LESSON - 8
BRANCH ACCOUNTS
OBJECTIVES
After going through this chapter you will be able to
• understand the purpose of Branch Accounting
• understand the various types of Branches
• follow the accounting treatment when goods are sent by H O to branches at Lost Price and at invoice price
• Calculate Profits by preparing Branch Accounts under debtors system and stock and debtors system
• Know the system of accounting when head office maintains independent branch.
STRUCTURE
8.1 Introduction
8.2 Objects of Branch Accounts
8.3 Types of Branches
8.4 Dependent Branch
8.5 Independent Branch
8.6 Whole sale Branch
Unit Questions
8.1 Introduction
Many business concern now-a- days carry on trading in different establishments scattered far and near. In other words, a business may be, and generally, is divided into so many divisions. If the various division are situated in different places of the same town or in different towns. They are known as branches. The parent establishment is known as ‘ Head Office’
Where a business has several selling branches it is essential that complete records be kept of the transactions relating to each branch, so that the head office can prepare accounts therefrom.
8.2 Objects of Branch Accounts.
The following are the main objects of maintaining branch accounts.
(i) Profit or loss of each branch can be found out. (ii) They halp in controlling Branches (iii) Actual financial position of the business can be found out on the basis of ahead office and branch accounting records. (iv) Branch requirements of goods and cash can be estimated.(v) Suggestions for increasing the efficiency of the branch can be sent on the basis of branch Accounts. (vi) They help in complying with the requirements of law because according to companies Act 1956. maintenance of accounting record of branches by companies is essential
8.3 Types of Branches
From the accounting point of view, branches may be classified as follows:-
(i) Dependent Branch
(ii) Independent Branch
(iii) Foreign Branch
(i) Dependent Branch/Branch not keeping full system of accounting/ Branches of which accounts are kept in the head office)
The term ‘Dependent Branch’ means a branch which does not maintain its own set of books. All records have to be maintained by the head office.
Features
(a) This type of branch sells only those goods supplied by the head office. However. Some times the branch may be allowed to make purchase from the local parties for which the payments are made directly by head office.
(b) The goods may be supplied to the branch by the head office ar cost price or at invoice price.
(c) All branch expenses such as rent, salary , advertisement etc., are paid by the head office.
(d) The branch manager is provided with a small amount of cash on the imprest system for meeting items of expenses.
(e) The branch is allowed to make only cash sales though in some cases, it may be allowed to make credit sales to approved customers.
(f) The branch remits sale proceeds (i.e, cash sales plus cash collected from debros_ periodically to the head office or credit the proceeds daily to the head office account, opened with a local bank.
(i) Dependent Branch
Accounting to respect of Dependent Branches
In case of a dependent branch, the head office may keep accounts of the branch according to any of the following systems
(i) Debtors system
(ii) Stock and Debtors system
(iii) Wholesale branch system
(iv) Final Accounts system
All these systems are now explained one by one in detail
(i) Debtors system (synthetic method)
This system is adopted in cash of branches of small size. Under this system ,a branch account is opened separately for each branch in the books of head office. This account is nominal account in nature. The opening balance of stock, debtors (if any), petty cash (if any)are debited to the branch account. The cost of goods sent to branch as well as expenses of the branch paid by the head office like salaries, rent, insurance etc., and closing balance of liabilities if any are also debited to it.
At the end of the year, the value of unsold stock, the total customers balances outstanding and that of petty cash are brought into the branch account on the credit side. The branch account reveals profit or loss. If the branch account shows a credit balance, it is branch profit and if debit balance is shown, it is branch loss.
When goods any invoiced at cost:
Branch Account ( in the books of head office)
Rs. Rs. Rs. Rs.
To Balance b/d
(Assets in the beginning)
Stock
Debtors
Petty cash
Furniture
Prepaid expenses
To Goods sent to branch A/c
To Bank (expenses paid by H.O)
To balance c/d (closing balance of liabilities accounts if any)
Creditors
Outstanding expenses
To General P&L.A/c
(Branch profit )(bal.A/c)
*(Branch Profit )( bal. Fig)
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
To balance b/d
(Opening balance of liabilities accounts if any)
Creditors
Outstanding expenses
By Bank
Cash sales
Cash collected from debtors
By Goods sent to Branch
A/c (returns to H.O)
By balance c/d (closing balance of Assets)
Stock
Debtors
Petty Cash
Furniture
(at depreciated value)
Prepaid expenses
By General P& L A/c
(Branch Loss) (bal.fig)
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
* Balancing figure is either profit or loss.
The following Journal entries are passed in the books of head office to record branch transactions:
(i) When goods are sent to branch
Branch Dr.
To goods sent to branch account
Note:- Reverse entry for goods returned to head office.
