Branch Accounting

By
Dr. Pranabananda Rath
Consultant & Visiting Faculty
 Objectives of the Chapter

 To learn the accounting and reporting for segments (i.e.,

branches and division) of a business entity.

 To understand the various classification of branches.

 To study the various methods used in branch accounting

including foreign branch.

 To understand the movements of foreign currency of

different branches.
 Branch

A trading company may try to expand

its business by opening BRANCHES as
another establishment of the company
in different locations.
As per Sec.29 of the companies act
1956, a branch can be described as any
establishment carrying on either the
same or substantially the same activity
as that carried on by head office of the
company.
 What is Branch Office?

Section 2 subsection 14 of the Companies

Act, 2013 defines a branch office. As per
the section “branch office”, in relation to a
company, means any establishment
described as such by the company.

Branch accounting is a bookkeeping system in which separate accounts

are kept for each branch or operating location of an organization.
Technically, the branch account is a temporary or
nominal ledger account, lasting for a designated accounting period.
 Branches & Division

 Branches and divisions are separate economic and

accounting entities from their home office. However,
they are not separate legal entities from their home
office.
Branch Division
A business unit located at A segment of a business entity
some distance from the home which generally has more
office. This unit carries autonomy than a branch.
merchandise obtained from Accounting for a division not
the home office, makes sales, operated as a separate
approves customers’ credit, corporation (i.e., subsidiary
makes collections from its company) is similar to that of
customers, and remits cash branches.  
received.
 Objectives of Branch Accounting

 To know the profit & loss of each branch separately.

 To ascertain financial position of each branch on a
particular date.
 To know the cash & goods required in different branches.
 To evaluate the performance of each branch.
 To calculate the different commission to manager.
 To know the profitability of each branch & types of
business for expansion.
 To give suggestion for overall improvement of branches.
 To help audit purpose.
Branch Accounts V/S Departmental Accounts
Basis of Distinction Branch Accounts Departmental Accounts
Maintenance of Branch accounts may be Departmental accounts are
accounts maintained either at branch maintained at one place
or at head office only
Allocation of common No allocation problem arises Common expenses are
expenses since the expenses in respect distributed among the
of each branch can be departments concerned on
identified some equitable basis
considered suitable in the
case
Reconciliation Reconciliation of head office No such problem arises
& branches is necessary in
case of independent branches
at the end of the accounting
year.

Conversion of foreign At the time of finalization of No such problem arises.

currency figures accounts, conversion of
figures of foreign branch is
necessary
Basis Branch Accounts Departmental Accounts
Types Branches can be divided Departments can be divided
in different headings only on basis of activity like
like Dependent Branch, Garments Deptt. Toys Deptt.
Independent branch, Grocerry Deptt. Of one
foreign Branch, business.
wholesale and Retail
Branch.
 Classification of Branch

Head
Branch
Office

Indian Foreign

Inland Branch
Classification of Branches

Branches

Inland Foreign

Independent

Dependent
Independent Branches: Maintain independent
accounting record.

Dependent Branches : Whole accounting records

are kept at Head office.
DIFFERNCE BETWEEN INDEPENDENT & DEPENDENT BRANCH

Basis Independent Dependent

Accounting Independent branch keeps The accounts of branches are
System full system of accounting at maintained at the Head Office
their place. level. At branch only Cash
Register. Debtors Register are
maintained.

Sale of Goods These branches sell goods These branches sell only those
received from head office as goods which are supplied by
well as from the purchases the Head office. They are
made by them. normally not allowed to make
own purchases.

Point of Branch keep the required All branch expenses of regular

Payment of cash to meet the expenses of nature like salary, Rent
Expenses regular nature with normally paid directly by head
themselves. office. Branch managers are
allowed to incur petty
expenses only.
Basis Independent Dependent
Remittance of Independent Branches are All the daily cash sale and
Cash not required to remit all the collection from debtors will be
cash daily to head office. deposited at local bank or
remitted to H.O.
Trial Balance A trial balance has been Trial Balance is not required to
extracted from the ledger be extracted as accounts are
maintained at branch level. maintained at Head Office.

