Branch accounting

Branch Accounting 650

KHURSHEED AHMAD ASSISTANT PROFESSOR (CONTROLLER OF FINANCES BAKHTAR UNIVERSITY)

• Any establishment described as a Branch by the Company

• Any establishment carrying on either the same or substantially the same activity as that carried on by

the Head Office of the Company; • Branch is a business unit located at some distance

from Home Office.• Unit carries merchandise obtained from the home

office, makes sales, approves customers’ credit, and makes collections from it’s customers.

• A branch may obtain merchandise solely from the home office.

BRANCH ACCOUNTS INCLUDING FOREIGN

BRANCH


A. Inland Branches:(i) Dependent Branches : branches in respect of which the whole of the accounting records are kept at Head Office only.(ii) Independent Branches : branches which maintain independent accounting records.B. Foreign Branches : branches which are located in a foreign country(i.e. in a country other than in which the company is incorporated and registered)

CLASSIFICATION OF BRANCHES :


Branch Accounts can be maintained at the Head Office, particularly when the business policies and administration of the Branch are wholly controlled

by the Head office.The Branch prepares the periodic returns based on which the accounting records are maintained at the

Head Office.

DEPENDENT BRANCHES


i. Final Accounts Method; ii. Debtors Method and

iii. Stock and Debtors Method.

METHODS OF ACCOUNTING :


(a) At cost price

Branch Trading and Profit & Loss Account

FINAL ACCOUNTS METHOD


Particulars Amt Particulars Amount

To Op. Stock at Branch (at Cost) To Goods sent from Head Office Less : Goods returned to H.O To Purchases (made directly by Branch, if any) To Direct Expenses at Branch (if any) To Gross proft c/d To Various expenses incurred at Branch (including Bad Debts ) To General P&L Account (Net Profit transferred)

XxxxXxxXxxxXxxxxx

Xxx

XxxxXxXxxxx

By Sales made at Branch (net of returns) — Cash — Credit By Closing Stock at Branch (at Cost)

By Gross profit b/d

Xxxxx

XxxXxxXxx

xxx

From the following particulars prepare Branch Trading and Profit and Loss Account in the books of Head Office: The Kabul stores invoiced goods to its Jalalabad Branch at cost which sells both for cash and credit. Cash received by the branch is remitted to H.O. Branch expense are paid direct from the H.O. except petty expense which are met by the branch.

QUESTION. 1


Particulars Amount Particulars Amount

Opening Balance: Stock Debtors Petty Cash Goods from H.O. Cash Sales Credit Sales Sales Return Bad Debts Discount Allowed Goods returned to H.O.

5,000 20,000 1,000

50,000 30,000 40,000 4,000 1,000 1,000 5,000

Rates & Taxes Salary & Wages Petty expense by the branch Pilferage of goods Closing Balance: Stock Debtors Petty Cash

3,000 6,000 1,000 1,000

8,000 25,000

800

In the books of H.O.

Branch Trading and Profit and Loss Account for the year ended……………

SOLUTION


To Opening Stock ,, Goods sent to Branch Less: Returns

,, Gross Profit c/d

To Pilferage of Stock ,, Bad Debt ,, Discount Allowed ,, Rates & Taxes ,, Salaries & wages ,, Petty Expense ,, General Expense A/c Net Profit transferred

50,000 5,000

5,000

45,000 25,000

75,000 1,000 1,000 1,000 3,000 6,000 1,000 12,000

00

By Sales: Cash Sales Credit Sales Less: Return ,, Closing Stock Add: Pilferage of Stock

By Gross Profit b/d

40,000 4,000 8,000 1,000

30,000

36,000

9,000 75,00

025000

25000 25000

If goods are invoiced above cost, the loading (i,e, profit element) on Opening Stock, Goods Sent from Head office (net of returns) and Closing Stock are

reversed, to ascertain the true profits.

(B) AT INVOICE PRICE


X Ltd. has its H.O. in Kabul and a branch in Mazarshareef. H.O. supplied goods to its branch at cost plus 33 1/3%. From the

particulars given below prepare a Branch Trading Account in the books of H.O.

It is estimated that 2% of the goods received are lost through natural wastage.

QUESTION 2


Particulars Amount

Particulars Amount

Opening Stock (I.P.) Goods sent to Branch (I.P.) Return to H.O. (I.P.)

40,000 2,50,0

00 10,000

Sales: Cash Credit Discount allowed to customers Closing Stock (I.P.)

1,00,000

3,00,000

10,000 60,000

In the books of H.O.

Trading Account for the year ended……………

Note: 1. Discount allowed to customer will appear in Branch Profit & Loss Account.

2. Loss through natural wastage is a normal loss and as such, the same should be charged against branch gross profit. So, no adjustment is required.

