Branch Accounting
Meaning of Branch :-
The aim of every business is to grow and increase its sales so as earn more and
more profits. To achieve this Objective the best strategy is to market its
products/services over a large territory, which is possible only if business decide
to split its business into certain divisions or parts. In case various division of the
are located in different places either in the same town or in different towns or
even in foreign countries. They are known as branches. For example Bata shoe co.
, State Bank Of India, LIC Housing Finance, etc. are opening their business
through various branches located in different places .
Types of Branches:
From an accounting point of view, The following are the main type of branches.
Type of Branches
Home Branches Foreign Branches
Dependent Branches
Independent Branches
1. Home Branch :
When a branch is opened in the same country Where the office is registered ,it is
called Home Branch. Home Branch can be further classified as follows:
A. Dependent Branches
B. Independent Branches
Dependent Branches
The Branch that do not maintain the complete record of its transaction are
called Dependent Branches. Accounts of such Branch are maintained by the Head
Office Branch keep some memorandum records e.g. Cash Register, Stock Register,
Debtor Register, Petty Cash Book, etc . Such Branches sell only those goods which
are supplied by Head Office and are not allowed to make direct purchases. All
Branch Expenses are directly paid by Head office.
Independent Branches
Independent Branches are those Branches which maintain complete record of its
transactions. They Make their own trial balance and final accounts and send this
record to Head Office for their incorporation in the Head Office Books. Such
Branches are allowed to make direct purchases apart from goods received from
the Head Office These Branches carry on their work in an autonomous manner.
From the amount received from cash sales or debtor , they can incur expenses
and can operate its own bank account.
(2). Foreign Branch
When a branch is opened abroad i.e. in a country other then a country where the
Head Office is registered, It Is called a Foreign Branch. They are independent in
nature. Just like independent branch they maintain their own records of their
transactions and also prepare their own trial balance and final accounts. the
main point of difference is in the case of foreign branch is that they maintain
accounting records in the unit of the currency of the foreign country in which
they are located.
Objective of keeping Branch accounts:
1) To ascertain the Profit or loss of each branch separately for a particular
accounting period.
2) To ascertain the financial position of each branch separately for a particular
accounting year.
3) To assess the progress and performance of each branch.
4) To calculate the commission payable to branch manager if that is based on the
profit of the branch.
5) To ascertain the stock and cash requirements of each branch.
6) To comply with the audit requirements of Companies Act 1956.
7) To ascertain the value of stock held by each branch at the end of a particular
period.
Following are the main ways in which the head office may keep the branch
accounts in its books:
Debtor System
Final Account System
Stock And Debtor System
Wholesale Branch System
Independent Branch System
Wholesale Branch System
Some Organisations sell their products through wholesale as well as through
own branches. Goods are supplied to the wholesale and the branch at the same
price i.e. wholesale price. The branch sells these goods to the customers at the
retail price which is more then the wholesale price. It means that the branch
earn more profit then the H.O. But the total profit of the branch shall be the
difference between the wholesale and retail price. Thus if the H.O. want to
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know the additional profits made by the retail branch, it is necessary to make
distinction between profit due to wholesale and profit due to retail business of
the branch. This system of calculating additional profit made by branch is
known as Wholesale Branch System.
Example:-
Suppose the cost of an item is 100, the wholesale price is 125 and the retail
price is 180. If the H.O. sends this item to the branch and the branch sells it to
the customer, the total profit earned by the concern is 80 (i.e. retail price 180-
cost price 100). But out of this profit of 80 the additional profit made by the
concern through its retail branch is only 55.
As Stated above, the wholesale price means the cost plus profit therefore in
the books of H.O. branch stock account shall be maintained at wholesale price.
At the end of the accounting period, the problem arises only when the goods
received from H.O. remained unsold at branch, because it includes a part of
profit which has been charged by the H.O. therefore the H.O. must create a
proper reserve by debiting its own profit and loss account in order to show the
branch stock at cost in the balance sheet. For this purpose the following entry
shall be made at the year end:
Date Particulars L.F Dr. Cr.