Reconciliation Reconciliation between There is no need of

branch Account in books of reconciliation as accounts are
head office and head office maintained at head office level
Account in the books of itself.
Branch is to be made before
finalizing the Accounts.

Methods of Accounting is done on the Accounting under Dependent

Preparing Final double entry system basis, branches can be made by three
Account so Trading/P&L A/c has different methods viz., Debtors
been prepared in normal system. Final Account system
way. and Stock and Debtors system
 Methods of Dependent Branches

Methods

Goods invoiced Goods invoiced

at Cost or at Wholesale
Selling Price price

Stock & Whole sale

Debtors Final Account
Debtors Branches
Method Method
Method Method
In the Branch Accounts Limited Records Means:

 Debtors Method.

 Stock & Debtors Method.

 Final Account Method.

 Goods Invoiced at Cost or Selling Price
Debtors Method
 It is suitable for small size branches.

 Head office opens a separate account for each branch.

 Under this method, separate branch account is

maintained for each branches to compute profit & loss
made by each branch.

 The goods supplied by the head office to branch may be

either at cost price or at cost plus profit.

 This account is a nominal account in nature and is

prepared to calculate profit and loss for each branch.
 Debtors Methods Means we have to
prepare accounts in the books of H.O.
Journal Entries
 Branch A/c: Performa

Particulars Rs. Particulars Rs.

To Balance b/d By Bank  XXX
Branch Stock XXX  (Amount remitted
Branch Debtors XXX  by Branch) XXX
Branch Petty Cash XXX XXX By Goods sent to
To Goods sent to Branch
branch XXX (Return to H.O) 
To Bank  XXX By Balance c/d:
(Amount remitted to Branch Stock XXX
branch) XXX Branch Debtors XXX XXX
To Bank  Branch Petty
(Branch Exp.’s paid by XXX Cash XXX
H.O.) XXX XXX
To General P & L A/c
 Treatment of Branch Transaction

 Branch expenses paid by the branch out of petty cash:

Such expenses will be deducted from the branch cash & at
the end reduced balance of cash will be shown on the
credit side of the branch accounts.
 Depreciation on fixed assets: This is not shown in the
branch account. But the closing balance of the fixed assets
will be shown on the credit side of the branch account
after deduction of the amount of depreciation.
 Credit Sale, Bad debts, Sales returns & discount allowed
pertaining to Branch: These items are pertaining to the
debtors account & will not be shown in the branch
account.
 Goods in transit: Such goods will be shown either on the
both sides of the branch account or will be ignored
completely.
 Purchase of fixed assets by the branch: Here in one hand
branch account will be credited by the head office & on
the other hand the remittance from the branch will be
reduced by that amount. If the branch has purchased the
asset on credit basis, then liabilities arises from the said
purchases will be shown on the debit side of the branch
account.
 Sale of fixed asset: If the sale is for cash, cash
remittances will increase from the branch but asset will
reduce in value to shown on the credit side of the branch
account.
Case:1

Cash Sales Rs. 2,00,000. Credit Sales Rs

6,00,000. The collection was made out of
the credit sales was Rs 5,80,000 and Rs
20,000 was not recovered. What Should be
the total Remittance?
Solution:

Particulars Amounts. Rs
Cash Sales 2,00,000
Collection from Creditors 5,80,000
Total Remittance 7,80,000
 Stock & Debtors Method

 Known as analytical method.

 It is an elaborate method of keeping branch accounts

and is considered very useful where the branch turnover
is sufficiently large and where a greater degree of
control is sought to be exercised by the head office over
the branch.

