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WHAT IS BRANCH?
The aim of every business is to grow and increase its sales volume so as to earn more and more profits. To achieve this objective the strategy is to make market its products/services over a large territory, which is possible only if the business decide to split its business into certain divisions or parts. These are called branches. For example, Bank of Punjab Ltd. With its registered head office at Chandigarh has opened up its branches in different sectors of Chandigarh as well as in different cities all over India. Likewise, Bata Shoe Co., State Bank of India LIC Housing Finance, Tata Finance Ltd., etc. have many branches all over the country.
TYPES OF BRANCHES
HOME BRANCHE
S
FOREIGN BRANCHES
DEPENDENT BRANCHES
INDEPENDENT BRANCHES
HOME BRANCHESWhen a branch is opened in the same
country where the head office is registered, it is called a home branch. Home branch are of two types-
(a) Dependent branches- The branch that do not maintain a complete record of its transactions are called ‘Dependent branches’.
(b) Independent branches- Independent branches are those branches which maintain a complete record of its transactions.
IMPORTANT TERMS1. INTER-BRANCH TRANSACTIONS- When a
branch sends goods or cash to another branch, it is called inter-branch transactions. Examples- Delhi branch sends goods to Agra branch etc.
Accounting treatment: The best way to deal with inter-branch transactions is to record these transactions by the concerned branches through the head office. This can be illustrated with the help of following example:
1. Agra branch sends goods to Delhi branch for Rs.5000.
This is a inter branch transaction and will be recorded by the head office and concerned branches as follows:
Head office books
Agra branch Delhi branch
Delhi branch A/c Dr. 5000
To Agra branch A/c 5000
(Being goods transferred from agra to delhi branch)
Head office A/c Dr. 5000
To goods sent to branch A/c 5000
(being goods sent to Delhi branch)
Goods from branch A/c Dr. 5000
To head office A/c 5000
(being goods received from Agra branch)
GOODS IN TRANSIT: When the goods sent by head office are not received by the branch till the date of closing of books of accounts, those goods are called goods in transit.
CASH IN TRANSIT: It is quiet common that the head office and the branch send cash to each other at regular intervals. Suppose, Ludhiana branch sends cash to head office on 30th march. The branch will immediately debit ‘Head office account’ and credit ‘cash account’. But the head office will not pas the entry for receipt of cash till cash is actually received. Now further suppose that the head office receives the cash on 2nd April. The head office will pass entry on 2nd April when the cash is actually received. For a few days, therefore, the two accounts will show different balances.
Procedure for reconciliation
• Compare the balance of ‘branch account’ in the head office books with the balance of ‘head office’ in the books of branch. If the two balances are same, there is no need for reconciliation. But in case of difference, the following steps must be followed.
• Find out the reason for the difference in balances.
• Pass the following adjustment entries either in the books of head office or in the books of branch, but not in both sets of books.
Reasons for the difference
If the adjustment entry is passed in the books of head office
If the adjustment entry is passed in the books of branch
(a) Goods in transit
Goods in transit A/c Dr.To branch A/c
Goods in transit A/c Dr.To head office A/c
(b) Cash in transit
Cash in transit A/c Dr.To branch A/c
Cash in transit A/c Dr.To head office A/c
THERE ARE THREE METHODS OF KEEPING ACCOUNTS OF DEPENDENT BRANCHES:
• DEBTORS SYSTEM
• FINAL ACCOUNT SYSTEM
• STOCK AND DEBTOR SYSTEM
This system is used for branches of small size. Under this method the head office prepares a ‘branch account’ separately for each branch. Branch account is a nominal account which gives us the profit or loss made at branch. The journal entries to be made at the head office under this system are as follows:
