LESSON - 8 BRANCH ACCOUNTS OBJECTIVES After going through this chapter you will be able to understand the purpose

of Branch Accounting understand the various types of Branches follow the accounting treatment when goods are sent by H O to branches at Lost Price and at invoice price Calculate Profits by preparing Branch Accounts under debtors system and stock and debtors system Know the system of accounting when head office maintains independent branch. STRUCTURE 8.1 Introduction 8.2 Objects of Branch Accounts 8.3 Types of Branches 8.4 Dependent Branch 8.5 Independent Branch 8.6 Whole sale Branch Unit Questions 8.1 Introduction Many business concern now-a- days carry on trading in different establishments scattered far and near. In other words, a business may be, and generally, is divided into so many divisions. If the various division are situated in different places of the same town or in different towns. They are known as branches. The parent establishment is known as Head Office Where a business has several selling branches it is essential that complete records be kept of the transactions relating to each branch, so that the head office can prepare accounts therefrom. 8.2 Objects of Branch Accounts. The following are the main objects of maintaining branch accounts. (i) Profit or loss of each branch can be found out. (ii) They halp in controlling Branches (iii) Actual financial position of the business can be found out on the basis of ahead office and branch accounting records. (iv) Branch requirements of goods and cash can be estimated.(v) Suggestions for increasing the efficiency of the branch can be sent on the basis of branch Accounts. (vi) They help in complying with the requirements of law because according to companies Act 1956. maintenance of accounting record of branches by companies is essential

8.3 Types of Branches From the accounting point of view, branches may be classified as follows:(i) Dependent Branch (ii) Independent Branch

(iii) Foreign Branch (i) Dependent Branch/Branch not keeping full system of accounting/ Branches of which accounts are kept in the head office) The term Dependent Branch means a branch which does not maintain its own set of books. All records have to be maintained by the head office. Features (a) This type of branch sells only those goods supplied by the head office. However. Some times the branch may be allowed to make purchase from the local parties for which the payments are made directly by head office. (b) The goods may be supplied to the branch by the head office ar cost price or at invoice price. (c) All branch expenses such as rent, salary , advertisement etc., are paid by the head office. (d) The branch manager is provided with a small amount of cash on the imprest system for meeting items of expenses. (e) The branch is allowed to make only cash sales though in some cases, it may be allowed to make credit sales to approved customers. (f) The branch remits sale proceeds (i.e, cash sales plus cash collected from debros_ periodically to the head office or credit the proceeds daily to the head office account, opened with a local bank. (i) Dependent Branch Accounting to respect of Dependent Branches In case of a dependent branch, the head office may keep accounts of the branch according to any of the following systems (i) Debtors system (ii) Stock and Debtors system (iii) Wholesale branch system (iv) Final Accounts system All these systems are now explained one by one in detail (i) Debtors system (synthetic method) This system is adopted in cash of branches of small size. Under this system ,a branch account is opened separately for each branch in the books of head office. This account is nominal account in nature. The opening balance of stock, debtors (if any), petty cash (if any)are debited to the branch account. The cost of goods sent to branch as well as expenses of the branch paid by the head office like salaries, rent, insurance etc., and closing balance of liabilities if any are also debited to it. At the end of the year, the value of unsold stock, the total customers balances outstanding and that of petty cash are brought into the branch account on the credit side. The branch account reveals profit or loss. If the branch account shows a credit balance, it is branch profit and if debit balance is shown, it is branch loss. When goods any invoiced at cost: Branch Account ( in the books of head office) Rs. Rs. Rs. Rs.

To Balance b/d (Assets in the beginning) Stock Debtors Petty cash Furniture Prepaid expenses

To Goods sent to branch A/c To Bank (expenses paid by H.O) To balance c/d (closing balance of liabilities accounts if any) Creditors Outstanding expenses To General P&L.A/c (Branch profit )(bal.A/c) *(Branch Profit )( bal. Fig)

xxx xxx xxx xxx xxx

xxx xxx

xxx

xxx xxx

xxx xxx To balance b/d (Opening balance of liabilities accounts if any) Creditors Outstanding expenses By Bank Cash sales Cash collected from debtors By Goods sent to Branch A/c (returns to H.O) By balance c/d (closing balance of Assets) Stock Debtors Petty Cash Furniture (at depreciated value) Prepaid expenses By General P& L A/c (Branch Loss) (bal.fig)

