchandise accounts of the head office at any other figure than cost. Periodically, from memoranda carried in these special accounts, the true values of the merchandise shown as handled through them must be brought into the regular merchandising accounts. The manner of making these adjustments is taken up on page 535. Here will be shown all the accounts affected on the head office books by the current transactions with the branch. The entries necessary to record the data of the problem are as follows:

It is to be noted that separate merchandise accounts are opened with each branch by name but that only one Sales to Branches account need be opened. The Branch Merchandise account with each branch provides all the necessary data for making the adjustment at the close of the period, the offsetting memorandum account for all the different Branch Merchandise accounts being the Sales to Branches account. At the close of the period, upon report of the total activities for the period at the branch, the following entries are made on the head office books:

An alternative method of summarizing branch activities is sometimes used, as follows:

Under the first method the effect is to merge the activities of the branch with the similar activities of the head office. A statistical abstract of the different branches is then depended upon by the head office management to show the results of the period’s trading at the various branches. Under the second method the effect is to bring onto the books under the various branch Profit and Loss accounts the results of the trading in each case. Whichever method best gives the information desired by the head office will, of course, be adopted.

A brief discussion will now be given of the chief problems met in branch accounting. No attempt will be made to discuss the problem of branch organization from the standpoint of system or control. Such a discussion belongs more particularly to the field of auditing than to that of accounting.

Purchases

From the head office point of view no special problems are met in the matter of purchasing. From the standpoint of the branch the question of purchases is largely the same as the question of sales from the head office standpoint, and the problem of sales is chiefly one of the price at which goods should be billed to the branch. This is treated in the next section. Attention is called here to the need of a very careful control and checking up on purchasing activities of the branch where the branch is permitted to buy some portion of its goods from outside sources. This may become necessary in cases of emergency, or may be a matter of fixed policy in those cases where commodities are sold at some of the branches which the head office does not care to furnish or cannot handle with economy. Where the branch makes purchases both from outside and from the head office, the result may be to complicate the adjustments necessary at the close of the fiscal period. The underlying principles on which the accounts and their adjustments rest are, however, the same.

Sales

From the standpoint of the head office, the problem of sales to the branches is, as mentioned above, largely a problem of policy as to whether goods shall be invoiced at absolute cost; at cost plus a small percentage for overhead expenses; at sales price, i.e., at the price at which the branch is expected to sell the commodity; or at some arbitrary figure which is designed for the purpose of keeping the branch in ignorance of the actual cost of the goods dealt in and therefore of the profit and loss upon the branch’s activities. If goods are billed to the branch at sales price and disposed of at the same price, a comparison of the branch records covering their purchases and their sales should indicate by the difference between the two the amount of stock on hand at any time; i.e., billing the goods to the branch at sales price makes the merchandise records of the branch virtually a perpetual inventory of the goods on hand. This method effects a closer check on losses and waste, for which, of course, a small allowance must always be made. One of the most serious wastes to be checked up is occasioned by too liberal weights and measures to customers. On the other hand, invoicing the goods at sales price gives the branch manager less discretion in adjusting differences with customers inasmuch as defective goods must usually be returned to the head office to secure for the branch full credit. Further, billing the goods at sales price with the purpose of securing accurate control over the branch merchandise necessitates the pursuit of an inflexible policy of sales at the billed price. Daily or weekly adjustments on account of fluctuations in the market cannot be made without losing the control over stock which the policy of billing at sales price secures. In some lines of business this is an insuperable defect.

Where merchandise is invoiced at cost the branch manager has a rather more secure hold on his customers in that he can give immediate satisfaction by making allowances and adjustments to settle difficulties as they come up. Particularly where the manager has an interest in the profits, a much greater incentive is offered him to conduct the affairs of the branch in an efficient and economical manner. This responsibility and power to make adjustments may be abused, however, and a greater degree of control can usually be secured by the head office where merchandise is billed at sales price.

As mentioned above, sometimes goods are billed to the branch at an arbitrary figure. Inasmuch as the question of control by means of a perpetual inventory does not enter into this policy, large discretion can be given the branch manager without unsatisfactory results in checking up the merchandise. He may be allowed to make whatever adjustments with customers seem advisable. Changes in selling price can be made as often as conditions demand, either at the instance of the head office or at the discretion of the manager. A policy of this sort requires a much more thorough system of report from the branch to the head office in order to give the head office a means of checking up periodically the activities of the branch.

It is well to point out that on the books of the head office sales to branches are in no sense income items and must never be recorded with regular sales to outside parties. Similarly, sales or transfers among branches are in no sense earnings. It should be noted that, to keep the head office records correct and up to date, any transfers of goods among branches should be reported immediately to the head office; better still, the authorization of the head office, except in cases of emergency, should be given before such transfers can be made.

Adjustments on Branch and Head Office Books

Head Office and Branch accounts are essentially accounts current between the head office and the various branches. At the close of the fiscal period when the results of the period’s business are being summarized, the four classes of adjustments which are sometimes necessary in the case of accounts current may have to be made. The head office may show a charge to the branch for items which the branch has not yet received at the close of the fiscal period. Similarly, the branch may have charges and credits to the Head Office account which the head office records do not show. If this condition exists, the two accounts must be reconciled in accordance with the method shown in Volume I, page 497. Almost invariably, unless a system of complete daily reports is in effect between the branch and the head office, the head office will have to wait for certain reports from the branch at the close of the fiscal period. The nature of the entries to effect these reports is given in the problem illustrated on page 532.