.
Profit and Loss A/c (H.O.) Dr.
To Stock Reserve A/c
(Being Reserve Created for the difference in the
wholesale price and cost price of the branch
closing stock)
Note: the above entry will be reversed in the next accounting
period
Stock And Debtor System
Profit and loss of a branch can be found out by preparing branch account but
there is another method for the same purpose. This method is known as stock and
debtors method. If it is desired to exercise a more detailed account control over
the working of a branch, the accounts of the branch are maintained under which
is described as the stock and debtors method.
When to use this system?
This system is to be used only when the goods are to be invoiced to the branch at
selling price.
Usefulness of the System?
This system is very useful in the following situations:-
Where the branch are of large size.
Where a greater degree of control is sought to be exercise over the
Branches.
When the goods are sent to the branches at an invoice price.
A brief description of various accounts opened in the books of Head Office is given
below:
Branch Stock Account
Branch Debtors Account
Goods sent to branch account
Branch adjustment account
Branch cash account
Branch Expense Account
Branch Profit and loss Account
A. Branch Stock Account;
a) Branch Stock Account is a practical means of controlling stock at
branch.
b) It is maintained at invoice price (Actual Stock with the branch is
shown as the balance in this account.)
B. Branch (Stock) Adjustment Account
It is prepared to ascertain gross profit of the branch. This account summarizes
the profit “loading” on all transactions. This account is credited with the
stock reserve on opening stock and loading on net good sent to branch. It is
credited with the loading on surplus in stock.
C. Goods sent to Branch Account
Goods sent to branch account is credited with the invoice price of goods sent to
the branch by the head office and transferred from other branches and debited
with the invoice price of the goods returned/transferred by the branch.
D. Branch Debtors Account
When branch is allowed to sell goods on credit. It is used to exercise control over
branch debtors. It is prepared like sundry debtors account.
E. Branch Cash Account
Branch Cash Account is prepared with a view to exercise control over the branch
cash. The account is generally opened where the branch is allowed to hold cash
received from debtors and use it for branch expenses and remit the balance to
head office after certain interval
F. Branch Expense Account
Branch expense records all branch expenses in cash. In addition, this account is
debited with the item like bad debts, discount allowed, depreciation on branch fixed
assets, etc. The balance of this account is transferred to branch profit and loss
account and thereby closed.
G. Branch Profit And Loss Account
Branch profit and loss account is prepared to ascertain the net profit or loss at
branch. Gross Profit or loss shown in the Branch Adjustment Account is transferred
to Branch profit and loss account. The branch expenses, Shortage of stock at cost
value and losses of stock etc. are debited to this account. If Any Income and gains is
credited to this account and cost value of surplus in the branch stock account.
Profit or loss made at the branch during accounting period, finally transferred to
General Profit & loss Account.
H. Branch Fixed assets Account
The head office may maintain separate asset accounts for each fixed assets. This
account is debited with the opening value of asset and purchase of an asset, if any.
This account is credited with the depreciation provided on the asset.
Following Journal Entries Are Made Relating To Various Typs Of Transactions
Under This Method
S.no. Particulars L.F. Debit Credit
1. When Goods Are Sent To Branch.
Branch Stock A/c
To Goods Sent To Branch A/c
Note :- Reverse Entry Will Be Passes For Goods Returned By Branch
2. When Sales Are Made By The Branch.
(a) For Cash Sales
Cash A/c Dr.
To Branch Stock A/c
(B)For Credit Sales
Branch Debtor A/c Dr.
To Branch Stock A/c
3. When Cash Is Received From Debtor
Cash A/c Dr.
To Branch Debtor A/c
4. For Discount Allowed, Allowances and Bed Debts
Branch Expenses A/c Dr.
To Branch Debtor A/c
5. When Goods Are Returned By Branch Debtor.
Branch Stock A/c Dr.
To Branch Debtor A/c
6. When Goods Are Returned By Branch Debtor
Direct To Head Office
Goods Sent To Branch A/c (Cost) Dr.
Branch Adjustment A/c (Loading) Dr.