xxx

xxx xxx xxx

xxx xxx xxx

xxx

xxx

xxx

xxx

xxx

xxx

* Balancing figure is either profit or loss. The following Journal entries are passed in the books of head office to record branch transactions: (i) When goods are sent to branch Branch Dr. To goods sent to branch account Note:- Reverse entry for goods returned to head office. (ii) When cheque or draft is sent for branch expenses Branch Account Dr. To Bank Account (iii) When cheque or draft is received as remittance from branch. Bank Account Dr. To Branch Account (iv) For closing balances of assets Branch Assets Account Dr To Branch Account (v) For opening balances of assets Branch Account Dr. To Branch Assets Account (vi) For Closing balances of liabilities Branch Account Dr. To Branch liabilities Account (vii) For opening balances of liabilities Branch liabilities Account Dr. To Branch Account (viii) For transferring the balance of goods sent to branch account. Goods sent to branch account. Dr. To Purchase Account (trading concern) Or Trading Account (Manufacturing concern) (ix) For branch profit. Branch Account. Dr. To General Profit and Los Account. Note:- Reverse entry for loss. (A) When Goods are involved at selling price (i.e.invoice price method) Some times head office sends goods to branch at invoice price. When the goods are sent at invoice price to the branch, the branch manager will have to sell the goods to the customers at invoice price.

As the goods are supplied to branch at invoice price, (a) opening stock (b) goods sent to branch (c goods returned by branch and (d) closing stock with be recorded in the branch account at this price. Hence in order to find out the true profit or loss at branch. It will be necessary to eliminate the loading. The following adjustment entries are to be made in the branch account. Stock reserve account Dr. To Branch Account (b) For profit an net goods sent to Branch (i.e) Goods sent to branch Goods returned to H.O) Goods sent to Branch A/c Dr. To Branch Account ( c) For Profit included in the closing stock Branch A/c Dr. To Stock reserve A/c II Stock and Debtors system Profit or loss of a branch can be found out by preparing branch account which has been discussed earlier, but there is another method for the same purpose. This method is known as stock and debtors method. In this method, the head office keeps separate accounts relating to various types of transactions at the branch instead of one branch account. The following accounts are kept in the head office books relating to a branch under this system. (i) Branch Stock Account (ii) Branch Debtors Account (iii) Branch Expenses Account (iv) Branch Adjustment Account (required only when the goods are sent at invoice price) (v) Branch Profit and Loss Account. (vi) Goods sent to the Branch Account. (i) Branch Stock Account This account deals with all goods received, returned and sold by the branch. The account helps the head office in maintaining an effective control over the branch stock. It is debited with (a) opening stock (b) goods sent to branch (c) gods returned by debtors. (d) surplus in stock if any. It is credited with (a) cash sales (b) credit sales (c) goods spoiled and goods lost like loss in weight, pilferage, loss in transit (d) goods returned to head office by branch (e) closing stock. It gives information about shortage or surplus of stock and the closing stock at the branch. (ii) Branch Debtors Account

This account is prepared to record all the transactions relating to branch debtors and ascertain either the closing balance of debtors or credit sales. (iii) Branch Expenses Account. All expenses incurred by branch are recorded in the debit side of this account and balance of this account is transferred to branch profit and loss account. (iv) Branch adjustment account When the goods are sent to branch at cost price, this account need not be prepared Instead , when the goods are supplied to branch at invoice price, it must be prepared to ascertain gross profit made by the branch. This account is debited with (a) closing stock reserve (b) profit element of stock shortages, defectives loss on transit and pilferage and (c) value of loss in weight (full amount) . It is credited with (d) stock reserve on the opening stock (b) loading on goods sent to branch and (e) the profit element of stock surplus. Balance of this account indicates gross profit or gross loss which is transferred to branch profit and loss account. (v) Branch profit and loss account This account is prepared to ascertain the net profit made by the branch . It is debited with (a) the balance of branch expense expenses account (b) cost of goods lost due to shortage or defectives, loss in transit, and pilferage . It is credited with (a) gross profit as shown in branch adjustment account (b) cost of surplus if any revealed by the branch stock account and (c) amount recoverable from insurance company for any losses of stock. Balance of this account indicates net profit of net loss which is transferred to General Profit and Loss Account. (vi) Goods sent to Branch Account. This account is prepared to find out the net value of goods sent to the branch Goods sent to branch and goods returned by the branch and loading included in them if any are recorded in this account. Balance of this account is transferred to either purchase account or trading account depending on whether the firm is trading concern or a manufacturing concern respectively. JOURNAL ENTRYS The following journals entries are required for 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 Note : Reverse entry will be passed for goods returned by branch to head office. (ii) When sales are made by the branch (a) For Cash sales Cash A/c Dr. (b) For credit sales

