Excelsior Community College Advanced Financial Accounting Unit II – Branch Accounting
Branch Accounting is an accounting accou nting system in which separate accounts are maintained for each branch of a corporate entity or organization. The primary objectives of branch accounting are better accountability and control, since profitability and efficiency can be closely tracked at the branch level. Branch accounting may involve added expenses for an organization in terms of accounting and infrastructure. This is because it may be necessary to appoint branch accountants to ensure accurate financial reporting and compliance with head office procedures and processes. Transactions affecting the Books of the branch
1. When Cash or Bank money is given by head office to branch for operating branch activities. activities .
Dr. C r.
Cash/ Bank Account Head office Account
2. When expenses are paid by branch
Dr. Cr.
Respective Expense Account Cash / Bank Account
3. When expenses are paid by head office
Dr. C r.
Respective Expense Account Head Office Account
4. When stock transfer from Head office to Branch
Dr. Cr.
Stock Account (At cost) Head office Account
5. When branch transfers cash or bank for any net revenue
Dr. Cr
Head office Account Cash / Bank Account
Maintenance of a separate accounting system for each branch of one legal entity. The home office opens an account in its general ledger entitled Branch, Branch Con trol, Investment in Branch, or some other similar name. Frequently, one account will be used to show the long-term investment in a branch while another account (such as Branch Current) will be used for more common accounts. In the home office ledger, this account or group of accounts is charged for everything sent to the branch or for services rendered to or for the branch, and it is credited for amounts received from the branch. In a similar manner, the branch ledger maintains an equity account entitled Home Office, Home Office Con trol, Home Office Current, or some other similar name. This account is credited for all assets received by the branch from the home office. It is also credited for all debts incurred for merchandise acquired or for services rendered by the home office for the branch. Such an account would also be credited as a result of expenses incurred by the home office for the benefit of the branch. It is debited for amounts sent by the branch to the home office. In operation, the branch account on the home office books will be debited when the home office account on the branch books is credited, and vice versa. Thus, the balances of such a pair of accounts should be equal in dollar amount, but the balances should be the opposite sides of the respective accounts. Two accounts that have such a relationship are often referred to as Reciprocal.
TYPES OF BRANCHES
From the accounting point of view, branches may be classified into (1) Dependent Branch (2) Independent Branch (3) Foreign Branch
(1) Dependent Branch 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. When the business policies and the administration of a branch are wholly controlled by the head office, its accounts also are maintained by it. In such a case, Branch accounts are written up at the head office out of reports and returns received from the branch. ACCOUNTING IN RESPECT OF DEPENDENT BRANCHES In case of a dependent branch, the head office may keep accounts of the branch acc to any of the following systems (1) Debtors System (2) Stock and Debtors system (3) Wholesale System (4) Final Account system (1) Debtors System (Synthetic Method)
This system is adopted in case 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 are debited to the branch account. (2) STOCK AND DEBTORS SYSTEM Profit and loss of a branch can be found out by preparing branch account but there is another method for the same purpose. This method is known as stock and debtors method. If it is desired to exercise a more detailed account control over the working of a branch, the accounts of the branch are maintained under which is described as the stock and debtors method. (3) WholeSale Branch System Manufacturers may sell goods to the consumers either through the wholesalers and approved stockists or through their branches. In order to know whether self-retailing through branch is more profitable than wholesaling, it is necessary to make d istinction between profit due to wholesale and profit due to retail business of the branch.Wholesale price is always less than retail price. (4) 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 a/c at cost. In such cases, the head office may also maintain a branch account.
BRANCH ACCOUNTING – STOCK AND DEBTOR SYSTEM
Stock and Debtors system is generally used when the goods are sent to the branch at pro-forma invoice price and the size of the branch is large. Under this system, the branch maintains a few central accounts to exercise greater control over the branch stock and other related expenses. These accounts usually are: 1. 2. 3. 4. 5. 6.
Branch Stock Account Branch Debtors Account Branch Expenses Account Branch Adjustment Account Goods Sent to Branch Account Branch Stock Reserve Account
Branch Stock Account
This account is on the pattern of a stock account. The account helps the Head Office in maintaining an effective control over the Branch Stock and tells about shortage and surplus in
the branch stock because of the difference between the pro-forma invoice price and the selling price. Unlike traditional accounting practice, branch stock a/c is always maintained on the selling price or pro-forma invoice price. Selling price is used to record the goods sold by the branch to its customer and goods returned by the branch customers. Rest of the information (even opening and closing balances) in branch stock a/c is recorded at pro-forma invoice price. Branch Debtors Account
Branch debtors’ a/c is maintained in the traditional manner to record transactions in between branch and its credit customers. Branch Expense Account
The purpose of maintaining this account is nothing but the compile all branch expenses at one place. This will include all types of expenses i.e. cash based expenses and receivables based expenses. Branch Adjustment Account
Branch adjustment a/c replaces the branch income statement (profit & loss a/c). This is the account in which all expenses and losses are closed along with the margin that is a difference between cost and the selling price. This difference is split into two; one is termed as “surplus” that comes from the branch stock a/c representing the difference between selling price and proforma invoice price, the second is termed as “loading” that represents the difference between pro-forma invoice price and cost. This loading is calculated on opening and closing stock balances and also on the net of the goods sent branch. Goods Sent to Branch Account
This is a supporting account, which is maintained to show second effects of the goods sent to branch and the goods returned from branch at pro-forma invoice price. Although the goods sent to and returned form the branch should be adjusted in the purchases a/c of the head office, but as we know that the branch stock a/c is not maintained at cost price, therefore, second effect of goods sent to and returned from branch is not recorded directly into the purchases a/c instead this second effect is recorded into the goods sent to branch a/c which after adjustment of the loading is finally closed into the purchases a/c. Branch Stock Reserve Account
This is contra to branch stock account. In this account opening and closing balance of loading on branch stock is maintained. ACCOUNTING ENTRIES IN THE BOOKS OF HEAD OFFICE Sr no.