SOLUTION:

Particulars Amount

Amount

Particulars Amount

Amount

To Opening Stock Less: Loading

,, Goods sent to Branch Less: Returns to H.O. Less: Loading (1/4× 2,40,000) [1/3 on CP = 1/4 on SP] ,, Gross Profit c/d

40,000 10,000

2,50,000

10,000 2,40,0

00 60,000

30,000

1,80,000

2,35,000

4,45,000

By Sales: Cash Credit

,, Closing Stock Less : Loading (1/4× 60,000)

1,00,000

3,00,000

60,000 15,000

400000

45000

4,45,000

Y Ltd. with its H.O. in Kabul invoiced goods to its branch at Kandhar at 20% less than the catalogue price which is cost plus 50%, with instruction that cash sales were to be made at invoice price and credit sales at catalogue price less discount at 15% on prompt payment. From the following particulars, prepare the Branch Trading and Profit and Loss Account for the year ended 31st March 2013 in H.O. books so as to show the actual profit and loss for the branch for the year.

QUESTION 3.



Particulars Amount

Particulars Amt..

Stock on 1.4.2012 (Invoice Price) Debtors ( ,, ) Goods received from H.O. (I.P.) Cash sales Credit Sales Cash received from Debtors

12,000

10,000 1,32,0

00

46,000 1,00,0

00 85,635

Discount allowed to Debtors Expense Remittance to H.O. Debtors (31.03.2013) Cash in hand (31.03.2013) Stock on 31.03.2013 (Invoice Price)

13,365

6,000 1,20,0

00 11,00

0 5,635 15,00

0 It was further reported that a part of stock at the branch was lost by fire (not covered by insurance) during the year whose value is to be ascertained and provisions should be made for discount to be allowed to Debtors as on 31.03.2013 on the basis of years trend of prompt payment.


Working: 1.Cost price Catalogue Price Invoice Price (Cat. Price – 20%) `100 = `100 + 50% = `150 – `30

= `150 = `120

(Working 2) Particulars Amount

Amount

Opening Stock (I.P.) Add: Goods Sent (I.P.)

Less: Cash Sales Invoice value of goods sold on credit (`1,00,000 x120 /150) 80,000 Closing Stock (I.P.)

46,000

80,000 15000

120001,32,000 1,44,000

1,41,000

∴ Stock Destroyed by fire 3000

Particulars Amount

Amount

Particulars Amount

Amount

To Opening Stock (`12,000 * 100/120) ,, Goods sent to Branch (`1,32,000 *100/120)

,, Gross Profit c/d

,, Expense ,, Discount Allowed ,, Stock Destroyed by fire ,, Provision for Discount ,, General Profit & Loss A/c (Net Profit Transferred)

10,000

1,10,000

41,000

1,61,000

6,000 13,365 2,500 1,337

17,798

41,000

By Sales: Cash Credit

,, Closing Stock (`15,000 x 100/ 120) Add: Stock Destroyed (Bal. fig.)

By Gross Profit b/d

46,000 1,00,000

12,500

2,500

1,46,000

15,000

1,61,000

41000

41,000

A branch may be operated under the retail profit basis as well as wholesale profit basis. For instance, the cost of a product is `100, retail price is `160, and the wholesale price is `150. Now, under retail profit basis there will be a profit of `60 earned by the branch. But if it is sold under wholesale basis, the amount of profit will be `50. Usually, it is the usual practice to debit branch with wholesale profit basis to know the usual profit made by a branch.

WHOLESALE AND RETAIL PROFIT AT BRANCH


For this purpose, H.O. Trading account will be credited with goods sent to branch at wholesale price. At the same time, closing stock at branch should be valued as per wholesale price basis. For this, H.O. should make proper reserve on closing stock at branch. The entry will be •Profit & Loss A/c ……… Dr. (Wholesale price - Cost price.) •To Stock Reserve A/c


X Ltd. has a retail branch at Hirat. Goods are sold at 60% profit on cost. The wholesale price is cost plus 40%.

Goods are invoiced from Kabul H.O. to branch at Puri at Wholesale price. From the following particulars ascertain

the profit made at H.O. and branch for the year ended 31st March 2013.

Sales at H.O. are made only on wholesale basis and that at branch only to customers. Stock at H.O. is valued at

invoice price.

QUESTION 4


Particulars H.O. Branch

Stock on 01.04.2012 Purchase Goods sent to Branch (at invoice price) Sales Stock on 31.03.2013 Expenses

7,00,000 42,00,000 15,12,000 42,84,000 16,80,000

80,000

--- --- ---

14,40,000

2,52,000 40,000

WORKING:


Let Cost price `100; Wholesale Price = `100 + `40 = `140; Invoice price `140; Selling Price at H.O. `140. Selling price at Branch `100 + `60 = `160. As goods are sent to branch at wholesale price i.e., `140, branch stock should be valued at the same price. Wholesale profit on opening stock of H.O. = `7,00,000 x 40 /140 = `2,00,000 on Closing stock of H.O. = `16,80,000 x 40 /140 = `4,80,000 on Closing stock of Branch = `2,52,000 x 40/ 140 = `72,000.