Branch debtors A/c Dr. To Branch Stock A/c Note: Reverse entry will be passed for goods returned by customers (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 Branch expenses paid in cash Branch expenses A/c Dr. To Cash/ Bank A/c (vi) For closing branch expenses account Branch P & L A/c Dr. To Branch expenses A/c The following additional adjustment entries are to be passed when the goods are sent at invoice price. (vii) For the difference between the invoice price and cost price of the opening stock. Stock Reserve A/c Dr. To Branch Adjustment A/c (viii) For the difference between the invoice price and cost price of the closing stock. Branch Adjustment A/c Dr. To Stock Reserve A/c (ix) For the difference between selling price and cost price of the goods sent to branch less returns. Goods sent to Branch A/c Dr. To Branch adjustment A/c (x) For insurance claim received Insurance claim A/c Dr. To Branch P & L A/c (xi) For any shortage in the branch stock account (a) Loading on such shortage Branch adjustment A/c Dr.

To Branch stock A/c (b) Cost of such shortage Branch Profit and Loss A/c Dr. To Branch stock A/c (xii) for any surplus in the branch stock account (a) Loading on such surplus Branch stock A/c Dr. To Branch adjustment A/c (b) Cost of such surplus branch stock A/c Dr. To Branch profit & loss A/c (xiii) For gross profit made by the branch Branch adjustment A/c Dr. To Branch P & L A/c Note- Reverse entry for gross loss for net profit disclosed by branch P & L A/c Branch P & L A/c To General P & L A/c Note Reverse entry for net loss. (xiv) For closing goods sent to branch A/c Goods sent to branch A/c To purchases or trading A/c. 8.4 DEPENDENT BRANCHES DEBTORS SYSTEM (a) When goods are sent to branch at cost price Example Layal shoe company opened a branch at Madras on 1.1.99 from the following particulars, the Madras Branch account for the year 1999 2000 1999 2000 Rs. Rs. Goods sent to Madras Branch 15,000 45,000 Cash sent to Branch for Rent 1,800 1,800 Salaries 3,000 5,000 Other expenses 1,200 1,600 Cash received from the branch 24,000 60,000 Stock on 31st December 2,300 5,800 Petty cash in hand on 31st December 40 30 Solution In the books of Head office Madras Branch A/c for 1999 Rs. Rs. Jan.1 To Balance b/d

To Goods sent to Branch To Cash Rent 1,800 Salaries 3,000 Other expenses 1,200 To General P& L A/c (Profit) Nil 15,000

6,000 5,340

26,340 31.Dec By Cash By Balance c/d Stock Petty Cash 24,000 2,300 40

26,340

Madras Branch A/c for 2000 Rs. Rs. Jan.1 To Balance b/d Stock Petty Cash To Goods sent to branch To Cash Rent 1,800 Salaries 5,000 Other expenses 1,600 To General P& L A/c (Profit) Nil

2,300 40 45,000

8,400 10,000 65,830 31.Dec ByCash 24,000 By Balance c/d Stock 5,800 Pettycash 30

65,830 Example From the following particulars relating to Hyderabad branch for the year ended 31.12.90 Prepare Branch A/c in the head office books. Rs. Rs. Stock at the Branch on 1.1.90 15,000 Debtors at the Branch on 1.1.90 30,000 Petty cash at the Branch on 1.1.90 300 Goods sent to Branch during 1990 2,52,000 Cash Sales 1990 60,000 Received from Debtors 1990 2,10,000 Credit sales during 1990 2,28,000 Cheques sent to branch during 1990 For salaries 9,000 For Rent & Rates 1,500 For Petty Cash 1,100 11,600 Stock at the branch on 31.12.90 25,000 Petty Cash 31.12.90 200 Goods returned by the branch 2,000 Debtors on 31.12.90 48,000

Solution: In the books of Head office Hydrabad Branch A/c Rs. Cr Rs. Jan.1

Dec.31 To Balance b/d Stock Debtors Petty Cash To Goods Sent to branch A/c To Bank Salaries 9,000 Rent & Rate 1,500 Petty Cash 1,100 To General P& L A/c (Profit) 15,000 30,000 300 2,52,000

11,600 36,300 3,45,200 31.Dec By Bank Cash sale 60,000 Cash received From Debtors 2,10,000 By Goods Sent to branch (Return to H.O) By Balance c/d Stock Debtors Petty Cash

