FIRST METHOD:- In this method, the trading 7 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 liab.
(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.
DEBTORS SYSTEM:
This system is adopted generally in those branches
which are fairly small in size. Under this system, the
head office opens s separate account for each branch
in order to record all transactions relating to branch.
This account is a nominal account in nature and is
prepared to calculate profit and loss for each branch.
The goods supplied by the head office to branch may
be either at cost price or at cost plus profit. The
following are the journal entries which are passed in
the books of the head office to record branch
transactions.
Sr.
1.
2.
Transactions
When goods are
sent to branch
For return of
goods to H.O.
3.
For transferring
the balance of
goods sent to
branch A/c
4.
10.
When cheque or
draft is sent for
branch expenses
When cheque or
draft is received
for remittance
For
closing
balance assets
For
beginnings
balances of assets
(next year)
For
closing
balances
of
liabilities
For
opening
balances
of
liabilities
(next
year)
For branch profit
11.
For branch loss
5.
6.
7.
8.
9.
Debit
Branch A/c
Credit
Goods sent to
branch A/c
Goods sent Branch A/c
to Branch
A/c
Goods sent Purchase
(in
to branch trading
A/c
concerns)
or
Trading A/c (in
mfg. Concern)
Branch A/c Bank A/c
Bank A/c
Branch A/c
Branch
Assets A/c
Branch A/c
Branch A/c
Branch A/c
Branch
Liabilities A/c
Branch
Liabilities
A/c
Branch A/c
Branch A/c
General profit
& Loss A/c
Branch A/c
Branch
A/c
Assets
General
profit
&
Loss A/c
Accounting Adjustment required in head Office Books:- The branch records are not in any way affected
due to invoicing of goods at cost plus profit. But, in order to calculate the profit of loss made by the
branch, some accounting adjustments, as stated below are required to be passed in the books of the
H.O. for eliminating the profit element included in (1) branch opening stock, (2) goods sent to branch
less returns made by branch to head office and (30 branch closing stock.
(i) For adjustment of excess price of the opening stock at branch
Stock Reserve A/c Dr.
To Branch A/c
(ii) For adjustment of excess price of the closing stock of unsold goods at branch
Branch Account Dr.
To Stock Reserve A/c
(iii) For adjustment of excess price of goods sent to branch less returns to head office
Goods sent to branch A/c Dr.
To branch A/c
Closing stock should always be valued at cost or market price whichever is lower.
(a) Goods charged to Branch at Cost Price:
In this case the following accounts are prepared in the books of the head office.
1. Branch Stock Account:- This account is similar to that of the branch Trading Account where items like
goods received from head office, goods returned to head office goods sold by branch and goods
returned by customers to the branch etc. are dealt with This account is debited with opening stock at
branch, goods sent to branch and goods returned to the branch by customers. This account is credited
with cash sales, credit sales made by the branch, the goods returned by branch to the head office and
closing stock at branch. The balance of this account represents gross profit or gross loss and the same is
transferred to branch Profit & Loss Account.
2. Good sent to Branch Account:- This account maintained in the books of the head office is credited
with goods sent to branch and is debited with goods returned by branch. At the end of the accounting
period, the balance of this account is transferred to Purchases Account in case of trading concern and to
the Trading Account in case of a manufacturing concerns.
3. Branch Debtors Account:- This account is prepared when the branch sells goods on credit. It is
necessary for recording all transactions concerning branch debtors and for ascertaining the balance of
debtors at branch.
4. Branch Petty Cash Account:- This account is maintained where the branch makes some petty cash
payments. This account is debited with the balance of petty cash available in hand at the beginning of
the accounting year and with cash sent to the branch by the head office for petty cash and is credited
with all petty cash expenses incurred by the branch. The balance of this petty cash account represent
petty cash available in hand at the end of the accounting period.
5. Branch Profit & Loss Account:-This account is prepared to ascertain the profit or loss made by the
branch during the accounting period. The gross profit or loss at the branch, as determined from the
branch Stock Account is transferred to this account. The various branch expenses or losses are debited
and if there is any income, the same should be credited to this branch profit & Loss Account. The
balance of this account represents net profit or net loss for the year.