 According to this system, a separate ledger for each

branch will have to be maintained at head office for
keeping accounts. The H.O maintained the following
accounts:
Accounts Purpose
Branch Stock Accounts (or Ascertainment of shortage or
Branch Trading Account) surplus
Branch Profit & Loss Calculation of net profit or
loss
Branch Debtors Account Ascertainment of closing
balance of debtors
Branch Expenses Account Ascertainment of total
expenses incurred
Goods sent to Branch Account Ascertainment of cost of
goods sent to branch
Branch Petty cash Accounts It is maintained where the
branch makes some petty cash
payments.
 Entries

The following journal entries will be required for preparation of

branch accounts according to stock & Debtors’ system in the books of
H.O.
Case

Goods are sent to the Branch at cost plus 25%. Opening

stock of the branch and debtors are Rs 40,000 and Rs
60,000 respectively. Goods sent to branch Rs 2,00,000,
Cash sales Rs 60,000, Credit sales Rs 1,20,000, Cash
collected from debtors Rs 1,35,000, Discount allowed Rs
8,000, Bad debt Rs 2,000. Expenses paid by branch Rs
4,000, Expenses paid by Head office Rs 3,000. Book value
of Furniture was Rs 50,000. Depreciation on furniture
10%. Prepare Branch accounts and show its profit or loss
during the said period.
Treatment of Losses under Stock and
Debtor System

Abnormal
Loss

Normal
Loss
 Treatment of Abnormal Loss

Note: Load of Abnormal Loss is debited

to Branch Adjustment a/c and Cost of
Abnormal loss is debited to Branch
Profit and loss a/c.
 Treatment of Abnormal Loss

Case:

Delhi Head office send goods to Bhubaneswar

Branch at 25% of Loading price. During the transit
Goods lost by fire was Rs 12,000. Opening stock
of branch Rs 2,00,000, Cash Sales Rs 4,80,000.
Goods sent to branch Rs 5,00,000 and Branch
Expense Rs 6,500.From the above information
you are required to prepare Branch stock
accounts, Branch adjustment account and Branch
P/L a/c.
 Branch Stock Account-Invoice Price

Particulars Amt. Rs Particulars Amt. Rs

To Balance b/d 2,00,000 By Branch Cash ( Cash
Sales) 4,80,000
To Goods Sent to
Branch 5,00,000 By Branch Adjustment
a/c (Load of Abnormal
Loss)-(12,000/125 × 2,400
25)

By Branch p/l a/c.

( Cost of Abnormal 9,600
Loss)-(12,000/125 ×
100)

By Balance c/d 2,08,000

7,00,000 7,00,000

Note: Cost = 100, Load = 25 , Loaded Price = 125.

 Branch Adjustment Account

Particulars Amts. Rs Particulars Amts. Rs

To Branch Stock a/c By Stock Reserve
( Load of Abnormal Loss)- 2,400 ( 2,00,000/125 × 25) 40,000
(12,000/125 × 25)
By Goods Sent to
To Stock Reserve a/c Branch (5,00,000/125 ×
( 2,08,000/125 × 25) 41,600 25) 1,00,000

To Gross Profit 96,000

1,40,000 1,40,000

Notes: GP = 4,80,000/125 × 25 = 96,000

 Branch P/L Account

Particulars Amts. Rs Particulars Amts. Rs

To Branch Exp. 6,500 By Gross Profit b/d 96,000

To Branch Stock a/c

( Cost of Abnormal Loss) 9,600

To Net Profit c/d 79,900

96,000 96,000
 Treatment of Normal Loss

 If loss is Abnormal Loss, then it shown in

P/L a/c. and If Normal Loss then it was
shown in Trading Accounts or Branch
Adjustment Accounts.