2,70,000 2,000

25,000 48,000 200 3,45,200 When goods are sent to branch at invoice price Manian Ltd, of Calcutta has a branch at Patna. Goods are invoiced to the Patna branch, the selling price being cost plus 25% The patna branch keeps its own sales ledger and transmits all cash received to Calcutta. All expenses are paid from Calcutta. From the following details prepare the Patna branch A/c for the year 1989. Rs. Stock (1.1.89) (invoice price) 1,250 Stock (31.12.89) (invoice Price) 1,500 Debtors 1.1.89 700 Debtors 31.12.89 900 Cash sales for the year 5,400 Credit sales for the year 3,500 Goods invoiced from Calcutta 9,100 Rent 400 Wages 340 Sundry expenses 80 Books of Manian Ltd. Calcutta (H.O) Patna Branch A/c Rs. Cr Rs. Jan.1

Dec.31 To Balance b/d Stock Debtors To Goods sent to branch

To Goods Sent to branch To Bank Rent 400 Wages 340 Sundry expenses 80 To Stock Reserve (1500x25/125) To General P & L A/c (Profit) 1,250 700 9,100

820 300 1,000

13,170 31.Dec By Bank Cash sale 5,400 Cash received from Debtors 3,300 By Stock Reserve (1250x25/125) By Goods sen to Branch loading (9,100x25/125) By Balance c/d Stock Debtors Petty Cash

8,700 250

1,820

1,500 900 13,170 Working Note: Calculation of Cash received from Debtors Branch Debtors A/c Rs. Cr Rs. 1.1.89 To Balance b/d To Sales (credit) 700 3,500 4,200 31.12.89 By Cash (Bal.fig) By Balance c/d 3,300 900 4,200 FINAL ACCOUNTS SYSTEM Example A Madras merchant has a branch at Pudukkottai to which goods are sent at cost plus 25% The branch keeps its own sales ledger and remits all cash received to the head office every day. All expenses are paid from the head office . the transactions for the branch were as follows. Rs. Rs. Stock (1.1994) at I.P 11,000 Cheques sent to branch Debtors (1.1.94) 100 Rent 600 Petty Cash (1.1.94) 100 Wages 200 Cash Sales 2,650 Salary 900 Credit Sales 23,950 Stock (31.12.94) at I.P 13,000 Goods sent to branch at I.P 20,000 Debtors(31.12.94) 2,000 Goods returned to head office 300 Petty Cash (31.12.94) 125 Bad debts 300 (Including miscellaneous Allowances to Customers 250 Rs.25 not remitted) Return Inwards 500 Collection from debtors 21,000 Prepare the Branch Trading and Profit and Loss A/c and Branch A/c for the year 1994. Solution : Branch Trading and Profit and Loss A/c for the year ending 31.12.94. Rs. Rs. To Opening stock (at cost ) (11,000 2,200)

To Goods sent to Branch 16,000 (at cost) Less Returns to H.O 240

To Wages To Gross profit c/d (bal.fig)

To Bad debts To Allowance To Rent To Salaries To Net Profit c/d 8,800

15,760

200 11,740 36,500

300 250 600 900 9,715 11,765 By Sales Cash 2,650 Credit 23,950 26,600

Less Returns 500 By Closing Stock(at cost) (13,000 2,600)

By Gross Profit b/d By Miscellaneous income

26,100 10,400 36,500 11,740 25

11,765 Branch A/c (Personal A/c) Rs. Rs. To Balance b/d Stock Debtors Petty Cash To Goods sent to branch at cost

To Bank (expenses) To Profit 8,800 100 100 16,000 1,700 9,715 36,415 By Bank Cash Sales 2,650 Cash received from debtors 21,000 By Goods sent to branch at cost (Return) By Balance c/d (10,400 +2,000+125) (Bal Fig)

23,650 240

12,525 36,415

WHOLESALE BRANCH SYSTEM Example : A Head office sends goods to its branch at 20% les than the list price. Goods are sold to customers at cost plus 100% From the following particulars ascertain the profit made at the head office and the branch on wholesale basis.