JOURNAL ENTRIES
1 For recording branch assets at the beginning of the year
Branch A/c Dr.To Branch Assets A/c
2 For recording branch liabilities at the beginning of the year
Branch liabilities A/c Dr.To branch A/c
3 For goods sent to branch
Branch A/c Dr.To goods sent to branch A/c
4 For goods returned by branch to H.O.
Goods sent to branch A/c Dr.To Branch A/c
5 For cash sent to branch for expenses
Branch A/c Dr.To cash/bank A/c
6 For cash remitted by branch to H.O.
Cash/bank A/c Dr.To branch A/c
7 For recording branch assets at the end of the year
Branch assets A/c Dr.To branch A/c
8 For recording branch liabilities at the end of the year.
Branch A/c Dr.To branch liabilities
9 For closing branch account
(a)If profit (i.e. credit side total > debit side total)Branch A/c Dr.To general P & L A/c(b) If loss (i.e. credit side total < debit side total)General P & L A/c Dr.To Branch A/c
Let us take an example to understand the format of branch account:
The Atlas Cycles Co. has a branch at Rohtak. Goods are invoiced to the branch at cost plus 25%. Branch is instructed to deposit cash every day in the head office account in the bank. All the expenses are paid by cheque by the H.O. except petty cash expenses which are paid by the branch manager. From the following particulars, prepare the branch account in the books of head office:
Stock on 1st April, 2000 5000Stock on 31st March, 2001 6000Sundry debtors on 1st April, 2000 2800Sundry debtors on 31st March,2001
3600
Cash sales for the year 21600
Credit sales for the year 14000
Cash remitted to the H.O. 30000
Machinery purchased by the branch
2400
Goods invoiced from the H.O. 36400
Expenses paid by the branch 240Expenses paid by the H.O. 3280H.O. sent cash to purchase safe for the branch
2600
BRANCH ACCOUNTSolution:
To branch stock 5,000
By cash remitted 30,000
To branch debtors
2,800
By St. reserve (5000 x 1/5)
1,000
To goods sent to branch
36,400
By goods sent to branch (36400 x 1/5)
7,280
To bank (expenses)
3,280
By branch stock 60,000
To bank (safe) 2,600
By branch debtors 3,600
To stock reserve (6000 x 1/5)
1,200
By branch machinery
2,400
To general P&L A/c (Profit)
3,760
By branch safe 2,600
By branch cash 2,160
55,040
55,040
Working notes:
(i) calculation of cash received from debtors:
To balance b/d
2,800
By cash (bal. fig.)
13,200
To sales (credit)
14,000
By balance c/d
3,600
16,800
16,800
DEBTORS ACCOUNT
(ii) Calculation of closing cash balance:
To sales 21600 By cash remitted to H.O.
30000
To debtors
13200 By machinery purchased
2400
By petty expenses
240
By balance c/d
2160
34800 34800
Under this system the profit or loss made by the branch is ascertained by preparing the ‘branch trading and profit & loss account’. This account is prepared on memorandum basis and do not form the part of the double entry system. After preparing this account, the next step is to incorporate profit or loss made by branch as well as the branch assets and liabilities in the books of head office. This is done by preparing the ‘Branch Account’ in the books of head office. The branch account under the present system will be in the nature of a personal account and must be distinguished from the branch account prepared under the debtors system in which case is a nominal account.
This method can be explained by an example which is given below:
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:
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 accounts
21000
Stock on 31-12-1999
13000
Goods returned to H.O.
400 Debtors on 31-12-1999
2000
Bad debts 300 Petty cash on 31-12-1999
125
Allowances to customers
250 (including miscellaneous income of Rs. 25 not
remitted to H..O.)
Prepare the branch trading and profit & loss A/c and branch account for the year ended 31st Dec, 1992.
Branch trading and profit and loss accountfor the year ended 31st December 1999
To opening stock (cost)
8800
By sales:
(11000-2200)
Cash 2650
To goods sent to branch
Credit 22350
(20000-4000) 16000
25000
Less: returns to H.O. 320
15680
Less: returns inward 500
24500
(400-80) By closing stock 10400
To wages 200 (13000-2600)
To gross profit c/d
10220
Solution:
34900
34900
To bad debts 300 By gross profit b/d
10220
To allowances 250 By miscellaneous income
25
To rent 600
To other expenses
900
To net profit 8195
10245
10245
BRANCH ACCOUNT (Personal)
To balance b/d 10600
By remittances to H.O.