Notes: Treatment of Normal Loss: Invoice Price(Load +

Cost) of Normal Loss is debited to Branch Adjustment
Accounts.
 Treatment of Normal Loss

Case:

Delhi Head office send goods to Bhubaneswar

Branch at 25% of Loading price. During the
transit Normal Loss was Rs 12,000. Opening
stock of branch Rs 2,00,000, Cash Sales Rs
4,80,000. Goods sent to branch Rs 5,00,000
and Branch Expense Rs 6,500.From the above
information you are required to prepare
Branch stock accounts, Branch adjustment
account and Branch P/L a/c.
 Branch Stock Account-Invoice Price

Particulars Amt. Rs Particulars Amt. Rs

To Balance b/d 2,00,000 By Branch Cash ( Cash
Sales) 4,80,000
To Goods Sent to
Branch 5,00,000 By Branch Adjustment 12,000
a/c (IP of Normal Loss)

By Balance c/d 2,08,000

7,00,000 7,00,000
 Branch Adjustment Account

Particulars Amts. Rs Particulars Amts. Rs

To Branch Stock a/c(IP of By Stock Reserve
Normal Loss: Load + 12,000 ( 2,00,000/125 × 25) 40,000
Cost)
By Goods Sent to
To Stock Reserve a/c Branch (5,00,000/125 ×
( 2,08,000/125 × 25) 41,600 25) 1,00,000

To Gross Profit 86,400

1,40,000 1,40,000
 Branch P/L Account

Particulars Amts. Rs Particulars Amts. Rs

To Branch Exp. 6,500 By Gross Profit b/d 86,400

To Net Profit c/d 79,900

86,400 86,400
 Final Account Methods
 According to this system, the profit or loss made by the branch is
determined by preparing branch Trading and Profit & Loss Account at
cost price.
 It should be carefully noted that all expenses whether paid by the head
office of by the branch are debited to the Trading and profit & Loss
Account prepared for the branch.
 The profit and loss as disclosed by this account is exactly same as that of
the branch account prepared according to Debtors/ Synthetic system. It
should be further noted that the branch. Trading and profit & Loss
Account is only a memorandum account not forming part of the full
accounting system.
 If the branch account is also prepared, in addition to the branch Trading
& profit and loss Account, then such a branch account will be treated as
a personal account and not considered in the nature of a nominal
account under the Debtors system. Then branch account under such
circumstances, will show a debit balance which will be equal to net
worth or net assets available at branch at the end of the according
period.
The outline of Trading and Profit and Loss Account is presented:
Assignment
Case:
You are asked to prepare Branch Trading and Profit & Loss Account in
the Head Office books from’ the particulars hereunder mentioned:
Case:3
 Assignment:

A Delhi merchant has a branch at madras to which he

supplies goods at cost + 25%. The branch keeps its own sales
ledger and transmits all cash received to head office every
day. All expenses are paid from the H.O. for the year ended
31st December 1999, the transactions of the branch were as
follows:

Prepare the branch trading and profit & loss A/c and branch
account for the year ended 31st Dec, 1992.
Stock on 1-1-1999 11000 Return inwards 500
Debtors on 1-1-1999 1700 Cheques sent to
branch:
Petty cash on 1-1-1999 100 Rent 600
Cash sales 2650 Wages 200
Goods sent to branch 20000 Other expenses 900
Collection on ledger 21000 Stock on 31-12-1999 13000
accounts
Goods returned to H.O. 400 Debtors on 31-12-1999 2000
Bad debts 300 Petty cash on 31-12- 125
1999
Allowances to 250 (including
customers miscellaneous income
of Rs. 25 not
remitted to H..O.)
 Branch trading and profit and loss account
Solution:
for the year ended 31st December 1999
To opening stock 8800 By sales:
(cost)
(11000- Cash
2200) 2650
To goods sent to Credit
branch 22350
(20000-4000)
16000 25000
Less: returns to H.O. 15680 Less: returns inward 24500
320 500
(400-80) By closing stock 10400
To wages 200
(13000-2600)
To gross profit c/d 10220
 34900 34900
To bad debts 300 By gross profit b/d 10220
To allowances 250 By miscellaneous 25
income
To rent 600
To other expenses 900
To net profit 8195
10245 10245
 BRANCH ACCOUNT (Personal)