(ii) When cheque or draft is sent for branch expenses
Branch Account Dr.
To Bank Account
(iii) When cheque or draft is received as remittance from branch.
Bank Account Dr.
To Branch Account
(iv) For closing balances of assets
Branch Assets Account Dr
To Branch Account
(v) For opening balances of assets
Branch Account Dr.
To Branch Assets Account
(vi) For Closing balances of liabilities
Branch Account Dr.
To Branch liabilities Account
(vii) For opening balances of liabilities
Branch liabilities Account Dr.
To Branch Account
(viii) For transferring the balance of goods sent to branch account.
Goods sent to branch account. Dr.
To Purchase Account (trading concern)
Or Trading Account (Manufacturing concern)
(ix) For branch profit.
Branch Account. Dr.
To General Profit and Los Account.
Note:- Reverse entry for loss.
(A) When Goods are involved at selling price (i.e.invoice price method)
Some times head office sends goods to branch at invoice price. When the goods are sent at invoice price to the branch, the branch manager will have to sell the goods to the customers at invoice price.
As the goods are supplied to branch at invoice price, (a) opening stock (b) goods sent to branch (c goods returned by branch and (d) closing stock with be recorded in the branch account at this price. Hence in order to find out the true profit or loss at branch. It will be necessary to eliminate the loading. The following adjustment entries are to be made in the branch account.
Stock reserve account Dr.
To Branch Account
(b) For profit an net goods sent to Branch (i.e) Goods sent to branch –Goods
returned to H.O)
Goods sent to Branch A/c Dr.
To Branch Account
( c) For Profit included in the closing stock
Branch A/c Dr.
To Stock reserve A/c
II Stock and Debtors system
Profit or loss of a branch can be found out by preparing branch account which has been discussed earlier, but there is another method for the same purpose. This method is known as stock and debtors method. In this method, the head office keeps separate accounts relating to various types of transactions at the branch instead of one branch account. The following accounts are kept in the head office books relating to a branch under this system.
(i) Branch Stock Account
(ii) Branch Debtors Account
(iii) Branch Expenses Account
(iv) Branch Adjustment Account (required only when the goods are sent at invoice price)
(v) Branch Profit and Loss Account.
(vi) Goods sent to the Branch Account.
(i) Branch Stock Account
This account deals with all goods received, returned and sold by the branch. The account helps the head office in maintaining an effective control over the branch stock. It is debited with (a) opening stock (b) goods sent to branch (c) gods returned by debtors. (d) surplus in stock if any. It is credited with (a) cash sales (b) credit sales (c) goods spoiled and goods lost like loss in weight, pilferage, loss in transit (d) goods returned to head office by branch (e) closing stock. It gives information about shortage or surplus of stock and the closing stock at the branch.
(ii) Branch Debtors Account
This account is prepared to record all the transactions relating to branch debtors and ascertain either the closing balance of debtors or credit sales.
(iii) Branch Expenses Account.
All expenses incurred by branch are recorded in the debit side of this account and balance of this account is transferred to branch profit and loss account.
(iv) Branch adjustment account
When the goods are sent to branch at cost price, this account need not be prepared Instead , when the goods are supplied to branch at invoice price, it must be prepared to ascertain gross profit made by the branch. This account is debited with (a) closing stock reserve (b) profit element of stock shortages, defectives loss on transit and pilferage and (c) value of loss in weight (full amount) . It is credited with (d) stock reserve on the opening stock (b) loading on goods sent to branch and (e) the profit element of stock surplus. Balance of this account indicates gross profit or gross loss which is transferred to branch profit and loss account.
(v) Branch profit and loss account
This account is prepared to ascertain the net profit made by the branch . It is debited with (a) the balance of branch expense expenses account (b) cost of goods lost due to shortage or defectives, loss in transit, and pilferage . It is credited with (a) gross profit as shown in branch adjustment account (b) cost of surplus if any revealed by the branch stock account and (c) amount recoverable from insurance company for any losses of stock. Balance of this account indicates net profit of net loss which is transferred to General Profit and Loss Account.
(vi) Goods sent to Branch Account.
This account is prepared to find out the net value of goods sent to the branch Goods sent to branch and goods returned by the branch and loading included in them if any are recorded in this account. Balance of this account is transferred to either purchase account or trading account depending on whether the firm is trading concern or a manufacturing concern respectively.
JOURNAL ENTRYS
The following journals entries are required for various types of transactions under this method.
(i) When goods are sent to branch
Branch stock A/c Dr.
To Goods sent to branch A/c
Note : Reverse entry will be passed for goods returned by branch to head office.
(ii) When sales are made by the branch
(a) For Cash sales
Cash A/c Dr.