23650
(8800+1700+100)
(2650+21000)
To goods sent to branch less returns (at cost)
15680
To bank (expenses)
1700
By balance c/d 12525
To profit 8195
(10400+2000+125)
36175
36175
Working notes: Calculation of credit sales
Branch debtors A/cTo balance b/d
1700 By cash 21000
To sales (credit) (bal. fig.)
22350
By bad debts 300
By return inwards
500
By allowances
250
By balance c/d
2000
24050
24050
Under this system, the H.O. maintains the following accounts for keeping records of branch transactions:
1.Branch stock account
2.Branch debtors account
3.Branch expenses account
4.Branch adjustment account (for calculation of gross profit or gross loss)
5.Branch profit & loss account (for calculation of net profit or net loss)
6.Goods sent to branch account
The journal entries to be made at the head office under this system are as follows:
JOURNAL ENTRIESThe journal entries to be made at the head office under this system are as follows:
1 For goods sent to branch
Branch stock A/c Dr. To goods sent to branch A/c
2 For goods returned by branch to H.O.
Goods sent to branch A/c Dr. To branch stock A/c
3 For sales made by branch
(a) If cash sales:Cash/bank A/c
Dr. To branch
stock A/c(b) If credit sales:Branch debtors A/c
Dr. To branch
stock A/c
4 For goods returned by branch debtors
Branch stock A/c Dr. To branch debtors A/c
5 For cash received from debtors
Cash/bank A/c Dr. To branch debtors A/c
6 For discount allowed to debtors
Branch expenses A/c Dr. To branch debtors A/c
7 For bad debts Branch expenses Dr. To branch debtors A/c
8 For goods returned by branch directly to head office
Goods sent to branch A/c Dr.Branch adjustment A/c Dr. To branch debtors A/c
9 For agreed allowances to customers off selling price already taken into account while invoicing
Branch adjustment A/c Dr. to branch Stock A/c
10 For loss or shortage of stock
( i) if normal lossBranch adjustment A/c Dr. To branch stock A/c(ii) If abnormal lossBranch adjustment A/c Dr.Branch profit & loss A/c Dr. To branch stock A/c
11 For insurance claim recoverable
Insurance claim recoverable A/c Dr. To branch P & L A/c
12 For surplus in stock
Branch stock A/c Dr. To branch adjustment A/c To branch P & L A/c
13 For goods sent by one branch to another branch
Goods sent to branch A/c Dr.Branch adjustment A/c Dr. To branch stock A/c
14
For goods received by one branch to another branch
Branch stock A/c Dr. To goods sent to branch A/c to branch adjustment A/c
15
For apparent profit over the invoice price
Branch stock A/c Dr. To branch adjustment A/c
16
For branch expenses paid in cash
Branch expenses A/c Dr. To cash A/c
17
For closing ‘branch expenses A/c’
Branch adjustment A/c Dr.Branch P & L A/c Dr. To branch expenses A/c
18
For closing ‘goods sent to branch A/c’
Goods sent to branch A/c Dr. To purchases or trading A/c
19
For loading (a)For loading of opening stock:
Stock reserve A/c Dr.
To branch Adjustment A/c
(b) For loading of goods sent to branch
Goods sent to branch A/c Dr.
T o branch adjustment A/c
(c) For loading of closing stock
Branch adjustment A/c Dr.
