Preparing Branch Accounts

While preparing Branch Accounts, special care should be taken with respect to the following items (points worth noting):

(1) Credit Sales, Bad Debts, Discount Allowed, Sales Returns:

Credit sales, Bad debts, Discount allowed, Returns from Debtors to branch are not direct transactions from the Head office and as such they are not recorded in the Branch Account. However, these items will be taken into consideration while ascertaining the amount of Closing or Opening Balance of Debtors or Cash Received from Debtors, in the Memorandum Branch Debtors Account.

In short, the above items are not shown in the Branch Account, however; the net effect of these items is automati­cally given effect in the Branch Account, by showing Opening Debtors. Closing Debtors and Cash Received from Debtors.

(2) Loss of Stock, Surplus of Stock

Shortage or surpluses of stock at the Branch due to normal or abnormal reasons are not shown in the Branch Account.

(3) Depreciation of Fixed Assets:

Depreciation of Branch fixed assets is not shown in the Branch Account. However, the opening bal­ance of the fixed assets and closing balance of the fixed assets (of course deducting depreciation) are shown in the Branch Account.

It is important to note that when opening balance and closing balance of fixed assets are entered in the Branch Account, automatically the effect of depreciation is there.

(4) Goods in Transit:

Goods – in – transit is the difference between goods sent by Head Office and received by the Branch. Such goods will be shown either on both sides of the Branch Account or will be ignored altogether while preparing the Branch Account.

(5) Expenses Incurred by Branch:

Expenses actually paid by Branch are not shown in the Branch Account. But the amount remitted by Head Office to Branch for meeting expenses is debited in Branch Account. If actual amount spent by Branch is less, the cash balance is shown as a part of closing balance, in the credit side of the Branch Account.

This will be clear from the following example:

Example:

If Opening Balance of Branch cash is Rs. 100; cash remitted by Head Office to Branch is Rs. 600 and the closing Balance of cash with Branch is Rs. 50; actual amount spent is Rs. 650 (Rs. 100 + Rs. 600 – 50), these items appear in Branch Account, as under:

(6) Purchase of Fixed Asset by Branch:

When the Branch has purchased any fixed asset for cash, the remittance from the Branch to Head Office is to be reduced by the amount and fixed asset should be shown on credit side of Branch Account, as closing balance. If the Branch has purchased fixed asset on credit basis, the liability arising from such purchases should be shown on the debit side of Branch Account as closing balance of liability.

(7) Sale of Fixed Asset:

When the Branch has sold fixed asset for cash, the proceeds is remitted to Head office. The asset will reduce in value to be shown on the credit side of the Branch Account. If the Branch has sold fixed asset on credit basis, the amount due is shown as debtors at the Branch at the close of the accounting period. Loss or profit arising from such sale of fixed asset will not be shown in the Branch Account as this is automatically adjusted through the above adjustments.

(8) In case Opening or Closing balance of Branch Debtors are not given. Memorandum Branch Debtors Account has to be prepared to find out missing figure. This account is prepared on the same pattern on which Total Debtors Account is prepared under Single Entry System. Similarly, if opening or closing balance of Branch stock is missing, then Memorandum Branch Stock Account has to be prepared.

Illustration 1:

ADVERTISEMENTS:

The Bombay General Stores invoices goods to their various branches at cost, and the branches sell the goods not only for cash but on credit also. Expenses of branches are paid by the Head Office.

From the follow­ing particulars relating to the Calcutta Branch, prepare the necessary account in the Head Office books:

Note:

Closing Balance of debtors not given in the problem has to be found out by preparing memorandum debtors account. Closing balance of furniture is after deducting depreciation. Branch profit can also be found out by preparing a trading and profit and loss account in the usual way by ignoring the opening and closing balances except stock, and showing all expenses and losses in the profit and loss Account.

Illustration 2:

The Bombay Trading Company invoiced goods to its branch at Delhi at cost. The Head Office paid all the branch expenses from its bank, except petty cash expenses which were met by the branch.

All the cash collected by the branch was banked on the same day to the credit of the Head Office account. The following is a summary of the transactions of the branch during the year ended March 31, 2006.

Note:

The branch account, as prepared above, is a nominal account showing profit or loss made by the branch. If it is desired to prepare a trading and profit and loss account for ascertaining profit or loss, the accompanying branch account will only be a personal account showing the total of closing balances as the difference between the two sides.

 

The following points may be remembered while you prepare the Branch Account:

1. No entry is made for credit sales at the Branch in the books of Head Office. Head Office makes entry only for the cash received on account of remittance from the cash sales along with cash received from Branch Debtors.

2. Petty expenses, paid by the Branch Manager out of petty cash, are not shown in the Branch Account. Branch Account is debited with the opening balance of cash and further sum sent by Head Office to Branch. At the closing time, Branch Account is credited with the closing balance of Petty Cash. Thus, the petty expenses are automatically charged to Branch Account.

