BRANCH ACCOUNTING INTRODUCTION In order to increase the

BRANCH ACCOUNTING

INTRODUCTION : In order to increase the sales , business houses are required to market their products over a larger territory and may generally split their business into certain divisions or parts. If the various parts are located in different parts of the city , different cities or in different countries like germany , australia etc , these are known as branches. Head office controls the activities of various branches.

OBJECTIVES OF BRANCH ACCOUNTING : The main object of keeping branch accounts is dependent on the nature of business and specific need of a particular branch. To know the profit or loss of each branch. To ascertain financial position of each branch on a particular date. To know the cash and goods requirement of the various branches. To evaluate the progress and performance of each branch.

The transaction between headquarters and branch offices The type of current transactions between headquarters and branch The establishment of new branches Transfer between headquarters and branch stock in trade Different types of transactions under the account settings When setting up a new set of branches between the subjects Headquarters set up "branch exchange" Branches set up "between the headquarters” Transfer between headquarters and branch stock in trade Headquarters set up "branches Stock delivered" Branches set up "headquarters shipped inventory. " 4

To calculate commission for payment to the managers if based on profits of branch. To know the profitability of each branch and type of business for expansion of the business. To give concrete suggestions for the improvement in the working of various branches. To meet the requirements of specific enactments as all branches of a company must keep the accounts for audit purposes.

TYPES OF BRANCHES : (A) . Branches not keeping full system of accounting (dependent branches). (B). Branches keeping full system of accounting (independent branches). (C). Foreign branches. Features of dependent branches are : Such branches sell only those goods which are received from the head office and are not usually allowed to make purchases in the open market.

Goods are supplied by the head office to such branches either at cost price or at invoice price. All expenses of the branch such as rent , salary or staff , advertisement etc are paid by the head office. Petty expenses such as cartage , entertainments etc are paid out of petty cash book balance. The amount received from cash sales or cash received from debtors is either remitted to the head office daily or deposited in the account of head office at some local bank. The branch manager is normally expected to sell the goods for cash only but he may be authorized to sell goods on credit in certain cases. Such branches do not maintain their own books of account. All records are maintained by the head office.

8 Goods in Transit (GIT) Goods were sent by the Head Office before the end of the financial period, but received by the branch after the end of the financial period GIT =Goods Sent to Branch – Goods received from HO

9 Remittances/Cash in Transit (CIT) The remittance or cash was remitted by the branch before the end of the financial period, but was received by the Head office after the end of the financial period CIT= Remittance to Head Office – Remittance from Branch

Accounting treatment of the new branch accounting treatment Headquarters account Between branches 15 000 Branch account Headquarters contacts 15 000 10

The treatment of Headquarters transfering the branch goods to Headquarters account Transction between branches inventory 8 000 Delivery of branch 8 000 11

Branch account transported to the headquarter 8 000 headquarters contacts 8 000 12

TREATMENT OF TRANSACIONS IN THE BOOKS OF HEAD OFFICE AND BRANCH

14 Transactions Head office (HO) Branch books 1 Opening Stock Dr HO Trading Cr Stock (opening stock)[at cost] Dr Branch Trading Cr Stock (Opening stock)[at Cost or Cost+profit] 2 Goods purchased directly from HO suppliers[at cost] Dr Purchase(Trading) Cr Creditors No entry 3 Goods purchased NO entry directly from Branch suppliers [at cost] Dr Purchase(trading) Cr Creditors

15 Transactions Head office (HO) books Branch books 4 Goods sent from HO to Branch [cost+profit] Dr Branch a/c Cr Goods sent to Branch Dr Good received from HO Cr Ho a/c 5 Goods returned from Branch to HO Dr Goods sent to branch Cr Branch a/c Dr HO a/c Cr Good received from HO 6 Cash sales/Credit sales Dr HO Cash/Debtors Cr HO Sales Dr Branch cash/ debtors Cr Branch sales