Head office Branch Rs. Rs. Purchases 2,00,000 -Goods sent to branch(invoice price) 80,000 -Sales 1,70,000 80,000 Solution: Trading and Profit & Loss A/c H.O Rs. Branch Rs. H.O Rs. Branch Rs. To Purchases To Goods received from H.O To Gross Profit c/d

To Stock Reserve (Closing stock) (16,000 x60/160) To Net profit c/d 2,00,000 --1,15,000 3,15,000 6,000

1,09,000 1,15,000 -80,000 16,000 96,000

16,000 16,000 By Sales By Goods sent to branch By Closing stock

By Gross Profit 1,70,000 80,000 65,000 3,15,000 1,15,000

1,15,000 80,000

16,000 96,000 16,000

16,000 Working Note: Calculation of closing stock Rs. Rs. Value of Closing Stock at H.O 2,00,000

Purchase Less: Cost of goods sold (1,70,000x100/200) 85,000 Less: Cost of Goods sent to Branch (80,000x100/160) 50,000 1,35,000 --------Closing Stock 65,000 Value of closing stock at Branch Goods received from H.O 80,000 Less: Cost of goods sold (80,000x100/200) 64,000 Closing Stock 16,000 Note: H.O.Cost Price Whole sale Rate List Price i.e Rate at which Goods 200(100+100) supplied to branch 160 (200 200x20%)

STOCK AND DEBTOR SYSTEM (b) When goods are sent at cost price. The Calcutta Commercial Company unvoiced goods to its Jamshedpur Branch at cost. The Head office paid all the branch expenses from its except petty cash expenses which were paid by the branch. From the following details relating to the Branch prepare. (1) Branch Stock A/c (2) Branch Debtors A/c (3) Branch Expenses A/c (4) Branch P & L A/c Stock (Opening) 21,000 Discount to customers 4,200 Debtors (Opening) 37,800 Bad debts 1,800 Petty Cash (Opening) 600 Goods returned by Goods sent from H.O Customers to branch 1,500 Goods returned to H.O 3,000 Salaries & Wages 18,000 Cash Sales 52,000 Rent & Rate 3,600 Advertisement 2,400 Debtors (closing) 29,400 Cash received from debtors 85,000 Petty Cash (Closing) 300 Stock (Closing) 19,500 Credit sales 85,200 Allowances to customers 600

Solution: Rs. Rs. To balance b/d To Goods sent to branch To Branch Debtors To Branch Profit & Loss A/c (Transfer) 21,000 78,000 1,500 59,700

1,60,200 By cash By Goods sent to Branch By Branch Debtors By Balance c/d 52,000 3,000 85,200 19,500

1,60,200 Branch Debtors A/c Rs. Rs. To Balance b/d To Branch Stock A/c (Credit sales) 37,800 85,200

1,23,000 By cash By Branch expenses [bad debts, allowances, discount] By Branch Stock (Returns) By Balance c/d 85,500 6,600 1,500

29,400 1,23,000 Branch Expenses A/c Rs. Rs. To Balance b/d To Branch (Advt.Salaries & Wages, Rent & Rates) To Petty expenses (600 300) 6,600 24,600 300 31,500 By Branch P & L A/c (transfer) 31,500

31,500

Branch Profit & Loss A/c Rs. Rs. To Branch Expenses A/c To general P&L A/c (Profit) Bal.fig.7 31,500 28,200 59,700 By Branch Stock A/c 59,700

59,700 When goods are sent at invoice Price:A head office invoices goods to its branch at cost plus 50% Branch remits all cash received to the head office and all expenses are met by the H.O .From the following particulars ,prepares the necessary accounts on the stock & debtors system to show the profit or loss at the branch. Rs. Rs. Stock on 1.1.89 (invoice price) 27,900 Goods returned by debtors 3,600 Debtors on 1.1.89 20,400 Goods returned to H.O

by Branch 4,500 Goods invoiced to the branch 1,53,000 Expenses at the branch 600 (invoice price) shortage of stock 1,350 Cash Sales 75,000 Expenses at the branch 16,200 Credit Sales 93,000 Bad debts 600 Cash collected from debtors 91,200 Branch Stock A/c Rs. Rs. To Balance b/d To Goods sent to branch To Branch Debtors 27,900 1,53,000 3,600

1,84,500 By cash A/c By Branch Debtors By Goods sent to Branch (Returns to H.O) By Branch Adjustment A/c (loading on shortage) By Branch P & L A/c (Cost of shortage of stock) By Balance c/d 75,000 93,000 4,500 450 900 10,650

1,84,500

Branch Debtors A/c Rs. Rs. To Balance b/d To Branch Stock A/c 20,400 93,000

1,13,400 By cash By Branch Stock A/c By Branch expenses (Discount + Bad debts) By Balance c/d (Bal.fig) 91,200 3,600 1,200 17,400 1,13,400

Branch Expenses A/c Rs. Rs. To Bank To Branch Debtors (Credit sales) 16,200 1,200