(b) For credit sales
Branch debtors A/c Dr.
To Branch Stock A/c
Note: Reverse entry will be passed for goods returned by customers
(iii) When cash is received from debtors
Cash A/c Dr.
To Branch debtors A/c
(iv) For discount allowed, allowances and bad debts.
Branch expenses A/c Dr.
To Branch debtors A/c
(v) For Branch expenses paid in cash
Branch expenses A/c Dr.
To Cash/ Bank A/c
(vi) For closing branch expenses account
Branch P & L A/c Dr.
To Branch expenses A/c
The following additional adjustment entries are to be passed when the goods are sent at invoice price.
(vii) For the difference between the invoice price and cost price of the
opening stock.
Stock Reserve A/c Dr.
To Branch Adjustment A/c
(viii) For the difference between the invoice price and cost price of the
closing stock.
Branch Adjustment A/c Dr.
To Stock Reserve A/c
(ix) For the difference between selling price and cost price of the goods sent to branch less returns.
Goods sent to Branch A/c Dr.
To Branch adjustment A/c
(x) For insurance claim received
Insurance claim A/c Dr.
To Branch P & L A/c
(xi) For any shortage in the branch stock account
(a) Loading on such shortage
Branch adjustment A/c Dr.
To Branch stock A/c
(b) Cost of such shortage
Branch Profit and Loss A/c Dr.
To Branch stock A/c
(xii) for any surplus in the branch stock account
(a) Loading on such surplus
Branch stock A/c Dr.
To Branch adjustment A/c
(b) Cost of such surplus branch stock A/c Dr.
To Branch profit & loss A/c
(xiii) For gross profit made by the branch
Branch adjustment A/c Dr. To Branch P & L A/c
Note- Reverse entry for gross loss
for net profit disclosed by branch P & L A/c
Branch P & L A/c
To General P & L A/c
Note – Reverse entry for net loss.
(xiv) For closing goods sent to branch A/c
Goods sent to branch A/c
To purchases or trading A/c.
8.4 DEPENDENT BRANCHES
DEBTORS SYSTEM
(a) When goods are sent to branch at cost price
Example
Layal shoe company opened a branch at Madras on 1.1.99 from the following particulars, the Madras Branch account for the year 1999 –2000
1999 2000
Rs. Rs.
Goods sent to Madras Branch 15,000 45,000
Cash sent to Branch for
Rent 1,800 1,800
Salaries 3,000 5,000
Other expenses 1,200 1,600
Cash received from the branch 24,000 60,000
Stock on 31st December 2,300 5,800
Petty cash in hand on 31st December 40 30
Solution
In the books of Head office
Madras Branch A/c for 1999
Rs. Rs.
Jan.1 To Balance b/d
To Goods sent to Branch
To Cash
Rent 1,800
Salaries 3,000
Other expenses 1,200
To General P& L A/c (Profit) Nil
15,000
6,000
5,340
26,340
31.Dec By Cash
By Balance c/d
Stock
Petty Cash
24,000
2,300
40
26,340
Madras Branch A/c for 2000
Rs. Rs.
Jan.1 To Balance b/d
Stock
Petty Cash
To Goods sent to branch
To Cash
Rent 1,800
Salaries 5,000
Other expenses 1,600
To General P& L A/c (Profit) Nil
2,300
40
45,000
8,400
10,000
65,830
31.Dec
ByCash 24,000
By Balance c/d
Stock 5,800
Pettycash 30
65,830
Example
From the following particulars relating to Hyderabad branch for the year ended 31.12.90 Prepare Branch A/c in the head office books.
Rs. Rs.
Stock at the Branch on 1.1.90 15,000
Debtors at the Branch on 1.1.90 30,000
Petty cash at the Branch on 1.1.90 300
Goods sent to Branch during 1990 2,52,000
Cash Sales 1990 60,000
Received from Debtors 1990 2,10,000
Credit sales during 1990 2,28,000
Cheques sent to branch during 1990
For salaries 9,000
For Rent & Rates 1,500
For Petty Cash 1,100 11,600
Stock at the branch on 31.12.90 25,000
Petty Cash 31.12.90 200
Goods returned by the branch 2,000
Debtors on 31.12.90 48,000
Solution:
In the books of Head office
Hydrabad Branch A/c
Rs. Cr Rs.