16 Transactions Head office (HO) books Branch books 7 Closing stock Dr Stock(Closing) Cr HO Trading Dr Stock (Closing) Cr Branch Trading good purchased directly from Branch suppliers [at cost] & goods received from HO [cost+profit] 8 Gross profit on trading Dr HO Trading Cr HO profit and loss Dr Branch Trading Cr Branch profit and loss 9 HO expenses paid Dr Expenses (P&L) No entry by HO Cr Cash/Bank

17 Transactions Head office (HO) books Branch books 10 Branch expenses Dr Branch a/c paid by Head Office Cr Cash/Bank Dr Expenses (P&L) Cr HO a/c 11 Branch expenses No entry paid by Branch Dr Expenses (P&L) Cr Cash/Bank 12 Administrative Dr Branch a/c charges for services Cr HO P&L rendered by HO to (Income) Branch Dr Branch P&L Cr HO a/c

18 Transactions Head office (HO) Branch books 13 Provision for Unrealized Profit (Branch & Goods in Transit)[cost+profit] Increase in provision Dr HO P&L Cr Prov. For Unrealized profit Decrease in provision Reverse 14 Goods in Transit(GIT) Dr Goods in Transit NO entry Cr Branch a/c 15 Cash in Transit (CIT) Dr Cash in Transit Cr Branch a/c No entry

Transactions Head office (HO) 19 books Branch books 16 Profit made by the branch Dr Branch a/c Cr Retained profit Dr Branch P&L Cr HO a/c 17 Profit made by HO Dr P&L Cr Retained profit No entry 18 Cash remittances from the branch Dr Bank Cr Branch a/c Or Dr Bank Cr remittance from branch Dr Remittance from branch Cr Branch a/c Dr HO a/c Cr Bank Or Dr Remittance to HO Cr Bank Dr HO a/c Cr Remittances to HO

ACCOUNTING RECORDS FOR HEAD OFFICE OR SYSTEM OF ACCOUNTING FOR BRANCH (1) . DEBTORS SYSTEM (synthetic method). (2). FINAL ACCOUNT SYSTEM. (3). STOCK AND DEBTORS SYSTEM (analytical method). (4). WHOLESALE BRANCH SYSTEM.

(1). DEBTORS SYSTEM : This system is adopted generally in those branches which are fairly small in size. Under this system , head office opens a separate account for each branch in order to record all transactions relating to that branch. This account is a nominal account in nature and is prepared to calculate profit and loss for each branch. Goods supplied by the branch may be either at cost price or at cost plus profit. The main defect in this method is that it does not provide full information for analysis of branch profit and loss.

ILLUSTRATION Invoicing goods to branch at cost. From the following particulars relating to delhi branch for the year ending 31 st march 2012 , prepare necessary accounts in the head office books : Balances as on 1 -4 -2011 : Stock at branch = 15000 Debtors at branch = 30000 Petty cash at branch = 300 Goods sent to branch during the year = 252000 Remittance from the branch :

For cash sales = 60000 Received from debtors = 210000 Total = 270000 Goods returned by the branch = 2000 Credit sales during 2011 -2012 = 228000 Cheques sent to branch during the year : For salaries = 9000 For rent & taxes = 1500 For petty cash = 1100 Total = 11600 Balances as on 31 -3 -2012 Stock at branch = 25000 Petty cash = 200 Debtors = 48000

DELHI BRANCH ACCOUNT for the year ended 31 -3 -2012 : Particulars Amount Particulars To branch stock a/c 15000 By cash a/c : To branch debtors a/c 30000 Cash sales 60000 To branch petty cash a/c 300 Received from debtors 210000 270000 By branch stock a/c 25000 By branch debtors a/c 48000 By branch petty cash 200 To goods sent to branch 252000 Less : returns to head office 2000 To bank a/c (expenses) : Rent & taxes Salaries 1500 9000 Petty cash 1100 To general p&l a/c 250000 11600 36300 Amount

BRANCH STOCK A/C : PARTICULARS AMOUNT To balance b/d 15000 By Delhi branch a/c (transfer) 15000 To Delhi branch a/c 25000 By branch c/d 25000 BRANCH DEBTORS A/C PARTICULARS AMOUNT To balance b/d 30000 By Delhi branch a/c (transfer) 30000 To Delhi branch a/c 48000 By balance c/d 48000