6. Branch Cash Account:-This account is maintained for recording all cash transactions relating to the
branch. This account is considered quite essential where the branch is permitted to purchase goods
locally and to incur expenses at branch out of cash available with the branch.
The following journal Transactions
entries
will
be
required
for
Debit
Credit
preparation of branch
accounts according to
stock & Debtors’
system in the books of
H.O. Sr.
1.
Goods sent to branch
Branch Stock A/c
Goods sent to branch
A/c
2.
Goods returned by Goods sent to branch Branch stock A/c
branch
A/c
3.
Cash sales at branch Branch Cash A/c
Branch Stock A/c
remitted to H.O.
4.
Credit sales at branch Branch Debtors A/c
Branch Stock A/c
5.
Returns
from Branch stock A/c
Branch Debtors A/c
Customers
6.
Bad Debt & discount Branch Expenses A/c
Branch Debtors A/c
etc. allowed
7.
Cash received from Branch Cash A/c
Branch Debtors A/c
branch
debtors
remitted to H.O.
8.
Shortage of goods in Branch P/L A/c
Branch Stock A/c
branch stock
9.
Surplus of goods in Branch Stock A/c
Branch P/L A/c
branch stock
10.
Expenses paid by head Branch Expenses A/c
Cash A/c
office
11
Transfer of branch Branch P/L A/c
Branch Expenses A/c
expenses to branch
P/L A/c
12.
Goods in transit
Good in transit A/c
Branch Stock A/c
13.
Good lost in transit Branch
P/L
A/c Branch Stock A/c
being abnormal loss
insurance
claim
receivable A/c (if any
claim is admitted)
14.
Transfer of branch Branch Stock A/c
Branch P/L A/c
gross profit
15.
Transfer of branch net Branch P/L A/c
General P/L A/c
profit
GOODS CHARGED TO BRANCH AT SELLING PRICE
The stock and Debtors system, as discussed above is particularly considered very useful and appropriate
where goods are invoiced to the branch t Selling Price. A brief description of various account opened in
the books of the head office is given below:
Branch Stock Account:- this account is prepared in the same way as that when goods are invoiced at
cost, except that all entries are made at invoice price. This method of accounting helps the head office
to exercise a better control over the branch stock. This account clearly brings into focus the shortage or
surplus in stock at branch. The balance of this account, after posting all the relevant entries should be
equal to the stock in hand available at branch, unless there is any surplus or shortage. The profit or the
‘load’ included in such surplus or shortage should be transferred to the branch Adjustment Account
while the cost of such surplus or shortage should be adjusted to the branch profit & Loss Account.
Branch Adjustment Account:- This account is prepared for ascertaining the amount of gross profit
earned by the branch. This is done by eliminating the profit element or the ‘loading’ included in the
value of opening and closing stock at branch, goods sent to branch, less returns made by branch to head
office and in surplus or shortage in branch stock etc. The balance of the account represents the gross
trading profit or loss which is then transferred to the branch profit & Loss Account.
Goods sent to branch Account:-the purpose of preparing this account is to ascertain the exact value of
the goods sent to the branch during the accounting period. This account is credited with the value of
goods sent to branch selling price and is debited with the value of goods returned by the branch at the
same invoice value. After adjusting the ‘Loading’ i.e., the profit included in such goods, the balance of
this account is transferred to Purchases Account.
Branch profit & Loss Account:- This account is prepared to ascertain the net profit or loss at the
branch. The branch gross profit or loss as shown by the branch adjustment account is transferred to the
branch profit & loss account. The branch expanses, shortage of stock at cost value and losses of stock
etc. are debited to the account. This account is further credited with incomes and gains, if any at branch
and cost value of surplus in branch stock etc. The balance of the account represents net profit or loss
made at the branch during the accounting period, which is finally transferred to general profit & loss
account.