To stock reserve A/c
20
For closing ‘branch adjustment A/c’
Branch adjustment A/c Dr. To branch P & L A/c
21
For ‘branch P & L A/c’
Brasnch P & L A/c Dr. To General P & L A/c
This method can be explained by taking an example:Indian Soap Mills Ltd. Has two branches at Agra and Goa. Goods are invoiced to branches at cost + 50%. Branches remit all cash received to H.O. and all expenses are met by H.O. from the following particulars, prepare the necessary accounts, on the Stock & Debtors System, to show the profit earned at the branches:
AGRA GOA
Stock on 1st April, 1990 (invoice price)
9300 15600
Debtors on 1st April, 1990 6800 8700
Goods sent to branch (cost price)
34000 36000
Sales at branches:
Cash sales 25010 35000
Credit sales 31000 30100
Cash collected from debtors 30400 29800
Goods returned by debtors 1200 1500
Goods returned by branch to H.O.
1500
Goods transferred from Goa to Agra
2100 2100
Surplus of stock 300
Shortage of stock 450
Discount allowed to customers 200 350
Expenses at branches 5400 6700
BRANCH STOCK ACCOUNT
Particulars Agra
Goa Particulars Agra
Goa
To bal b/d 9300
15600
By cash 25010
35000
To goods sent to branch
51000
54000
By branch debtors
31000
30100
To braqnch debtors
1200
1500
By goods sent to branch
1500
-
To goods sent to branch A/c
By goods sent to branch
(goods received from Goa)
2100
- (goods sent to Agra)
- 2100
To branch adjustment
By branch adjustment
(loading of surplus)
- 100 (loading of shortage)
150 -
To branch P & L A/c
By branch P & L A/c
(cost of surplus)
- 200 (cost of shortage)
300 -
By balance c/d 5640
4200
63600
71400
63600
71400
Branch Debtors A/cTo balance b/d
6800
8700
By cash 30400
29800
To branch stock A/c
31000
30100
By branch stock (returns)
1200
1500
By branch exp. (discount)
200 350
By balance c/d
6000
7150
37800
38800
37800
38800
Branch expenses A/cTo branch debtors
200 350 By branch P & L A/c
5600
7050
To cash 5400
6700
5600
7050
5600
7050
Branch adjustment A/cTo stock reserve
1880
1400
By stock reserve
3100
5200
To branch stock
By goods sent to branch A/c
17200
17300
(loading of shortage)
150 - By branch stock A/c
To branch P& L
18270
21200
(loading of surplus)
- 100
20300
22600
20300
22600
Branch P & L A/cTo branch expenses A/c
5600
7050 To branch adj. A/c
To branch stock A/c
(gross profit)
18270
21200
(cost of shortage)
300 - By Br. stock A/c
To net profit 12370
14350
(cost of surplus)
- 200
18270
21400
18270
21400
A branch is said to be independent when it keeps a full system of accounting and maintains its own books of accounts. In other words, the branch carries on business as an independent unit, records all the transactions in its own books, extracts its own trial balance and prepare its own trading and profit & loss account and balance sheet.
Books of accounts: an independent branch generally maintains the following books of accounts:
(a)Journal (e) petty cash book
(b)Cash book (f) purchase book
(c)Ledger (g) sales book
(d)Stock register
Procedure for incorporating branch accounts in the books of H.O.
Under this method the following journal entries are passed:
1.For incorporation debit side items of trading account
Branch trading A/c Dr.
To Branch A/c
2.For incorporating credit side items of trading account
Branch A/c Dr.
To branch trading A/c
3. For closing branch trading account
(a) If gross profit
Branch trading A/c Dr.
To branch P & L A/c
(b) If gross loss
Branch P & L A/c Dr.
To branch trading A/c
4.For incorporating debit side items of P & L A/c
branch P & l A/c Dr.
To Branch A/c
5. For incorporating credit side items of P & L A/c
Branch A/c Dr.
To branch P & L A/c
6. For closing branch P & L A/c
(a) If net profit
Branch P & L A/c Dr.
To general P & L A/c
(b) If net loss
General P & L A/c Dr.
To branch P & L A/c
7. For incorporating branch assets
Branch assets A/c Dr. (individually)
To Branch A/c
8. For incorporating branch liabilities
Branch A/c Dr.
To branch liabilities A/c (individually)