INVOICING PRICE METHOD ILLUSTRATION Unique stores ltd. has an old established branch at Kanpur. Goods are invoiced to branch at 20% profit on invoice price. All expenses are paid by head office except petty expenses. Stock on 1 -1 -2011(invoice price) = 15000 Sundry debtors = 9000 Cash in hand = 400 Office furniture = 1200 Goods supplied by head office (invoice price) : Goods returned to head office = 1000

Goods returned by debtors = 480 Debtors at the end = 8220 Cash sales = 50000 Credit sales = 30000 Discount allowed = 300 Expenses paid by head office : Rent = 1200 Salary = 2400 Stationery and printing = 300 Petty expenses paid by branch manager = 280 Stock on 31 -12 -2011 (invoice price) = 14000 Provide depreciation on furniture @10%.

BRANCH ACCOUNT : PARTICULARS AMOUN T PARTICULARS To branch stock a/c 15000 By cash (remittances) : To branch debtors a/c 9000 Cash sales 50000 To branch cash-in-hand 400 Cash from debtors (1) 30000 80000 To branch office furniture a/c 1200 By branch stock a/c 14000 By branch debtors a/c 8220 (20/100 x 15000) By branch furniture a/c(1200120) By goods sent to branch a/c 3000 1080 To goods sent to branch a/c 80000 Rent Less : returns to h. o. 1200 1000 Salary 79000 To bank a/c : 2400 Stationery and printing 300 AMOUNT By stock reseve a/c 3900 To stock reserve a/c (20/100 x 14000) 2800 To general p & l a/c 10920 (20/100 x 79000) 15800 By cash-in-hand (400 -280) 120

Working note - 1 : Calculation of cash received from debtors. DEBTORS ACCOUNT : PARTICULARS AMOUNT To balance b/d 9000 By sales return a/c 480 To sales (credit) a/c 30000 By cash (bal. fig) 30000 By discount a/c 300 By balance c/d 8220 39000

(2). FINAL ACCOUNT SYSTEM : According to this system , the profit and loss made by the branch is determined by preparing branch trading and profit & loss a/c at cost price. It should be carefully noted that all expenses whether paid by the head office or by the branch are debited to trading and profit & loss a/c prepared for the branch. Illustration A Delhi merchant has a branch at Chennai to which he charges the goods at cost plus 25%. The branch keeps its own sales ledger and remits all cash received to the head office everyday.

Stock 1 -1 -2011 at invoice price = 11000 Debtors = 100 Petty cash = 100 Cash sales = 2650 Goods sent to branch at invoice price = 20000 Collection on ledger accounts = 21000 Goods returned to head office at invoice price = 300 Bad debts = 300 Allowances to customers = 250 Return inwards = 500 Cheques sent to branch :

Rent = 600 Salary & other expenses = 900 Wages = 200 Stock 31 -12 -2011 at invoice price = 13000 Debtors = 2000 Petty cash (including) : Misc. income = 25 Not remitted = 125 BRANCH TRADING & PROFIT & LOSS Account for the year ending 31 -122011

PARTICULARS AMOUN T PARTICULARS To opening stock (11000 – 2200) 8800 By sales : To goods sent to branch a/c Cash 2650 (20000 – 4000 ) 16000 Credit 23950 AMOUN T Less : returns to head office (300 -60) 240 15760 Less : returns 500 26100 Wages 200 Closing stock (13000 -2600) 10400 Rent To bad debts 600 300 Accrued income 25 Salaries and other expenses Allowances 900 250 rent profit Net 9715 11765

BRANCH ACCOUNT (PERSONAL) ACCOUNT : PARTICULARS AMOUN T To opening balances : PARTICULARS AMOUN T By remittances : Stock 8800 (2650 + 21000) Debtors 100 Balance c/d Petty cash 100 Stock 10400 Debtors 2000 Petty cash 125 Goods sent to branch 16000 Less : returns to h. o. 240 15760 Bank (expenses) 1700 profit 9715 36175 23650 36175