Stock Reserve/suspense Account:- This account is prepared to adjust the loads included in the value of
opening and closing stock at branch. This account is credited with the load included in the closing stock
at branch and its balance is carried forward to the next accounting period.
Apart from the above, the other accounts which are required to be prepared according to ‘Stock &
Debtors’ system under method (B) referred to above, are branch Expenses Account, Branch Debtors
Account, Branch Cash Account and Branch Assets Account etc. these accounts are prepared in the same
way as those when goods sent to branch are charged at cost, as already stated in method (A) above.
The following journal entries are made relating to various types of transactions under this method.
(i) When goods are sent to branch
Branch Stock A/c Dr.
To goods sent to branch A/c
(ii) When sales are made by the branch
(a) For Cash Sales (b) For Credit Sales
Cash A/c Dr.
Branch Debtors A/c Dr.
To branch Stock A/c to branch Stock A/c
(iii) When cash is received from Debtors
Cash A/c Dr.
To branch Debtors A/c
(iv) For discount allowed, allowances and bad debts
Branch Expenses A/c Dr.
To Branch Debtors A/c
(v) For agreed allowances to customers off selling price already taken into account while invoicing.
Branch Adjustment A/c Dr.
To branch Stock A/c
(vi) When goods are returned by branch debtors
Branch Stock A/c Dr.
To branch Debtors A/c
(vii) When goods are retuned by branch debtors direct to head office
Goods sent to branch A/c (cost)
Branch Adjustment A/c (Loading)
To branch Debtors A/c
(viii) For normal loss of stock
Branch Adjustment A/c Dr. [with invoice price]
To branch Stock A/c
(ix) For abnormal loss, waste or leakage or shortage of stock
Branch Adjustment A/c Dr. [with loading only]
Branch P. & L. A/c Dr. [With cost]
To Branch Stock A/c [with invoice price]
(x) When goods are transferred from one branch to another branch
Transferor branch Transferee Branch
Goods sent to branch Dr. Branch Stock A/c Dr.
(With cost) (With invoice price)
Branch Adjustment A/c Dr. To (Goods sent to Branch A/c
(With loading) (With cost)
To branch Stock A/c to branch Adjustment A/c
(with invoice price) (with loading)
(xi) For apparent profit over the invoice price
Branch stock A/c Dr.
To Branch Adjustment A/c
(xii) For branch expenses paid in cash
Branch Expenses A/c Dr.
To Cash
(xiii) For closing branch expenses account (excluding cash in hand at the end) to branch P. & L. account
Branch Adjustment A/c
(With non-recurring expenses)
Branch P. & L. A/c Dr.
(With recurring expenses)
To branch Expenses A/c
(xiv) For adjustment of excess price of the opening stock
Stock Reserve A/c Dr.
To branch Adjustment A/c
(xv) For adjustment of excess price of the closing stock
Branch Adjustment A/c Dr.
To Stock reserve A/c
(xvi) For adjustment of excess price of goods sent to branch
Goods sent to branch A/c Dr.
To Branch Adjustment A/c
(xvii) For insurance Claim recoverable
Insurance Claim Dr.
To Branch P. & L. A/c
(xviii) For transfer of balance of branch adjustment A/c (i.e. gross profit)
Branch Adjustment A/c Dr.
To branch P. & L. A/c
(xix) For transfer of profit or loss to general profit and loss account
(a) If profit (b) If loss
Branch P. & L. A/c Dr. General P. & L. A/c Dr.
To Generl P. & L. A/c To branch P. & L. A/c
(xx) For closing the goods sent to branch account
Goods sent to Branch A/c Dr.
To Purchases or Trading A/c
BRANCH KEEPING FULL SYSTEM OF ACCOUNTING
Now we deal certain transactions which require special attention.
(i) Purchase of Branch fixed Assets:- Generally the branch fixed assets are maintained in the books of
head office. When an assets is purchased, the following entries are passed.
Head office books Branch Books
a) If the payments is Branch fixed Assets A/c Dr. Head Office A/c Dr.