17,400 By Branch P& L.A/c (transfer) 17,400

17,400 Branch Adjustment A/c Rs. Rs. To Stock Reserve (10,650 x50/150) To Branch stock A/c (Loading on shortage) (1,350 x50/150) 3,550 450

58,000 By Stock Reserve (27,900x50/150) By Goods sent to Branch (Net) Loading (1,48,500 x50/150) 9,300 49,500

58,000 Branch Profit & Loss A/c Rs. Rs. To Branch Expenses A/c To Branch Stock A/c Cost of shortage of stock To General P & L A/c (Net Profit) 17,400 900

36,500 54,800 By cash Adjustment A/c (Gross Profit) 54,800

54,800 Goods sent to Branch A/c Rs. Rs. To Branch Stock A/c To Branch Adjustment A/c To Purchase A/c (Bala.Fig) 4,500 49,500 99,000 1,53,000 By Branch Stock A/c 1,53,000

1,53,000 INDEPENDENT BRANCHES Adjustment Journal entries Example:Show what entries would be passed by head office to record the following transactions in the books on 31st December , the date of annual closing? (i) Goods amounting Rs.1,500 transferred from Chennai branch to Trichy branch under instructions from head office. (ii) Depreciation of Rs.1,000 on Chennai branch fixed assets when such accounts are opened in the head office books. (iii) A remittance of Rs.9000 made by the Trichy branch to head office on 25th December and received by the head office on 4th January (iv) Goods amounting to Rs.15,000 sent by head office to Trichy branch on 20th December and received by the latter on 15th January. Solutions: Dec.31 (i)

(ii)

(iii)

(iv) Trichy Branch A/c Dr. To Chennai Branch A/c (Being goods transferred from Chennai branch to Trichy branch as per instruction) Dr. Chennai Branch A/c Dr. To Chennai Branch fixed Asset A/c (Being depreciation written off on Chennai branch assets) The head office will not pass any entry until intimation is received . When information about it is received the following entry is passed. Cash in transit A/c Dr. To Trichy Branch A/c Goods in transit A/c Dr. To Trichy Branch A/c (Being the entry to adjust the goods sent to Trichy Branch on 20th Dec. but not received by the branch till 31st Dec.] Rs. 1,500

1,000

9,000

15,000 Rs. 1500

1000

9,000

15,000

Example A branch sent the following Trial Balance to its H.O Rs. Rs. Head office Account -- 57,840 Sundry Creditors -- 14,000 Sales -- 2,20,000 Balance at Bank 9,000 -Cash in hand 140 -Sundry Debtors 54,000 -Purchases 1,60,000 -Rent and Rates 4,000 -General Expenses 7,000 -Salaries 12,000 -Bad debts 700 -Fixture and fittings 2,400 --

Machinery 4,600 -Stock, Ist January 38,000 -------------- -----------2,91,840 2,291,840 ------------- -----------The proportion of head office expenses to be charged to the branch is Rs.4,500 . The salaries include a sum of Rs.2,600 paid to branch manager who is further entitled to 15 % commission on the net profit of the branch before charging such commission. The branch stock on 31st December was Rs.22,000 .Prepare the Branch Trading and P & L A/c and balance sheet allowing 10 % depreciation on the fixed assets. Books of Head office Branch Trading and P & L A/c for the year ended -------Rs. Rs. To Opening Stock To Purchases To Gross Profit C/d

To Rent To General Expenses To Salaries To Bad debts To H.O Expenses payable To Depreciation On Fixtures 240 On Machinery 460 To Commission to Branch Manager (15,100 x 15%) To Net Profit c/d 38,000 1,60,000 44,000 2,42,000 4,000 7,000 12,000 700 4,500

700 2,265 12,835 44,000 By Sales By Closing stock

By Gross Profit b/d 2,20,000 22,000 2,42,000 44,000

44,000

Liabilities Rs. Assets Rs. Sundry Creditors Branch Manager s Commission due H.O A/c

Add. H.O Expenses Add> Net Profit

57,840 4,500 12,835 14,000 2,265

75,175 91,440

91,440 Cash Bank Debtors Stock Fixtures Less Depreciation 10% Machinery Less.Depreciation 10%