(3). STOCK AND DEBTORS SYSTEM : There is yet another method of calculating profit and loss of a branch which is popularly known as (stock & debtors system) or (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. (a). Goods charged to branch at cost price. ILLUSTRATION

Stock 1 -1 -2011 = 15000 Stock 31 -12 -2011 = 14000 Debtors 1 -1 -2011 = 25000 Debtors 31 -12 -2011 = 35000 Cash at branch 1 -1 -2011 = 500 Cash sent to branch = 1500 Goods sent to branch = 50000 Goods returned by branch = 500 Cash sales = 32000 Credit sales = 58000 Allowances to customers = 300 Returns from customers = 600

Bad debts written off = 500 Discount allowed to customers = 2000 Remittance from branch = 70000 Rent & taxes = 1500 Salaries = 5000 General trade charges = 1500 Normal loss of goods due to wastage = 1000 Abnormal loss of goods due to pilferage = 2000 BRANCH STOCK ACCOUNT :

PARTICULARS AMOUN T To balance b/d 15000 By cash a/c (sales) 32000 By branch debtors a/c(credit sales) 58000 To goods sent to branch a/c 50000 Less : returns to h. o. 500 49500 To branch debtors a/c (sales return) 600 To branch p & l a/c 40900 By branch p & l a/c (pilferage of goods) 2000 By balance c/d 14000 106000 BRANCH DEBTORS ACCOUNT : PARTICULARS AMOUN T To balance b/d 25000 By branch cash a/c (bal. fig) 44600 To branch stock a/c 58000 Branch expenses : Allowances

Discount 2000 Bad debts 500 2800 By branch stock a/c (sales return) 600 By balance c/d 35000 83000 BRANCH CASH ACCOUNT : PARTICULARS AMOUN T PARTICULARS To balance b/d 500 By branch expenses : To general cash a/c 1500 Rent & taxes 1500 To branch stock a/c 32000 Salaries 5000 83000 AMOUNT

GOODS SENT TO BRANCH ACCOUNT : PARTICULARS AMOUNT To purchases a/c (transfer) 49500 By branch stock a/c BRANCH EXPENSES ACCOUNT : PARTICULARS AMOUNT To branch cash a/c PARTICULARS AMOUNT By branch p & l a/c 10800 Rent & taxes 1500 Salaries 5000 General trade charges 1500 8000 To branch debtors a/c 2800 10800

BRANCH PROFIT & LOSS Account PARTICULARS AMOUNT PARTICULARS To branch expenses : AMOUNT By branch stock a/c Allowances 300 Discount 2000 Bad debts 500 Rent & taxes 1500 Wages & salaries 5000 General trade charges 1500 ( Gross profit ) 40900 To branch stock ( cost of goods pilfered ) 2000 Net profit transferred to general P & l a/c 28100 40900

(b) . Goods charged to branch at selling price : ILLUSTRATION Crown industries has a branch at Madurai to which goods are invoiced at cost plus 25%. Branch expenses are paid direct from head office and the branch remits all cash to head office. Goods received from head office at invoice price= 60000 Returns to head office at invoice price = 1200 Branch stock on 1 -1 -2011 at invoice price = 6000 Cash sales = 20000 Credit sales = 36000 Branch debtors on 1 -1 -2011 = 7200

Cash collected from debtors = 32000 Discount allowed to debtors = 600 Bad debts in the year = 400 Goods returned by debtors to branch = 800 Rent , rates and taxes at branch = 1800 Branch office expenses = 600 Branch stock at invoice price on 31 -12 -2011 = 12000 BRANCH STOCK ACCOUNT : PARTICULARS AMOUN T To balance b/d 6000 By cash a/c 20000 By branch debtors a/c 36000 To goods sent to branch a/c 60000

return) To branch adjustment a/c (loading of surplus) 25/125 x 2400 480 To branch p & l a/c (cost of surplus) 1920 68000 BRANCH DEBTORS ACCOUNT : PARTICULARS AMOUNT PARTICULARS AMOUN T To balance b/d 7200 By cash a/c 32000 To branch stock a/c (credit sales) 36000 By branch expenses a/c Discount 600 Bad debts 400 1000 By branch stock a/c (sales 800