Jan.1
Dec.31 To Balance b/d
Stock
Debtors
Petty Cash
To Goods Sent to branch A/c
To Bank
Salaries 9,000
Rent & Rate 1,500
Petty Cash 1,100
To General P& L A/c
(Profit)
15,000
30,000
300
2,52,000
11,600
36,300
3,45,200 31.Dec By Bank Cash sale 60,000
Cash received
From Debtors 2,10,000
By Goods
Sent to branch
(Return to H.O)
By Balance c/d
Stock
Debtors
Petty Cash
2,70,000
2,000
25,000
48,000
200
3,45,200
When goods are sent to branch at invoice price
Manian Ltd, of Calcutta has a branch at Patna. Goods are invoiced to the Patna branch, the selling price being cost plus 25%
The patna branch keeps its own sales ledger and transmits all cash received to Calcutta. All expenses are paid from Calcutta. From the following details prepare the Patna branch A/c for the year 1989.
Rs.
Stock (1.1.89) (invoice price) 1,250
Stock (31.12.89) (invoice Price) 1,500
Debtors 1.1.89 700
Debtors 31.12.89 900
Cash sales for the year 5,400
Credit sales for the year 3,500
Goods invoiced from Calcutta 9,100
Rent 400
Wages 340
Sundry expenses 80
Books of Manian Ltd. Calcutta (H.O) Patna Branch A/c
Rs. Cr Rs.
Jan.1
Dec.31 To Balance b/d
Stock
Debtors
To Goods sent to branch
To Goods Sent to branch
To Bank
Rent 400
Wages 340
Sundry expenses 80
To Stock Reserve
(1500x25/125)
To General P & L A/c
(Profit)
1,250
700
9,100
820
300
1,000
13,170 31.Dec By Bank Cash sale 5,400
Cash received
from Debtors 3,300
By Stock Reserve
(1250x25/125)
By Goods sen to Branch – loading
(9,100x25/125)
By Balance c/d
Stock
Debtors
Petty Cash
8,700
250
1,820
1,500
900
13,170
Working Note:
Calculation of Cash received from Debtors
Branch Debtors A/c
Rs. Cr Rs.
1.1.89 To Balance b/d
To Sales (credit) 700
3,500
4,200 31.12.89 By Cash (Bal.fig)
By Balance c/d
3,300
900
4,200
FINAL ACCOUNTS SYSTEM
Example
A Madras merchant has a branch at Pudukkottai to which goods are sent at cost plus 25% The branch keeps its own sales ledger and remits all cash received to the head office every day. All expenses are paid from the head office . the transactions for the branch were as follows.
Rs. Rs.
Stock (1.1994) at I.P 11,000 Cheques sent to branch
Debtors (1.1.94) 100 Rent 600
Petty Cash (1.1.94) 100 Wages 200
Cash Sales 2,650 Salary 900
Credit Sales 23,950 Stock (31.12.94) at I.P 13,000
Goods sent to branch at I.P 20,000 Debtors(31.12.94) 2,000
Goods returned to head office 300 Petty Cash (31.12.94) 125
Bad debts 300 (Including miscellaneous
Allowances to Customers 250 Rs.25 not remitted)
Return Inwards 500 Collection from debtors 21,000
Prepare the Branch Trading and Profit and Loss A/c and Branch A/c for the year 1994.
Solution :
Branch Trading and Profit and Loss A/c for the year ending 31.12.94.
Rs. Rs.
To Opening stock (at cost )
(11,000 – 2,200)
To Goods sent to Branch 16,000
(at cost)
Less Returns to H.O 240
To Wages
To Gross profit c/d (bal.fig)
To Bad debts
To Allowance
To Rent
To Salaries
To Net Profit c/d
8,800
15,760
200
11,740
36,500
300
250
600
900
9,715
11,765 By Sales
Cash 2,650
Credit 23,950
26,600
Less Returns 500
By Closing Stock(at cost)
(13,000 – 2,600)
By Gross Profit b/d
By Miscellaneous income
26,100
10,400
36,500
11,740
25
11,765
Branch A/c (Personal A/c)
Rs. Rs.
To Balance b/d
Stock
Debtors
Petty Cash
To Goods sent to branch at cost
To Bank (expenses)
To Profit
8,800
100
100
16,000
1,700
9,715
36,415 By Bank
Cash Sales 2,650
Cash received from
debtors 21,000
By Goods sent to branch at cost
(Return)
By Balance c/d
(10,400 +2,000+125)
(Bal Fig)
23,650
240
12,525
36,415
WHOLESALE BRANCH SYSTEM
Example :
A Head office sends goods to its branch at 20% les than the list price. Goods are sold to customers at cost plus 100% From the following particulars ascertain the profit made at the head office and the branch on wholesale basis.
Head office Branch
Rs. Rs.
Purchases 2,00,000 --
Goods sent to branch(invoice price) 80,000 --
Sales 1,70,000 80,000
Solution:
Trading and Profit & Loss A/c
H.O
Rs. Branch
Rs. H.O
Rs. Branch
Rs.