To balance b/d 1060 By remittances to 2365

0 H.O. 0
(8800+1700+100) (2650+21000)

To goods sent to 1568

branch less returns 0
(at cost)
To bank (expenses) 1700 By balance c/d 1252
5
To profit 8195 (10400+2000+125)

3617 3617
5 5
 Working notes: Calculation of credit sales:

Branch debtors A/c

To balance b/d 1700 By cash 21000

To sales (credit) 22350 By bad debts 300

(bal. fig.)
By return 500
inwards
By allowances 250

By balance c/d 2000

24050 24050
 Goods invoiced at wholesale price to Branches

DISTINCTION BETWEEN WHOLESALE AND RETAIL PROFIT AT BRANCH:

 Sometimes head office also sells goods at retail or list price besides
sending the goods to branches at wholesale prices.
 The difference between the retail price and wholesale price will be
the profit made by the branch.
 Suppose if an article costs to head office Rs. 100 and it is supplied to
the branches at Rs. 160 at wholesale price but both head office and
branches sell goods at Rs. 200, then, profit made by the branch will be
Rs. 40 (i.e., Rs. 200 –Rs. 160) and not Rs. 100 (Rs. 200-Rs.100).
 The goods are sent by the head office to the branches at Wholesale
price and if all the goods are sold there is no problem but if some
goods remain unsold at the end of the accounting year, these unsold
goods at the branches must be reduced to cost price by making a stock
reserve for unrealized profit for the difference between the wholesale
and cost price and will be debited to the head office profit and loss
account, as previously the head office must have earned profit while
sending goods to the branches.
 Methods

 Under the said method the H.O supplies the goods to its
retail branches at wholesale price which is cost plus whole
sale profit.
 The profit attributable to such branches is the difference
between the sale proceeds of goods at the shops & the
wholesale price of goods sold.
 In this method it was assumed that the producer would
always be able to sell the goods on whole sale price and
there by realize profit equal to the difference between the
wholesale price & the cost.
 Here the branch stock a/c or trading a/c is debited with:
The value of opening stock, price of the goods send, during
the wholesale price & It is credited by: Sales affected &
closing stock of goods valued at wholesale price.
Case:4
 Accounting For Independent Branches

 When the size & turnover of a business house is big, it

is required all branch maintains complete records of its
transactions. These branches are called independent
Branches.

 Each branch maintains comprehensive books of

accounts of their respective transactions.

 A separate trial balance of each branch are prepared.

 The HO maintains one ledger account for each such

branch, where in all transactions between the head
office & the branches are recorded.
 Books Maintained By the Branch

The following books are maintained by the Independent

Branches:
a. Journal Book
b. Ledger book
c. Cash Book
d. Bank Account
e. Debtor Ledger
f. Creditor ledger
g. Fixed Assets Ledger
h. Purchase and Sales book
 Incorporation of Trial Balance

As we know that in case of independent branches,

separate set of books have been maintained at every
branch. But to get the overall performance and result of
the business, the accounts of Branch should be
incorporated in the books of head office. Thus, Trial
balance of branch has been incorporated in the books of
Head Office at the year end.

The following is the procedure to incorporate the branch Trial

balance under the two different methods:
 First Method
In this method, the trading & profit & Loss A/c of the branch is prepared
in the regular way in the books of head Office.

The entries to be passed are as follows:

(i) Debit branch Trading Account and Credit Branch Account with the total of the
items usually debited to a trading Account, such as opening stock, purchases,
wages. Manufacturing expenses etc.

Branch Trading A/c Dr.