2,400 240

4,600 460 140 9,000 54,000 22,000

2,160

4,340

91,440 8.5 INDEPENDENT BRANCHES Independent branch means a branch which maintain its own set of books and has freedom to operate independently. The branch receive goods from head office and also purchases from outside. The branch manager is not required to remit the daily cash receipts, as he would require some working capital to pay for his purchases and also to defray local expenses. Accounting Treatment Such a branch maintains an independent and complete set of books as is ordinarily maintained by any business. It can prepare its own trial balance. Trading and profit and loss account and balance sheet and send their copies to the head office for their incorporation in the head office books. It maintains a head office account in its books. This account is debited with cash sent to the head office, goods supplied to head office. Payment made by the branch for purchase of assets and loss to be borne by the head office and credited with cash received from the head office, goods received from the head office, depreciation of branch fixed assets, charge made by head office for rendering services and profit earned by the branch. Similarly , in the head office books., there will be separate branch account for each branch. Reconciliation of transit items (i) Goods in transit: The head office will pass the following adjustment entry. Goods in transit A/c To branch A/c (ii) Cash in transit: An adjustment entry will be passed in the books of the branch or head office(if the intimation of such remittance is received by the head office)

In the Books of branch In the books of head office Cash in transit A/c Dr. Or Cash in transit A/c Dr To Head office A/c To branch A/c Cash in transit or goods in transit will appear as an asset in the balance sheet. Some other adjustments (i) Purchase of branch fixed assets : Head office books Branch Books (a)When the payment for fixed asset is Branch fixed Asset A/c Dr. Head Office A/c Dr. made by the branch To Branch A/c To Cash A/c (b) When the payment for fixed asset is made Branch Fixed Asset A/c Dr. No entry by the head office To Bank A/c (ii) Depreciation of fixed Assets: In the Books of Head office In the Books of Branch Branch A/c Dr. Depreciation A/c Dr. To Branch fixed assets A/c To Head Office A/c (iii) Head office Expenses: In the Books of Head office In the Books of Branch Branch A/c Dr. P & L A/c Dr. To P & L A/c To Head Office A/c (iv) Inter branch Transaction : The entries will be as follows: In the books of chennai branch Head Office A/c Dr. In the books of Lucknow branch Goods from H.O A/c Dr. To Head office A/c In the books of head office Lucknow Branch A/c Dr. To chennai Branch A/c (iii) Cash paid by branch on behalf of Head office : When the branch has paid some amount on behalf of head office (say for purchases made by H.O) the entries will be as follows. In the Books of Head office In the Books of Branch Purchase A/c Dr. Head Office A/c Dr.

To Branch A/c To Cash A/c (v) Cash Collected by branch on behalf of head office. When the branch has collected some amount on behalf of head office (say collection of calls in arrears from shareholders ) the entries will be as follows:In the Books of Head office In the Books of Branch Branch A/c Dr. Cash A/c Dr. To Calls in arrears To Head office A/c Incorporation of Branch Trial Balance in Head office Books. (i) For debit side items of trading A/c (Total of opening stock net purchases and direct expenses) Branch Trading A/c Dr. To Branch A/c (ii) For Credit side items of trading A/c (Total of net sales and closing stock Branch A/c Dr. To Branch Trading A/c (iii) For transfer of gross profit or gross loss (a) Branch Trading A/c Dr. To Branch P & L A/c (b) for Gross loss Branch P & L A/c Dr. To Branch Trading A/c (iv) For various expenses and losses (i.e salaries, rent, depreciation and discount allowed etc) which appear on the debit side of P &L A/c Branch P & L A/c Dr. To branch A/c (v) For various incomes and gains (e.g discount earned) which appear on the credit side of P&L A/c Branch A/c Dr. To branch P&L A/c (vi) For transfer of net profit or net loss. a) For net profit Branch P&L A/c Dr. To General P&L A/c b) For net loss Dr. General P & L A/c To Branch P & L A/c (vii) For total of various branch liabilities (i.e Branch Creditors, Branch Expenses Outstanding etc.

