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.
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