3. Head Office makes no entry for the discount allowed, Bad Debts written off. Returns made by Branch Debtors etc. But these are considered while preparing Branch Debtors Account.

4. Depreciation of Branch fixed assets is not shown in the Branch Account. However, the Branch Account is debited with the value of the fixed assets in the beginning of the accounting period and credited with the value of fixed assets at the end of the accounting period. Thus the difference i.e., depreciation is automatically charged.

5. Fixed assets may be sold by Branch at a profit or loss, for which no entry is made in the Branch Account. The sale proceeds of such fixed assets are remitted to Head Office. Similarly when purchase of asset is made, remittance is reduced to that extent.

When sale of asset takes place remittance in­creases and the value of asset decreases; when purchase of asset takes place remittance decreases and the value of asset increases. The Branch Account is recorded with the closing figure i.e., Opening Balance + Purchase – Sale Proceeds of asset.

6. In case Opening and Closing balance of branch Debtors are not given, Memorandum Branch debtors Account has to be prepared to find out missing figure. This account is prepared in the same pattern on which Total debtors Account is prepared under Single Entry System. Similarly, if opening and closing balance of Branch stock is missing, then Memorandum branch Stock Account has to be prepared.

 

Stock and Debtors System of Accounting for Branch

 This method is applicable particularly where there are large numbers of transaction and they are numerous. This method helps the Head Office to make efficient control on branches as there are a few more accounts are to be opened viz:

(a) Branch Stock Account;

(b) Branch Debtors Account;

(c) Branch Stock Adjustment Account;

(d) Goods Sent to Branch Account;

(e) Branch Profit and loss Account.

Sometimes in addition to above, Branch Cash Account, Branch Expenses; Branch Fixed Assets Account etc. may also be opened. It may be recalled that Branch Stock Account, Branch Debtors Account, Branch Cash Account, Branch Expenses Account, Goods Sent to Branch Account have been explained in detail, So, in order to avoid repetition we will only explain here in detail, the most significant and important account under Stock-Debtors System i.e., Branch (Stock) Adjustment Account.

Practically Branch (stock) Adjustment Account deals with the loading on the respective items of goods relating to Branch Stock Account. In short, loading is to be computed on Opening Stock at Branch, Closing Stock at Branch, Goods sent to Branch, Goods Returned by Branch, Shortage of Stock, Surplus of Stock, Lost-in-Transit, Pilferage of Stock, Wastage of Stock, or any Normal and Abnormal Losses.

Branch Stock Adjustment Account is prepared at Invoice Price. The difference between the two sides of this account reveals either gross profits (if credit side to greater than the debit side) or gross loss (if debit side is greater than the credit side).

Entries:

After ascertaining gross profit or gross loss from Branch Stock Adjustment Account, a Branch Profit and Loss Account is to be prepared which will exhibit the net result of the business and the same is transferred to General Profit and Loss Account.

Branch Profit and Loss Account:

Branch Profit and Loss Account exhibits the net result of the operations, i.e., net profit or net loss. This account is credited with the amount of gross profit which is transferred from Branch Adjustment Account, Cost of surplus of stock or any revenue income and this account is debited with all branch expenses, depreciation, cost of abnormal loss of stock, etc. If credit side is greater than the debit side, there will be net profit and vice versa in the opposite case.

Special Note:

It must be remembered that the loss which is related to branch and which is within the jurisdictions and control of branch, the same should be charged against Branch Profit and Loss Account. Otherwise the same should be charged to General Profit and Loss.

Fixed Assets/Liabilities Account:

A separate fixed asset account and liabilities account may be maintained by the Head Office as per usual double entry principle, i.e., in case of fixed asset, with the opening balance of fixed assets, purchase of fixed asset will be added and appear in the debit side and depreciation on fixed asset will appear on the credit side to find out the closing balances of fixed assets.

Treatment of some special Items:

Apparent Profit/Loss:

Sometimes Branch Stock account shows an unusual increase or decrease in the value of stock. This is the result of inaccurate prediction of the possible selling prices of the goods invoiced by Head Office. The goods are invoiced by Head Office after charging a certain expected percentage of profit although the goods are sold, in practice, at either more or less than the expected percentage of profit.

As a result, Branch Stock Account reveals either a ‘surplus’ of stock which is called ‘Apparent Profit’ or a ‘deficit’ of Stock which is called ‘Apparent Loss’ — these are not to be treated as ordinary surplus of shortage of stock.

The entries for this purpose are:

In the case of Apparent Loss, the entries will be reversed.

The students should remember that even after adjusting Normal Loss if their is a surplus in Branch Stock Account, the same should be treated as Apparent Profit and not Surplus of Stock.

Loss-in-transit:

Sometimes a part of the goods may be lost during transit, i.e., before the actual receipt of branch.

The entries for this purpose will be:

Pilferage/Shortage/Wastages of Stock or any Abnormal Loss:

The treatment of these items will be similar to Lost-in-transit stated above.

Surplus of Stock:

Sometimes there may be a surplus of stock, i.e., credit side of Branch Stock Account is higher than the debit side showing a surplus of stock.