To Purchases
To Goods received from H.O
To Gross Profit c/d
To Stock Reserve (Closing stock)
(16,000 x60/160)
To Net profit c/d
2,00,000
---
1,15,000
3,15,000
6,000
1,09,000
1,15,000 --
80,000
16,000
96,000
-
16,000
16,000 By Sales
By Goods sent to branch
By Closing stock
By Gross Profit 1,70,000
80,000
65,000
3,15,000
1,15,000
1,15,000 80,000
16,000
96,000
16,000
16,000
Working Note:
Calculation of closing stock
Rs. Rs.
Value of Closing Stock at H.O 2,00,000
Purchase
Less: Cost of goods sold
(1,70,000x100/200) 85,000
Less: Cost of Goods sent to Branch
(80,000x100/160) 50,000 1,35,000
---------
Closing Stock 65,000
Value of closing stock at Branch
Goods received from H.O 80,000
Less: Cost of goods sold (80,000x100/200) 64,000
Closing Stock 16,000
Note: H.O.Cost Price Whole sale Rate List Price
i.e Rate at which Goods 200(100+100)
supplied to branch
160 (200 – 200x20%)
STOCK AND DEBTOR SYSTEM
(b) When goods are sent at cost price.
The Calcutta Commercial Company unvoiced goods to its Jamshedpur Branch at cost. The Head office paid all the branch expenses from its except petty cash expenses which were paid by the branch. From the following details relating to the Branch prepare.
(1) Branch Stock A/c
(2) Branch Debtors A/c
(3) Branch Expenses A/c
(4) Branch P & L A/c
Stock (Opening) 21,000 Discount to customers 4,200
Debtors (Opening) 37,800 Bad debts 1,800
Petty Cash (Opening) 600 Goods returned by
Goods sent from H.O Customers to branch 1,500
Goods returned to H.O 3,000 Salaries & Wages 18,000
Cash Sales 52,000 Rent & Rate 3,600
Advertisement 2,400 Debtors (closing) 29,400
Cash received from debtors 85,000 Petty Cash (Closing) 300
Stock (Closing) 19,500 Credit sales 85,200
Allowances to customers 600
Solution:
Rs. Rs.
To balance b/d
To Goods sent to branch
To Branch Debtors
To Branch Profit & Loss A/c
(Transfer) 21,000
78,000
1,500
59,700
1,60,200 By cash
By Goods sent to Branch
By Branch Debtors
By Balance c/d 52,000
3,000
85,200
19,500
1,60,200
Branch Debtors A/c
Rs. Rs.
To Balance b/d
To Branch Stock A/c
(Credit sales) 37,800
85,200
1,23,000 By cash
By Branch expenses
[bad debts, allowances, discount]
By Branch Stock (Returns)
By Balance c/d 85,500
6,600
1,500
29,400
1,23,000
Branch Expenses A/c
Rs. Rs.
To Balance b/d
To Branch (Advt.Salaries & Wages, Rent & Rates)
To Petty expenses (600 – 300) 6,600
24,600
300
31,500
By Branch P & L A/c (transfer)
31,500
31,500
Branch Profit & Loss A/c
Rs. Rs.
To Branch Expenses A/c
To general P&L A/c (Profit)
Bal.fig.7
31,500
28,200
59,700 By Branch Stock A/c
59,700
59,700
When goods are sent at invoice Price:-
A head office invoices goods to its branch at cost plus 50% Branch remits all cash received to the head office and all expenses are met by the H.O .From the following particulars ,prepares the necessary accounts on the stock & debtors system to show the profit or loss at the branch.
Rs. Rs.
Stock on 1.1.89 (invoice price) 27,900 Goods returned by debtors 3,600
Debtors on 1.1.89 20,400 Goods returned to H.O
by Branch 4,500
Goods invoiced to the branch 1,53,000 Expenses at the branch 600
(invoice price) shortage of stock 1,350
Cash Sales 75,000 Expenses at the branch 16,200
Credit Sales 93,000 Bad debts 600
Cash collected from debtors 91,200
Branch Stock A/c
Rs. Rs.
To Balance b/d
To Goods sent to branch
To Branch Debtors
27,900
1,53,000
3,600
1,84,500 By cash A/c
By Branch Debtors
By Goods sent to Branch (Returns to H.O)
By Branch Adjustment A/c (loading on shortage)
By Branch P & L A/c
(Cost of shortage of stock)
By Balance c/d
75,000
93,000
4,500
450
900
10,650
1,84,500
Branch Debtors A/c
Rs. Rs.
To Balance b/d
To Branch Stock A/c
20,400
93,000
1,13,400 By cash
By Branch Stock A/c
By Branch expenses
(Discount + Bad debts)
By Balance c/d (Bal.fig) 91,200
3,600
1,200
17,400
1,13,400
Branch Expenses A/c
Rs. Rs.