To Branch Debtor A/c
7. For Normal Loss Of Stock
Branch Adjustment A/c (I.P.)
To Branch Stock A/c
8. For Abnormal Loss ,Waste Or Leakage Or
Shortage Of Stock
Branch Adjustment A/c (Loading) Dr.
Branch P.&L. A/c (Cost) Dr,
To Branch Stock A/c (I.P.)
Note:-Reverse Entry For Surplus In Stock
9. When Goods Are Transferred from One Branch to
Another Branch
(a) Transferor Branch
Goods Sent To Branch A/c (Cost) Dr.
Branch Adjustment A/c (Loading) Dr.
To Branch Stock A/c (I.P.)
(b) Transferee Branch
Branch Stock A/c (I.P.) Dr.
To Goods Sent To Branch A/c (Cost)
To Branch Adjustment A/c (Loading)
10. For Apparent Profit Over The I.P.
Branch Stock A/c Dr
To Branch Adjustment A/c
11. For Branch Expenses Paid in Cash
Branch Expenses A/c Dr.
To Cash A/c
12. For Closing Branch Expenses Account(excluding
cash in hand at the end)
Branch Adjustment A/c (non recurring expenses)Dr.
Branch P.&L. A/c (recurring expenses) Dr.
To Branch Expenses A/c
13. For Adjustment of Excess Price of the opening stock
Stock Reserve A/c Dr.
To Branch Adjustment A/c
14. For Adjustment of Excess Price of Closing Stock
Branch Adjustment A/c Dr.
To Stock Reserve A/c
15. For Adjustment of Excess Price of Goods Sent To
Branch
Goods Sent To Branch A/c Dr.
To Branch Adjustment A/c
16 For Insurance Claim Recoverable
Insurance Claim A/c Dr.
To Branch P.&L. A/c
17. For Transfer of Balance of branch Adjustment
A/c (G.P .)
Branch Adjustment A/c Dr.
To Branch P.&L. A/c
Note;- Reverse Entry For Gross Loss
18. For Transfer of Profit or Loss To general Profit and
loss account.
(a)If Profit
Branch P.&L. A/c Dr.
To General P.&L. A/c
(b)If Loss
General P.&L. A/c Dr.
To Branch P.&L. A/c
19. For Closing Goods sent To Branch Account
Goods Sent To Branch A/c Dr.
To Purchases A/c or Trading A/c
Illustration:- Crown Industries , Mumbai has a branch at Goa To Which goods
are invoiced at cost plus 25%. The branch makes sales both cash or credit.
Branch Expanses are paid direct from Head Office and the branch remits all cash
to Head Office.
Details:-
Goods Received From H.O. At I.P. 60,000
Returns To Head Office at I.P. 1,200
Branch Stock on 1-1-2011 at I.P. 6,000
Cash Sales 20,000
Credit Sales 36,000
Branch Debtor on 1-1-2011 7,200
Cash Collected From Debtors 32,000
Discount Allowed to the Debtor 600
Bad Debts in the Year 400
Goods Returned by Debtors to Branch 800
Rent, Rates, and Taxes at Branch 1,800
Branch Office Expenses 600
Branch Stock at I.P. on 31-12-2011 12,000
The difference in branch stock account is treated as surplus
SOLUTION:-
In The Books Of Crown Industries , Mumbai
Branch Stock Account
To Balance B/d 6,000 By Cash A/c 20000
To Goods Sent To Branch A/c 60,000
Less: Returns to H.O. 1200 58800 By Branch Debtor A/c 36000
To Branch Debtor A/c (sales return) 800 By Balance c/d 12000
To Branch Adjustment A/c (Loading
of Surplus i.e. 25/125*2400) 480
To Branch P/L (Cost of Surplus) 1920
68000 68000
Branch Debtor Account
To Balance B/d 7200 By Cash Sales A/c 32000
By Branch Expenses A/c 1000
To Branch Stock A/c (credit Sales ) 36000 Discount 600
Bad Debts 400
By Branch Stock A/c
(Sales Return ) 800
By Balance c/d 9400
43200 43200
Branch Expenses Account
To Cash A/c 2400 By Branch P.&L. A/c 3400
To Branch Debtor A/c 1000
3400 3400
Branch Adjustment Account
To Stock Reserve A/c 2400 By Stock Reserve A/c 1200
To Branch P.&L. A/c 11040 By Goods Sent To Branch 11760
A/c
BY Branch Stock A/c 480
13440 13440
Branch Profit and Loss Account
To Branch Expenses Account 3400 By Branch Adjustment A/c 11040
To General P.&L. A/c ( Net Profit ) 9560 By Branch Stock A/c 1920
12960 12960
INDEPENDENT BRANCH
Branches keeping full system of accounting or independent branches
are those branches which also purchase goods from the market besides
getting the good from the head office. They can also supply goods to the
head office, pay expenses from the cash realised and deposit cash in
their own account.