The entries are:

Illustration 1:

Red & Co. of Mumbai started a business at Bangalore on 1.4.2006 to which goods were sent at 20% above cost. The branch makes both Cash Sales and Credit Sales. Branch expenses are met from branch cash and balance money returned to H.O. The branch does not maintain double entry books of accounts and necessary accounts relating to branch are maintained by H.O.

Following from the details are given for the year ending 31st March 2007.

Draw up the necessary ledger accounts like Branch Debtors Account, Branch Stock Account, Goods Sent to Branch Account, Branch Cash Account, Branch Expenses Account and Branch Adjustment Account for ascertaining gross profit and Branch Profit and Loss Account for ascertaining branch net profit.

Illustration 2:

Y Ltd. opened a new Branch at Vadodara on 1st Jan. 2009 where goods are sent by H.O. at 25% above cost. All expenses of Branch are met from branch cash and the balance remitted to H.O. Branch sells goods both for cash and credit.

From the following particulars, prepare the necessary accounts in the books of H.O. and ascertain the profit or loss made by Branch for the year ended 31st Dec. 2009 assuming that the branch does not maintain double entry books of accounts:

Illustration 3:

Mithu-Mon Ltd. has two branches, one at Kolkata and the other at Chennai Goods are invoiced to branches at cost plus 50%. Branch remits all cash received to the Head Office and all expenses are met by Head Office.

From the following particulars, prepare the necessary accounts, under the Stock-Debtors System, to show the profit earned at the Branches:

Illustration 4:

A Head Office in Patna has two branches at Kolkata and at Chennai. Goods are consigned to them at loaded figures of 10% and 20% on cost, respectively. During the year, invoices to the Branches are Rs. 44,000 and Rs. 60,000, respectively.

Included in the item Rs. 44,000 are invoiced for goods costing Rs. 12,000 invoiced to Kolkata Branch at Rs. 13,200 which should have been invoiced to Chennai Branch. Sales are all for cash, being Kolkata Branch Rs. 22,000 and Chennai Branch Rs. 50,400. It may be assumed that closing stocks are correct.

Prepare the (i) Branch Stock, (ii) Goods Sent to Branch, and (iii) Branch Adjustment Accounts in the books of Head Office.

Illustration 5:

Sankha Trader Ltd. sends goods to its Gauhati Branch at cost plus 25%. From the following particulars you are required to show the necessary ledger accounts in the Head Office books:

Illustration 6:

Columnar Branch Stock Account (where there are two branches):

Pure Silk Company of Mursidabad has two Branches, one at Kolkata and the other at Delhi. Goods are invoice by the Murshidabad Head Office to its branches at cost plus 50% on Cost Both Cash and Credit Sales are made by the Branches and all cash collected by the Branches is sent to the Head Office and the Branch expenses are met by the Head Office.

The following particulars are supplied by the Branches for the year ended 31st March 2011:

Note:

When Branch Stock Account is prepared under Double Column, there is no necessity of preparing Branch Adjustment Account as Gross Profit can easily be ascertained from Branch Stock Account under Cost Price Column. Students are advised to complete the Invoice Price column at first.

Illustration 7:

Janata Traders, at Salt Lake, has a number of branch shops at different places of Kolkata All accounts are maintained by H.O. Goods are invoiced to branches at cost plus the expected mark up to 33⅓% and the accounting system is designed in such a manner which gives the H.O. as much control as possible over the branch stocks.

At Park Circus Branch at 1st Jan. 2009, goods costing Rs. 4,800 were in stock, apart of those goods costing Rs. 600 had been reduced in selling price to Rs. 675 and the balance of Debtors at the same time was Rs. 2,500.

The following particulars relating to Park Circus Branch at 31st Dec. 2009 were:

Illustration 8:

D Ltd with their Head Office at Delhi, invoiced goods to its Branch at Ghaziabad at 20% less than the list price which is cost plus 100% with instruction that cash sales were to be made at invoice price and credit sales at catalogue price (i.e., list price).

From the following particulars available from the Branch, prepare Branch Stock Account, Branch Adjustment Account, Branch Profit and Loss Account and Branch Debtors Account for the year ending 31st Dec. 2008:

Illustration 9:

Multi-chained Stores Ltd., Delhi, has its branches at Luck-now and Chennai. It charges goods to its Branches at cost plus 25%.

Following information is available of the transactions of the Luck-now Branch for the year ended on 31st March 2012:

Goods worth Rs. 15,000 (included above) sent by Luck-now Branch to Chennai Branch was in- transit on 31.3.2012.

Show the following accounts in the books of Multi-chained Stores Ltd.:

(a) Luck-now Branch Stock Account;

(b) Luck-now Branch Debtors Account;

(c) Luck-now Branch Adjustment Account;

(d) Luck-now Branch Profit and Loss Account and;

(e) Stock Reserve Account;

(f) Stock Lost by Fire Account; and

(g) Petty Cash Account.