The chief adjustment which is needed on the head office books is brought about through the policy of charging the branch with merchandise at some other figure than cost. Where this is done, the profit and loss on the branch activities cannot be determined until true costs are taken into the accounts in place of the fictitious figures used during the current period. The basis for converting the fictitious figure into a true cost figure is, of course, a secret known only to the head office. The memorandum accounts covering the merchandising transactions with the branch furnish the basis for determining the cost of goods sold by the branch. Thus, if goods are billed at, say, 30% above cost the billed price becomes 130% of the cost. It is therefore possible to determine the cost of all goods disposed of by the branch and of those still on hand. If it is desired to merge all the branch activities with the similar activities of the head office, the only adjustment necessary at the close of the fiscal period is to convert the sum total of the inventories on hand at the various branches to a cost valuation basis and include them with the head office inventory. This gives the data needed to determine the cost of goods sold and gross profit on the combined activities of the various branches and head office.

It is usually essential that the results of trading at each branch be determined, whether or not such results be incorporated separately on the head office books. Under the assumption that they are to be set up on the records of the head office, the billed cost of the goods disposed of at each branch must be converted to a cost basis and shown transferred from the Head Office Purchases account to the Profit and Loss account with each branch. This separates the total cost of goods sold as among the various branches and the head office. When the various branch Profit and Loss accounts are credited with their respective earnings from sales, the gross profit or loss on the trading activities at the various branches will thus be shown. Similarly, the regular merchandise accounts in which have been recorded the head office merchandising activities will show the gross profit on sales made at the head office. These adjustments are made without interfering in any way with the memorandum accounts carried on the branch books and on the head office books—accounts which have no place in the balance sheet of the head office. In their stead will appear the combined inventory of goods on hand at the branch and the head office converted to a cost basis.

Example of Adjusting Entries

The character of the entry needed to effect these adjustments will now be shown, using the data of the illustrative problem shown above. Comparison of the report of inventory from the branch, $14,000, with the record of goods shipped to the branch, $77,000, shows that goods to the billed value of $63,000 were disposed of at the branch. The records in the head office show that the goods were billed to the branch at 140% of cost. Converting this figure of $63,000 on the basis of 140% of cost develops a true cost of goods sold of $45,000. This is brought onto the head office books by the following entry:

Reference to the solution above shows that Branch A Profit and Loss has been charged with $10,000 expenses and credited with $85,000 earnings from sales. The gross profit, therefore, on the period’s activities at Branch A is the balance of the Branch A Profit and Loss account, i.e., $30,000. The only other adjustment necessary is the conversion of the Branch A inventory of $14,000 to a cost basis. The true cost here is, of course, $10,000 since the goods were billed at 140% of cost. The $10,000 will be included with the inventory of goods on hand at the head office before the determination of the head office cost of goods sold and gross profit can be made.

To secure a better understanding of the interrelations of these various accounts it is suggested that the student set up all the accounts and follow through them the transactions given in the illustrative problem above, both on the books of the branch and on the books of the head office.

A final problem of adjustment as between the head office and branch books concerns the treatment of fixed assets carried on the books of the branch. It may happen that the branch makes purchases of various pieces of property which are charged up to fixed asset accounts on the branch books. To secure uniform treatment, particularly as regards depreciation, it is customary at the close of the fiscal period to transfer the record of all fixed assets to the head office books. This is accomplished by entry on the branch books of a charge to Head Office General account, and credits to the various fixed asset accounts. On the books of the head office the record will be a charge to the various fixed asset accounts and a credit to the various Branch General accounts. Usually, therefore, on the branch books appear only current asset items, current liability items, expense and income items.

Reports from the Branch

The reports which the branch makes to the head office depend entirely on the degree of control to be exercised by the head office over its various branches. Accordingly, no general methods of universal applicability can be described. A statement of some of the different kinds of reports and the use made of them will be given. In some cases the branch books are kept in duplicate, the duplicates of all books of original entry being sent to the head office at the close of each month or oftener if desired. From these duplicate records the head office can keep a ledger record with every branch for comparison with the ledgers as kept by the branches. In other cases the head office requires that the branch send in daily duplicate copies of all business papers covering the transactions of the branch. Thus sales tickets are made in manifold, one copy of every sale, whether cash or credit, being sent to the head office. This furnishes the head office with a control over the selling activities of the branch. If the branch has charge of its cash a duplicate ticket of all deposits made should be forwarded to the head office. The canceled checks drawn by the branch must be forwarded by the banker to the head office. This procedure keeps the head office informed as to the cash transactions of the branch, giving both a control over the cash and a fairly complete knowledge of disbursements on account of expenses and of receipts from collections. If, now, all purchases of stock-in-trade are made from the head office, the latter has a close control over all the activities of the branch. It may thus keep a duplicate set of records, although that is scarcely necessary inasmuch as summaries can be made by which to check up the books of the branch at the close of the fiscal period.

Sometimes, instead of daily reports periodic summaries of the branch activities are made to the head office and these provide the basis for checking up on the branch at the close of the fiscal period. Where the head office maintains traveling auditors, such frequent reports are not necessary.

Examples of Reports

Below are given two examples of different kinds of reports from the branch to the head office. The first is a periodic summary of cash transactions followed by a statement of collections from customers. The second form is a type of ledger account carried with each branch on the books of the head office in accordance with detailed reports made by the branch or by traveling auditors from the head office. It will be noted that provision is made in the account by means of special rulings to show the total expenses of each branch, which total will enter into the trial balance; and also for an analysis of the expenses of each branch under suitable heads, these latter being treated simply as memoranda. Any credits or adjustments are entered in red ink, and are to be deducted before showing totals.