To Bank
To Branch Debtors
(Credit sales) 16,200
1,200
17,400
By Branch P& L.A/c
(transfer) 17,400
17,400
Branch Adjustment A/c
Rs. Rs.
To Stock Reserve
(10,650 x50/150)
To Branch stock A/c
(Loading on shortage)
(1,350 x50/150) 3,550
450
58,000 By Stock Reserve
(27,900x50/150)
By Goods sent to Branch (Net) Loading
(1,48,500 x50/150) 9,300
49,500
58,000
Branch Profit & Loss A/c
Rs. Rs.
To Branch Expenses A/c
To Branch Stock A/c
Cost of shortage of stock
To General P & L A/c
(Net Profit) 17,400
900
36,500
54,800 By cash Adjustment A/c
(Gross Profit)
54,800
54,800
Goods sent to Branch A/c
Rs. Rs.
To Branch Stock A/c
To Branch Adjustment A/c
To Purchase A/c (Bala.Fig) 4,500
49,500
99,000
1,53,000
By Branch Stock A/c 1,53,000
1,53,000
INDEPENDENT BRANCHES
Adjustment Journal entries
Example:-
Show what entries would be passed by head office to record the following transactions in the books on 31st December , the date of annual closing?
(i) Goods amounting Rs.1,500 transferred from Chennai branch to Trichy branch under instructions from head office.
(ii) Depreciation of Rs.1,000 on Chennai branch fixed assets when such accounts are opened in the head office books.
(iii) A remittance of Rs.9000 made by the Trichy branch to head office on 25th December and received by the head office on 4th January
(iv) Goods amounting to Rs.15,000 sent by head office to Trichy branch on 20th December and received by the latter on 15th January.
Solutions:
Dec.31
(i)
(ii)
(iii)
(iv)
Trichy Branch A/c Dr.
To Chennai Branch A/c
(Being goods transferred from Chennai branch to Trichy branch as per instruction) Dr.
Chennai Branch A/c Dr.
To Chennai Branch fixed Asset A/c
(Being depreciation written off on Chennai branch assets)
The head office will not pass any entry until intimation is received . When information about it is received the following entry is passed.
Cash in transit A/c Dr.
To Trichy Branch A/c
Goods in transit A/c Dr.
To Trichy Branch A/c
(Being the entry to adjust the goods sent to Trichy Branch on 20th Dec. but not received by the branch till 31st Dec.] Rs.
1,500
1,000
9,000
15,000 Rs.
1500
1000
9,000
15,000
Example
A branch sent the following Trial Balance to its H.O
Rs. Rs.
Head office Account -- 57,840
Sundry Creditors -- 14,000
Sales -- 2,20,000
Balance at Bank 9,000 --
Cash in hand 140 --
Sundry Debtors 54,000 --
Purchases 1,60,000 --
Rent and Rates 4,000 --
General Expenses 7,000 --
Salaries 12,000 --
Bad debts 700 --
Fixture and fittings 2,400 --
Machinery 4,600 --
Stock, Ist January 38,000 --
------------- ------------
2,91,840 2,291,840
------------- ------------
The proportion of head office expenses to be charged to the branch is Rs.4,500 . The salaries include a sum of Rs.2,600 paid to branch manager who is further entitled to 15 % commission on the net profit of the branch before charging such commission.
The branch stock on 31st December was Rs.22,000 .Prepare the Branch Trading and P & L A/c and balance sheet allowing 10 % depreciation on the fixed assets.
Books of Head office
Branch Trading and P & L A/c for the year ended --------
Rs. Rs.
To Opening Stock
To Purchases
To Gross Profit C/d
To Rent
To General Expenses
To Salaries
To Bad debts
To H.O Expenses payable
To Depreciation
On Fixtures 240
On Machinery 460
To Commission to Branch
Manager (15,100 x 15%)
To Net Profit c/d 38,000
1,60,000
44,000
2,42,000
4,000
7,000
12,000
700
4,500
700
2,265
12,835
44,000 By Sales
By Closing stock
By Gross Profit b/d
2,20,000
22,000
2,42,000
44,000
44,000
Liabilities Rs. Assets Rs.
Sundry Creditors
Branch Manager’s
Commission due
H.O A/c
Add. H.O Expenses
Add> Net Profit
57,840
4,500
12,835
14,000
2,265
75,175
91,440
91,440
Cash
Bank
Debtors
Stock
Fixtures
Less Depreciation 10%
Machinery
Less.Depreciation 10%
2,400
240
4,600
460 140
9,000
54,000
22,000
2,160
4,340
91,440
8.5 INDEPENDENT BRANCHES
Independent branch means a branch which maintain its own set of books and has freedom to operate independently. The branch receive goods from head office and also purchases from outside. The branch manager is not required to remit the daily cash receipts, as he would require some working capital to pay for his purchases and also to defray local expenses.