JOURNAL ENTRIES For Goods Sent to Branch (at Invoice)
Debit
Credit
(1)
Branch Stock Account (Dr) Goods Sent To Branch Account (Cr)
xxx xxx
For Goods Sold At Branch On Credit (2)
(3)
Branch Debtors Account (Dr) Selling Price) (At Branch Stock Account (Cr) For Goods Sold At Branch For Cash Branch Cash Account (Dr) Selling Price) (At Branch Stock Account (Cr)
xxx
xxx
xxx
xxx
For Cash Received From Branch Debtors (4)
(5)
(6)
(7)
(8)
(9)
Branch Cash Account (Dr) Branch Debtors Account (Cr) For Goods Returned by Branch Branch Stock Account (Dr) Branch Debtors Account (Cr) For Goods Returned by Branch To Head Office Goods Sent To Branch Account (Dr) (At Invoice) Branch Stock Account (Cr) For Cash Sent By Head Office to Branch For Expenses Branch Expenses Account (Dr) Cash Account (Cr) For Bad Debts/ discount Allowed To Branch Debtors Branch Debtors Account (Dr) Branch Debtors Account (Cr) For Shortage/ Shrinkage in Branch Stock Branch Adjustment Account (Dr)
xxx xxx xxx xxx xxx
xxx
xxx
xxx
xxx
xxx
xxx 61
Branch Stock Account (Cr)
xxx
(10)
For Surplus In Branch Stock Branch Stock Account (Dr) xxx Branch Adjustment Account (Cr)
xxx
(11)
For Closing Branch Expenses Account Into Branch Adjustment Account Branch Adjustment Account (Dr) Branch Expenses Account (Cr)
xxx
xxx
(12)
For Transfer of Opening Stock Reserve (Loading) Into The Branch Adjustment Account Branch Stock Reserve xxx Account (Dr) (with loading of opening Branch Adjustment Account (Cr)
xxx
(13) (14)
For Creating Stock Reserve on Closing Balance of Stock (Loading on Closing Stock) Branch Adjustment Account xxx (Dr) Branch Stock Reserve (Cr) For Loading on Net Amount of Goods Sent to Branch
xxx
xxx xxx
(15)
(16)
Goods Sent to Branch Account (Dr) Branch Adjustment Account (Cr) For Closing Goods Sent To Branch Account Into Purchase Account Goods Sent To Branch Account (Dr) Purchases Account (Cr)
xxx
For Closing the Branch Adjustment Account Into Profit & Loss Account Branch Adjustment Account (Dr ) (with the xxx amount of profit on branch) Profit & Loss Account (Cr)
xxx
xxx
LEDGER ACCOUNTS IN THE MAIN LEDGER OF HEAD OFFICE BRANCH STOCK ACCOUNT Particulars
Debit
Particulars
Balance Brought Forward (At Invoice) Goods Sent to Branch (At Invoice)
******
Branch Debtors (Sales Return) Branch Adjustment (Surplus)
Jef (5) Jef (10)
Branch Debtors (Credit Sales) (Selling Jef (2) Price) Branch Cash (Cash Sales)(Selling Jef(3) Price) Goods Sent to Branch (Return) Jef(6) Branch Adjustment (Shortage) Jef(9) Balance Carried Forward (At Invoice) ******
Jef (1)
Credit
GOODS SENT TO BRANCH ACCOUNT Particulars
Debit
Particulars
Credit
Branch Stock (Credit Sales)
Jef(6)
Branch Stock (Goods Sent) (At Invoice)
Jef(1)
Branch Adjustment (Loading) Purchases (Balancing Figure)
Jef(14) Jef(15) Particulars
Credit
Branch Adjust (Closing)
Jef(11)
BRANCH EXPENESE ACCOUNT Particulars
Debit
Cash (Expense) Jef(7) Branch Debtors (Discount Allowed + Jef(8) Bad Debts) BRANCH DEBTORS ACCOUNT Particulars
Debit
Particulars
Credit
Opening Balance Brought Forward Branch Stock (Credit Sales)
****** Jef(2)
Cash Received Branch Stock (Sales Return) Branch Expense (Bad Debts + Discount Allowed) Balance Brought Forward
Jef(4) Jef(5) Jef(8)
Particulars
Credit
******
STOCK RESERVE ACCOUNT Particulars
Debit
Branch Adjustment (Transfer of Opening Balance) Closing Stock Reserve Balance c/f
Jef(12) ******
Opening Stock Reserve Brought ****** Forward Branch Adjustment (ClosingLoading)Jef(13)
BRANCH ADJUSTMENT ACCOUNT Particulars
Debit
Particulars
Credit
Branch Stock (Shortage) Branch Expense (Closed)
Jef (9) Jef (11)
Jef(10) Jef(12)
Branch Stock Reserve (Closing) Profit & Loss Account (Balancing Figure)
Jef (13) Jef (16)
Branch Stock (Surplus) Branch Stock Reserve (Opening Balance) Goods Sent to Branch (Loading)
Jef(14)