Branch A/c Dr. To Branch Liabilities A/c (individually) (vii) For total of various branch liabilities (i.e Branch Creditors , Branch Liabilities A/c (individually) 8.6 Wholesale Branch System Accordingly, branch trading account is debited with. (ii) The value of opening stock at the branch and (iii) Price of goods sent during the year at wholesale price It is credited with. (i) Sale effected at the branch. (ii) Closing stock of goods valued at wholesale price. The value of goods lost due to accident, theft etc. is also credited to the branch trading account, calculated at the wholesale price. At this stage the branch trading account will reveal the amount of gross profit (loss) it is transferred to the branch profit and loss account . On further being debited with the expenses incurred at the branch and the wholesale price of goods lost, the branch profit and loss account will disclose the net profit (loss) at the branch. Since the closing stock at the branch has to be valued at wholesale price. It would be necessary to create a stock reserve equal to the difference between in the whole sale price and its cost (to the head office) by debiting the amount in the Head office Profit and loss Account This stock reserve is carried down to the next year and then transferred to the credit of the (head office) profit and loss account. Final Accounts System The head office can also ascertain the profit or loss of a dependent branch by preparing branch trading and profit and loss account at cost . In such cases. The head office may also maintain a branch account. Unit Questions: 1. What do you understand by branch accounting? What are its purposes? 2. Briefly explain the salient features of dependent branches? 3. Write a note on stock and debtors system. 4. What do you understand by independent branch ? Mention the entries necessary for the head office to incorporate Branch Trial Balance in the head office books. 5. When goods are sent to branch at invoice price. Relax Limited a supplies goods to its New Delhi at cost plus 25% All Cash sales at branch are daily remitted to Head Office and the latter directly pays all the branch expenses. The result of the branch operations for the year ended 31.12.93 were as follows. Rs. Stock of goods at branch (1.1.93) (invoice price) 3,000 Goods supplied at invoice price 24,000 Remittance from the branch 25,000 Cash paid by Head Office for .Salaries and Wages 1,900

Rent and Rates 600 Sundry expenses 2,000 Returns from the branch (invoice price) 150 Stock of goods at branch (31.12.93) (invoice price) 8,000 6. The Super Cycle Co, had a branch at Chennai. Goods are invoiced to the branch at cost plus 25% Branch is instructed to deposit cash everyday in the head office account in the bank. All expenses are paid by cheque by the Head Office except petty cash expenses which are paid by the branch. From the following particulars prepare branch account in the books of Head office. Rs. Rs. Stock on 1.1.1995 2,500 Goods invoiced from H.O 18,200 Stock on 31.12.1995 3,000 Expenses paid by H.O 1,400 Sundry debtors on 1.1.95 1,400 Expenses paid by branch 120 Sundry debtors on 31.12.95 1,800 Cash remitted by H.O to branch Cash Sales for the year 10,800 office for purchase of safe 1,300 Credit Sales for the year 7,000 Cash remitted to the H.O 15,000 Furniture purchased by the Branch manager 1,200 7. Jolly & Co. Ltd Madras, has branch at Madurai for sale of the goods . For the year ending 31st March 1995, The following particulars are furnished: Rs. Goods sent to branch 2,84,000 Goods returned by branch 8,000 Cash Sales 1,58,000 Credit Sales 4,04,000 Cash received from debtors 3,79,000 Branch expenses paid by H.O Rent 20,000 Salaries 60,000 Cash sent by Head Office to branch as petty cash 10,000 31.3.95 Petty Cash at Branch 200 300 Branch Debtors 47,000 Branch Stock 89,000 54,000 All the cash collections are remitted to the head Office . Show the Madurai Branch A/c in the Head Office books and also the Branch Trading and Profit & Loss Account for the year. 8. A Head office invoiced goods to its Branch by adding 25% to the cost, from the following particulars, relating to the Branch as certain profit or loss at the Branch by stock and Debtors system

Stock at the Brance 1.1.2005 Rs. 22,500 Drs. At the Branch 1.1.2005 Rs. 4,000 Goods sent to the Branch Rs. 2,65,200 Cash sales Rs. 80,000 Credit Sales Rs. 1,60,000 Cash received from Drs. Rs. 1,51,400 Discount allowed to customers Rs. 2,600 Goods returned by cutomers Rs. 1,500 Cash remitted to the Branch Rent Rs. 1,500 Salaries Rs. 8,000 Sundry Expenses Rs. 1,000 9. The following Trial Balance is received by a Head office from its Branch. Rs. Rs. Balance at Bank Cash in hand Sundry Drs Purchases Rent and Rates General Expenses Salaries Bad debts Fixture and fittings Machinery Stock on 1st January 18,000 280 1,05,000 3,20,000 10,000 12,000 24,000 1,400 4,800 9,200 76,000

5,83,680 Sundry Crs Sales Head office a/c 2,80,000

4,40,000 1,15,680

5,83,680

the proprtion of Head office expensies to be charged to the Branch is Rs.9000 . The salaries include a sum of Rs.5200 paid to the Branch manager who is further entitled to 15% on the net profit before charging such commission . The Branch stock on 31st December was Rs.44,000. Pre pare Branch Trading and profit and Loss Account and Balance sheet allowing 10% depreciation on the fixtures and fittings.