Accounting Treatment
Such a branch maintains an independent and complete set of books as is ordinarily maintained by any business. It can prepare its own trial balance. Trading and profit and loss account and balance sheet and send their copies to the head office for their incorporation in the head office books. It maintains a head office account in its books.
This account is debited with cash sent to the head office, goods supplied to head office. Payment made by the branch for purchase of assets and loss to be borne by the head office and credited with cash received from the head office, goods received from the head office, depreciation of branch fixed assets, charge made by head office for rendering services and profit earned by the branch. Similarly , in the head office books., there will be separate branch account for each branch.
Reconciliation of transit items
(i) Goods in transit: The head office will pass the following adjustment entry.
Goods in transit A/c
To branch A/c
(ii) Cash in transit:
An adjustment entry will be passed in the books of the branch or head office(if the intimation of such remittance is received by the head office)
In the Books of branch In the books of head office
Cash in transit A/c Dr. Or Cash in transit A/c Dr To Head office A/c To branch A/c
Cash in transit or goods in transit will appear as an asset in the balance sheet.
Some other adjustments
(i) Purchase of branch fixed assets :
Head office books Branch Books
(a)When the payment
for fixed asset is Branch fixed Asset A/c Dr. Head Office A/c Dr.
made by the branch To Branch A/c To Cash A/c
(b) When the payment
for fixed asset is made Branch Fixed Asset A/c Dr. No entry
by the head office To Bank A/c
(ii) Depreciation of fixed Assets:
In the Books of Head office In the Books of Branch
Branch A/c Dr. Depreciation A/c Dr.
To Branch fixed assets A/c To Head Office A/c
(iii) Head office Expenses:
In the Books of Head office In the Books of Branch
Branch A/c Dr. P & L A/c Dr.
To P & L A/c To Head Office A/c
(iv) Inter – branch Transaction :
The entries will be as follows:
In the books of chennai branch
Head Office A/c Dr.
In the books of Lucknow branch
Goods from H.O A/c Dr.
To Head office A/c
In the books of head office
Lucknow Branch A/c Dr.
To chennai Branch A/c
(iii) Cash paid by branch on behalf of Head office :
When the branch has paid some amount on behalf of head office (say for purchases made by H.O) the entries will be as follows.
In the Books of Head office In the Books of Branch
Purchase A/c Dr. Head Office A/c Dr.
To Branch A/c To Cash A/c
(v) Cash Collected by branch on behalf of head office.
When the branch has collected some amount on behalf of head office (say collection of calls in arrears from shareholders ) the entries will be as follows:-
In the Books of Head office In the Books of Branch
Branch A/c Dr. Cash A/c Dr.
To Calls in arrears To Head office A/c
Incorporation of Branch Trial Balance in Head office Books.
(i) For debit side items of trading A/c (Total of opening stock net purchases and direct expenses)
Branch Trading A/c Dr.
To Branch A/c
(ii) For Credit side items of trading A/c (Total of net sales and closing stock
Branch A/c Dr.
To Branch Trading A/c
(iii) For transfer of gross profit or gross loss
(a) Branch Trading A/c Dr.
To Branch P & L A/c
(b) for Gross loss
Branch P & L A/c Dr.
To Branch Trading A/c
(iv) For various expenses and losses (i.e salaries, rent, depreciation
and discount allowed etc) which appear on the debit side of
P &L A/c
Branch P & L A/c Dr.
To branch A/c
(v) For various incomes and gains (e.g discount earned) which appear on the credit side of P&L A/c
Branch A/c Dr.
To branch P&L A/c
(vi) For transfer of net profit or net loss.
a) For net profit
Branch P&L A/c Dr.
To General P&L A/c
b) For net loss Dr.
General P & L A/c
To Branch P & L A/c
(vii) For total of various branch liabilities (i.e Branch Creditors, Branch Expenses Outstanding etc.
Branch A/c Dr.
To Branch Liabilities A/c (individually)
(vii) For total of various branch liabilities (i.e Branch Creditors , Branch Liabilities A/c (individually)
8.6 Wholesale Branch System
Accordingly, branch trading account is debited with.
(ii) The value of opening stock at the branch and
(iii) Price of goods sent during the year at wholesale price
It is credited with.
(i) Sale effected at the branch.
(ii) Closing stock of goods valued at wholesale price.
The value of goods lost due to accident, theft etc. is also credited to the branch trading account, calculated at the wholesale price. At this stage the branch trading account will reveal the amount of gross profit (loss) it is transferred to the branch profit and loss account . On further being debited with the expenses incurred at the branch and the wholesale price of goods lost, the branch profit and loss account will disclose the net profit (loss) at the branch.