BRANCH EXPENSES ACCOUNT : PARTICULARS AMOUNT To cash a/c 2400 By branch p & l a/c 3400 To branch debtors 1000 3400 BRANCH ADJUSTMENT ACCOUNT : PARTICULARS AMOUNT To stock reserve a/c 2400 By stock reserve a/c 1200 To branch p & l a/c (gross profit) 11040 By goods sent to branch a/c 11760 By branch stock a/c 480 13440

BRANCH PROFIT & LOSS ACCOUNT : PARTICULARS AMOUNT To branch expenses a/c 3400 By branch adjustments a/c 11040 To general p & l a/c 9560 By branch stock a/c 1920 12960 (c). Goods sent to branch at cost plus certain fixed percentage on cost : Goods supplied by the head office to the branch may be invoiced at cost plus a fixed percentage of profit on cost. Here too , the ‘load’ included in the value of opening stock , closing stock and goods sent to branch minus the returns from branch to

head office is treated in the same way as in the case of branch , where the goods are supplied by the head office at selling price. ILLUSTRATION M/s brute ltd. invoices goods to their various branches at cost plus 25%. Branches sell the goods for both cash and credit. Branch expenses are paid by the head office. Branch stock at i. p. on 1 -1 -2011 = 8000 Branch debtors = 4000 Branch petty cash = 500 Branch furniture = 6000

Goods invoiced to branch during 2011 = 22000 Cheques sent to branch during 2011 : Salaries = 2000 Rent = 1000 Petty cash = 300 Cash sales by branch = 10000 Cash collected from debtors by branch = 9000 Goods returned by branch = 800 Credit sales by branch = 25000 Goods returned by branch debtors to branch = 400 Discount allowed to debtors = 500

Bad debts = 100 Branch stock at invoice price on 31 -12 -2011 = 10000 Branch petty cash = 200 Furniture is to be depreciated at 10%. BRANCH STOCK ACCOUNT : PARTICULARS AMOUN T To balance b/d 8000 By cash a/c (sales) 10000 By branch debtors a/c 25000 By bal c/d 10000 To goods sent to branch a/c 22000 Less : returns 800 21200 To branch debtors a/c(sales return) 400 To branch adjustment a/c (apparent profit) 15400

BRANCH DEBTORS ACCOUNT : PARTICULARS AMOUNT To bal b/d 4000 By cash a/c 9000 To branch stock a/c (credit sales) 25000 By branch stock a/c (sales return) 400 By branch expenses a/c Discount 500 Bad debts 100 600 By bal c/d 19000 29000: BRANCH ADJUSTMENT ACCOUNT 29000 PARTICULARS AMOUNT To stock reserve a/c 2000 By stock reserve a/c 1600 To branch p & l a/c (gross profit) 19240 By goods sent to branch a/c 4240 By branch stock a/c (apparent stock) 15400

BRANCH PROFIT & LOSS A/C PARTICULARS AMOUNT To salaries a/c 2000 By branch adjustment a/c 19240 To rent a/c 1000 To expenses a/c (300+500200) 600 To branch expenses (discount 600 & bad debts ) To depreciation a/c 600 To general p & l a/c (net profit) 14440 19240 GOODS SENT TO BRANCH ACCOUNT : 19240 PARTICULARS AMOUNT To branch adjustment a/c 4240 By branch stock a/c 21200 To trading a/c 16960 21200

BRANCH EXPENSES ACCOUNT : PARTICULARS AMOUNT To branch debtors a/c 600 By branch profit & loss a/c 600

(4). WHOLESALE SYSTEM OF ACCOUNTING Sometimes head office also sells goods at retail or list price besides sending the goods to branches at wholesale prices. The difference between the wholesale and retail price will be the profit made by the branch. Suppose if an article costs to head office 100/- and it is supplied to the branches at 160/- at wholesale price but both head office and branches sell goods at 200/- , then , profit made by the branch will be 40/- (i. e. 200 -160) and not 100(200 -100).