To branch A/c
(With Opening Stock, Purchases, Direct expenses, Wages)
(ii) Debit branch account and credit branch trading A/c with the total of items
to be credited to the Trading Account such as sales and closing stock.
Branch A/c
To branch Trading A/c
(With sale & closing Stock)
(iii) Debit branch Trading Account and Credit branch P & L A/c with the Gross
profit revealed by the Trading A/c.
Branch Trading
To branch P & L
(For Profit)
While for loss entry will be:
Branch P&L
To branch Trading A/c
(iv) Debit Branch P & L A/c and Credit Branch Account with total of various
expenses and losses, e.g., Salaries, Rent, Depreciation, Discount etc.
Branch P & L A/c Dr.
To branch A/c
(v) Debit branch A/c and Credit Branch P & L with the total of gains or incomes such as
Discount earned etc.
Branch A/c Dr.
To Branch P & L

(vi) Debit branch P & L A/c and credit General P & L A/c with the Net Profit revealed by
branch p & L A/c. (the entry will be reversed if there is loss).
For Profit
Branch P & L A/c Dr.
To General P & L A/c
For (Loss)
General P & L A/c Dr.
To Branch P & L A/c

(vii) Debit branch Assets individually and Credit branch Account with the total of the
assets.
Branch Assets
To branch A/c

(viii) Debit Branch Account and Credit branch Liabilities.

Branch A/c
To branch liabilities.
(ix) Debit Goods in Transit & Cash in Transit and Credit Branch A/c.
(If such items, shown in Adjustment)
Goods in Transit A/c Dr.
Cash in Transit A/c Dr.
To branch A/c
 Second Method

Under this method branch results are prepared in Memorandum

Manner. The entries needed under this method are:

(a) For incorporating branch net Profit after making Trading & P & L A/c
Branch A/c Dr.
To General P & L A/c
(b) For incorporating branch Assets & Liabilities, the following entries has been
made:

Branch Assets
To branch A/c
Branch A/c
To Branch Liabilities

Thus in the second method, only one entry regarding Net Profit is required
after making trading & P & L as a result reducing the volume of entries.
 Foreign Branch

 Whenever any entity has operation outside country, such

operations are called foreign operation. It can be in the
form of Branch, Subsidiary, Associate and Joint Venture.

 This branches generally maintained independent &

complete record of business transacted by them in
currency of the country in which they operate.

 The accounting principles which apply to inland branches

also apply to foreign branch after converting the trial
balance of the foreign branch in the Indian currency.
 Accounting for Foreign Branches

AS 11 (Revised 2003), classifies the foreign branches as:

 IFO (Integral Foreign Operation).

 NFO (Non-Integral Foreign Operation)

 Integral Foreign Operation (IFO)

 It is a foreign operation, the activities of which are an

integral part of those of reporting enterprise.

 The business of IFO is carried on as if it were an

extension of the reporting enterprise's operation.

 It carries on business in a single foreign currency, where

is the country was located.

 For example- sale of goods imported from the reporting

enterprise and remittance of proceeds to the reporting
enterprise.
 Non-Integral Foreign Operation (NIFO)
 It is a foreign operation that is not an Integral Foreign
Operation.

 The business of a NFO is carried on in a substantially

independent way by accumulating cash and other monetary
items, incurring expenses generating income and arranging
borrowing in its local currency.

 An NFO may also enter into transactions in foreign currencies,

including transactions in the reporting currency.

 An example of NFO may be production in a foreign currency out

of the resources available in such country independent of the
reporting enterprise.
 Applicable exchange rates- IFO

Item Exchange Rate

Revenue Items Date of transaction rate / Average rate
Opening Stock Opening Rate
Closing Rate Closing Rate
Fixed Assets Translated at the original rate. If there is a
change in the value of the Foreign Currency
Liabilities, adjustment should be made to cost
of fixed assets in rupees.
Depreciation Rate Used for translation of value of fixed
assets
Current Assets & Current Closing Rate
Liab.
Long Term Liabilities Closing Rate
Items related to HO Balances in the books of head Office
 Applicable exchange rates-NIFO

Item Exchange
All Assets / All Closing Rate
Liabilities
Pre acquisition Rate when such profit were earned
Profit
Items related to HO Balance in the books of Head Office
Share Capital Earliest Rate given