Since the closing stock at the branch has to be valued at wholesale price. It would be necessary to create a stock reserve equal to the difference between in the whole sale price and its cost (to the head office) by debiting the amount in the ‘ Head office Profit and loss Account’ This stock reserve is carried down to the next year and then transferred to the credit of the (head office) profit and loss account.
Final Accounts System
The head office can also ascertain the profit or loss of a dependent branch by preparing branch trading and profit and loss account at cost . In such cases. The head office may also maintain a branch account.
Unit Questions:
1. What do you understand by branch accounting? What are its purposes?
2. Briefly explain the salient features of dependent branches?
3. Write a note on stock and debtors system.
4. What do you understand by independent branch ? Mention the entries necessary for the head office to incorporate Branch Trial Balance in the head office books.
5. When goods are sent to branch at invoice price.
Relax Limited a supplies goods to its New Delhi at cost plus
25% All Cash sales at branch are daily remitted to Head
Office and the latter directly pays all the branch expenses.
The result of the branch operations for the year ended
31.12.93 were as follows.
Rs.
Stock of goods at branch (1.1.93) (invoice price) 3,000
Goods supplied at invoice price 24,000
Remittance from the branch 25,000
Cash paid by Head Office for .Salaries and Wages 1,900
Rent and Rates 600
Sundry expenses 2,000
Returns from the branch (invoice price) 150
Stock of goods at branch (31.12.93) (invoice price) 8,000
6. The Super Cycle Co, had a branch at Chennai. Goods are invoiced to the branch at cost plus 25% Branch is instructed to deposit cash everyday in the head office account in the bank. All expenses are paid by cheque by the Head Office except petty cash expenses which are paid by the branch. From the following particulars prepare branch account in the books of Head office.
Rs. Rs.
Stock on 1.1.1995 2,500 Goods invoiced from H.O 18,200
Stock on 31.12.1995 3,000 Expenses paid by H.O 1,400
Sundry debtors on 1.1.95 1,400 Expenses paid by branch 120
Sundry debtors on 31.12.95 1,800 Cash remitted by H.O to branch
Cash Sales for the year 10,800 office for purchase of safe 1,300
Credit Sales for the year 7,000 Cash remitted to the H.O 15,000
Furniture purchased by the
Branch manager 1,200
7. Jolly & Co. Ltd Madras, has branch at Madurai for sale of the goods . For the year ending 31st March 1995, The following particulars are furnished:
Rs.
Goods sent to branch 2,84,000
Goods returned by branch 8,000
Cash Sales 1,58,000
Credit Sales 4,04,000
Cash received from debtors 3,79,000
Branch expenses paid by H.O
Rent 20,000
Salaries 60,000
Cash sent by Head Office to branch as petty cash 10,000
31.3.95
Petty Cash at Branch 200 300
Branch Debtors 47,000
Branch Stock 89,000 54,000
All the cash collections are remitted to the head Office . Show the Madurai Branch A/c in the Head Office books and also the Branch Trading and Profit & Loss Account for the year.
8. A Head office invoiced goods to its Branch by adding 25% to the cost, from the following particulars, relating to the Branch as certain profit or loss at the Branch by stock and Debtors system
Stock at the Brance 1.1.2005 Rs. 22,500
Drs. At the Branch 1.1.2005 Rs. 4,000
Goods sent to the Branch Rs. 2,65,200
Cash sales Rs. 80,000
Credit Sales Rs. 1,60,000
Cash received from Drs. Rs. 1,51,400
Discount allowed to customers Rs. 2,600
Goods returned by cutomers Rs. 1,500
Cash remitted to the Branch
Rent Rs. 1,500
Salaries Rs. 8,000
Sundry Expenses Rs. 1,000
9. The following Trial Balance is received by a Head office from its Branch.
Rs. Rs.
Balance at Bank
Cash in hand
Sundry Drs
Purchases
Rent and Rates
General Expenses
Salaries
Bad debts
Fixture and fittings
Machinery
Stock on 1st January 18,000
280
1,05,000
3,20,000
10,000
12,000
24,000
1,400
4,800
9,200
76,000
5,83,680 Sundry Crs
Sales
Head office a/c 2,80,000
4,40,000
1,15,680
5,83,680
the proprtion of Head office expensies to be charged to the Branch is Rs.9000 . The salaries include a sum of Rs.5200 paid to the Branch manager who is further entitled to 15% on the net profit before charging such commission . The Branch stock on 31st December was Rs.44,000.
Pre pare Branch Trading and profit and Loss Account and Balance sheet allowing 10% depreciation on the fixtures and fittings.
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