Made by the branch To branch A/c To Cash
b) If the payments is Branch Fixed Asses A/c Dr. No Entry
Made by the head To bank
Office
(ii) Depreciation of Fixed Assets:- As branch fixed assets are maintained in the books of head office so
entries relating to depreciation will also be passed through head office account. The following entry will
be passed:
H.O. Books Branch Books
Branch Account Dr. P. & L. A/c Dr.
To Branch Fixed Assets A/c To Head Office A/c
(iii) Head Office Expenses:- If some services such as administration or technical are rendered by the
head office to the branch then a proportionate charge for such expenses will be made to each branch by
the head office and entry for that will be as follows:
H.O. Books Branch Books
Branch Account Dr. P. & L. A/c Dr.
To P. & L. A/c To head Office A/c
(iv) Reconciliation of transit items:- The balance of head office account (in branch books) and branch
account (in head office books) should normally be the same and one will make debit and other will
credit for all transactions affecting these accounts. But these accounts may differ in balances because of
the following reasons:
a) Cash in transit:- Sometimes the branch is remitting the cash to the head office before the close of the
accounting year, say on 28th December, when the account are closed on 31st December (next year).
While remitting the cash to the head office the branch will debit the head office account but if the
remittance is received by the head office after the closing date of accounting year, say on 4th January,
then head office will not give a credit for the same amount of remittance on 31st December, so the two
balances, i.e., H.O. A/c (in branch books) and branch Account (in H.O. passed in the books of branch or
head office (if the intimation of such remittance is received by the head office).
Branch Books Head office Books
Cash in Transit A/c Dr. Cash in Transit A/c Dr.
To head office A/c OR To branch A/c
b) Goods in transit:- Similarly the two balances may differ because of goods in transit Suppose the head
office sent goods to the branch on 28th December but those goods were received by the branch on 4th
January (next year), head office must have debited the account of branch in its books but there will b no
corresponding credit to head office account in the books of branch; so on the last day of accounting
year, i.e., 31st December the head office will pass the following adjusting entry:
Goods in Transit A/c Dr.
To Branch A/c
Cash in transit or goods in transit will be shown as an asset in the balance sheet.
(v) Inter-branch transactions:- if the head office has many branches and there is a possibility that some
branch may supply goods or send cash to the other branch, such transactions among the branches are
called inter-branch transactions. Such transactions may be recorded either by maintaining a current
account of a branch in another branch’s books or such transactions may be recorded by all branches by
passing entries thorough head office account. For example, if goods are supplied by Kolkata branch to
Delhi branch and the head office is at Mumbai, then the following journal entries will be passed in the
books of head office and the branches:
Mumbai books Kolkata Books Delhi Books
Delhi branch A/c Dr. Head office A/c Dr. Goods Received from
To Kolkata branch To Goods supplied to other branches A/c Dr.
Other branches A/c To head Office A/c
(vi) Cash paid by branch on behalf of H.O.:- if the branch has paid some amount of cash for purchase
made by H.O.) on behalf of H.O. then the following entries will be entered in the books of H.O. and the
branch:
H.O Books Branch Books
Purchases A/c Dr. H.O. A/c Dr.
To branch A/c To Cash A/c
(vii) Cash collected by branch on behalf of H.O:- if the branch has collected some cash on behalf of H.O.
(say for calls in arrears from the shareholders of H.O.) then the following journal entries will be passed in
the books of H.O. and the branch:
H.O. Books Branch Books
Branch A/c Dr. Cash A/c Dr.
To Calls in Arrears To H.O. A/c
(viii) If a bill is drawn by one branch on another branch: If a bill is drawn by Agra branch on Mumbai
branch and the H.O. is at Delhi, then the following entries will be passed in the books of H.O. and
branches:
H.O. Books Agra branch Mumbai Branch
Agra branch A/c Dr. B/R A/c Dr. H.O. A/c Dr.
To Bills payable To H.O. To B/OP A/c
B/R A/c Dr.
To Mumbai Branch.