JOURNAL ENTRIES
1. Purchase of branch fixed assets
If payment is made by the branch:
Branch fixed assets a/c Dr.
To Branch a/c
(In the books of H.O)
Head office a/c Dr.
To cash a/c
(In the books of branch)
If payment is made by the head office
Branch fixed assets a/c Dr,
To bank a/c
(In the books of H.O)
2. Depreciation of fixed assets
Branch a/c Dr,
To branch fixed assets a/c
(In the books of H.O)
Profit and loss a/c Dr.
To Head office a/c
(In the books of branch)
3. Head office expenses
Branch a/c Dr.
To profit and loss a/c
(In the books of H.O)
Profit and loss a/c Dr.
To head office a/c
(In the books of branch)
4. Reconciliation of transit items
a) Cash in transit
Cash in transit a/c Dr.
To head office a/c
(In the books of branch)
Cash in transit a/c Dr,
To branch a/c
(In the books of head office)
b) Goods in transit
Goods in transit a/c Dr.
To branch a/c
(In the books of head office)
5. Inter branch transactions
For example if goods are supplied by Kolkata branch to Delhi
branch and head office is at Mumbai then following journal
entries are passed:
Delhi branch a/c Dr.
To Kolkata branch a/c
(In the books of Mumbai)
Head office a/c Dr.
To goods supplied to other branch a/c
(In the books of Kolkata)
Goods received from other branch a/c
To head office a/c
(In the books of Delhi)
6. Cash paid by branch on behalf of head office
Purchases a/c Dr.
To branch a/c
(In the books of head office)
H.O a/c
To cash a/c
(In the books of branch)
7. Cash collected by branch on behalf of
Head office
Branch a/c Dr.
To calls in arrear a/c
(In the books of head office)
Cash a/c Dr.
To head office a/c
(In the books of branch)
8. If a bill is drawn by one branch to another branch
If a bill is drawn by Agra branch on Mumbai branch and the head
office is at Delhi when the following entries will be passed in the
books of head office and branch
Agra branch a/c Dr.
To bills payable a/c
B/R a/c Dr.
To Mumbai branch a/c
(In the books of head office)
B/R a/c Dr.
To head office
(In the books of Agra branch)
Head office a/c Dr.
To bills payable a/c
(In the books of Mumbai branch)
DEBTORS SYSTEM
This system is adopted generally in those branch which are fairly
small in size. This account is nominal account in nature and is
prepared to calculate profit and loss account.
TRANSACTIONS
a) when goods are sent to branch
branch a/c Dr.
To goods sent to branch
b) for return of goods to H.O
goods sent to branch a/c
To branch a/c
c) for transfereing the balance of goods sent to branch
goods sent to branch a/c
To purchase a/c
d) when cheque is sent to branch expense
branch a/c
To bank
e) when cheque is received for remittance
bank a/c
To branch
f) for closing balance of asset
branch asset a/c
To branch
g) for beginning balance of asset
branch a/c
To branch asset
h) for opening balance of liability
branch liability a/c
To branch
i) for branch profit
branch a/c
To general P&L a/c
j) for branch loss
general P&L a/c
To branch a/c