ILLUSTRATION A head office sends goods to its branch at 20% less than the list price. Goods are sold to customers at cost plus 100%. head office branch Opening stock at cost 40000 32000 (wholesale price in case of branch) Purchases 200000 Goods sent to branch 96000 Sales 170000 80000 Sundry expenses 14000 8000

TRADING AND PROFIT & LOSS A/C : PARTICULARS H. O. BRANC H PARTICULARS H. O. To opening stock 40000 32000 By sales 170000 80000 To purchases 200000 By goods sent to branch 96000 By closing stock (1) 95000 By gross profit b/d 361000 144000 121000 16000 To goods from head office 96000 To gross profit c/d 121000 16000 To sundry expenses 361000 144000 14000 8000 To stock reserve against By stock reserve against Closing branch stock Opening branch stock (60/160 x 64000) 24000 By net profit 95000 (32000 x 60/160) BRANC H 64000 12000 8000 133000 16000

Working (1) note : . Calculation of closing stock h. o. branch Opening stock at cost 40000 32000 (wholesale price in case of branch) Purchases at cost 200000 Goods from h. o. (wholesale price) 96000 Less : cost of goods sent to branch 60000 (96000 x 100/160) Less : cost of sales to outsiders 85000 64000 (wholesale price in case of branch) 95000 64000

BRANCHES KEEPING FULL SYSTEM OF ACCOUNTING : Branches keeping full system of accounting or independent branches are those branches which also purchase goods from the market besides getting the goods from the head office. They can also supply goods to the head office , pay expenses from the cash realized and deposit cash in their own account. Such branches keep complete set of double entry books and prepare their own trial balance , trading and profit & loss account and balance sheet. Such branches open head office account in their books.

ILLUSTRATION A and co. ltd having its head office at Delhi with branches at Allahabad and lucknow. Pass the necessary journal entries as per the following transactions which took place during the year. (a). Remittances of 4500/- made by lucknow branch to its head office on 30 th December , received by head office on 5 th January (next year). (b). Goods valuing 2200/- dispatched by Allahabad branch on 27 th December , under instructions from the head office and received by the lucknow branch on 30 th December.

(c) . Depreciation amounting to 1100 on lucknow branch fixed assets when accounts of such assets are maintained at the head office. (d). Goods worth 9000/- dispatched by head office to Allahabad branch on 30 th December , received by that branch on 7 th January (next year). (e). Lucknow branch paid 400/- dividend to a local shareholder on behalf of the head office. (f). A sum of 600/- being arrears of call money was received by the Allahabad branch from a shareholder in November but was not communicated to the head office till 3 rd January (next year ).

Lucknow branch draws a bill receivable for 5500/- on Allahabad branch which sends its acceptance. In the books of Head Office /JOURNAL ENTRIES SR. NO. PARTICULARS a. b. c. L. F. DEBIT Cash in transit a/c dr. to lucknow branch a/c (cash remitted by lucknow branch still in transit) 4500 Lucknow branch a/c dr. to Allahabad branch a/c (being goods transferred from Allahabad branch to lucknow branch under our instructions) 2200 Lucknow branch a/c dr. to lucknow fixed assets a/c (depreciation charged on lucknow branch fixed assets) 1100 CREDIT 4500 2200 1100

e. f. Dividend a/c dr. to lucknow branch a/c (dividend paid by lucknow branch on our behalf) 400 Allahabad branch a/c dr. to calls in arrears a/c (calls in arrears received by Allahabad branch on our behalf) 600 400 600 g. (1). Lucknow branch a/c dr. to bills payable a/c (being bill drawn by lucknow branch on Allahabad branch) 5000 (2). 5000 Bills receivable a/c dr. to Allahabad branch a/c (being bills accepted by Allahabad branch) 5000

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