Solution In the books of H.O.

Puri Branch Trading Account for the year ended 31st March, 2013



To Opening Stock (I.P.) ,, Goods sent to Branch (I.P.) ,, Purchase ,, Gross Profit c/d

To Expenses ,, Closing Stock Reserve on Branch Stock: (`2,52,000 x 40/ 140) On H.O. Stock: (`16,80,000 x 40/ 140) ,, General P&L A/c (Net profit Transferred)

7,00,000

--- 42,00,0

00 25,76,0

0074,76,000 80,000

72,000

4,80,000

21,44,000

27,76,000

By Sales ,, Goods sent to Branch (I.P.) ,, Closing Stock

By Gross Profit b/d

By Opening Stock Reserve Provision for unrealized profit (`7,00,000 x 40 140)

42,84,000 15,12,000

16,80,000

7476000

25,76,000

2,00,000

27,76,000


Solution In the books of H.O.

Puri Branch Trading Account for the year ended 31st March, 2013



To Opening Stock (I.P.) ,, Goods sent to Branch (I.P.) ,, Purchase ,, Gross Profit c/d

To Expenses ,, Closing Stock Reserve on Branch Stock: (`2,52,000 x 40/ 140) On H.O. Stock: (`16,80,000 x 40/ 140) ,, General P&L A/c (Net profit Transferred)

7,00,000

--- 42,00,0

00 25,76,0

0074,76,000 80,000

72,000

4,80,000

21,44,000

27,76,000

---

15,12,000 ---

1,80,00 0

16,92,000 40,000

-----

-----

140,000

180,000

By Sales ,, Goods sent to Branch (I.P.) ,, Closing Stock

By Gross Profit b/d

By Opening Stock Reserve Provision for unrealized profit (`7,00,000 x 40/ 140)

42,84,000 15,12,000

16,80,000

7476000

25,76,000

2,00,000

27,76,000

14,40,000 ---

2,52,000

1692000

1,80,000

180,000

Under the Debtors System, the Branch Account is prepared in the following format to ascertain the Net profit from

Branch operations.

DEBTORS METHOD : (FOR DEPENDENT

BRANCHES)


Particulars Amount

Particulars Amount

To Balances b/d (Assets at Branch at beginning) —Stock — Debtors — Petty Cash at Branch To Goods sent to Branch (at cost) To Sundry Creditors (direct purchase by Branch) To Bank — various expenses incurred at Branch To General P & L Account (Net Profit transferred)

×××

××× ××× ×××

×××

×××

×××

×××

By Cash —Remittances received from Branch By Goods sent to Branch (returns at cost) By Balances b/d (Assets at Branch at end) — Stock — Debtors — Petty Cash at Branch By General P & L Account (Net Loss transferred)

×××

×××

××× ××× ××× ×××

xxxx xxxx

Note : If goods are invoiced above cost, the loading (i.e. profit element) on opening stock, Goods sent from

Head Office (net of returns) and Closing Stock are reversed, in order to ascertain the true profits.

Prepare a Branch account in the books of Head Office from the following particulars for the year ended 31st March, 2013 assuming that H.O. sold goods at cost price 25%.

QUESTION


Particulars Amount Particulars Amount

Stock on 1.4.2012 (I.P.) Debtors ( ,, ) Petty cash ( ,, ) Goods sent to branch (I.P.) Goods return to H.O. (I.P.) Cash Sales Cash received from Debtors

12,500 5,000 1,000

40,000 5,000

13,000 30,000

Bad Debts Allowances to customers Returns Inwards Charges sent to Bank: Rates & Taxes Salaries Misc. Exps. Stock on 31.03.2013 (I.P.) Debtors ( ,, ) Petty Cash ( ,, )

2,000 1,000 1,000

3,000 8,000 1,000

15,000 4,000 1,000

Particulars Amount

Amount

Particulars Amount

Amount

To Balance b/d Stock Debtors Petty Cash ,, Goods sent to branch To Bank A/c: Rates & Taxes Salaries Misc. Expenses ,, Goods sent to Branch (Loading on returns) ,, Closing Stock Reserve (` 15,000 x 1/5) ,, General Profit & Loss A/c

12,500 5,000 1,000

3,000 8,000 1,000

1850040000

12000

1,000

3,000

3,000

By Stock Reserve (Loading) ,, Bank A/c: Cash Sales (13000-1000),, Cash Received from Debtors ,, Goods sent to branch (Return to H.O.) ,, Goods sent to branch (Loading) 40000x1/5

By Balance c/d Stock Debtors Petty Cash

12,000

30,000

15,000 4,000 1,000

2500

42,000

5,000

8,000

20,000

77,500 77500

SOLUTION


Note: Here, loading is 25/ 125 = 1/5 of invoice price. Hence, loading on opening stock will be `12,500 x 1/5 = `2,500 and so on.

Branch accounting

Economy & Finance

Transcript of Branch accounting