BRANCH ACCOUNTING

Branch: A branch is a separate segment of a business. In order to increase the sales, business houses are requires to market their products over a larger territory and may generally split their business into certain divisions or parts. These various parts or divisions may be located in different part of the same city or in different cities of the same country or in different countries in the world. These are known as branches. The head office controls the activities of various branches. Branch accounting: Branch accounting is the process through which the accounting system of a branch is maintained. Objectives of branch accounting: The main objects of branch accounts are dependent on the nature of the business and specific need of a particular branch. The objectives of keeping the branch accounts acceptable to all businesses are as follows. 1. 2. 3. 4. 5. 6. 7. To know the profit or loss of each branch separately. To ascertain the financial position of each branch separately on a particular date. To know the cash & goods requirements of the various branches. To evaluate the progress and performances of each branch To calculate commission for payment to the managers, if based on profits of branch. To give concrete suggestions for the improvement in the working of the various branches. To meet the requirements of specific enactments as all branches of a company must keep the accounts for audit purpose.

Types of Branches: i. a) b) c) a) From accounting point of view the following are the main types of branches: Dependent Branch (Branch not keeping full system of accounting) Independent Branch (Branch keeping full system of accounting) Foreign Branch

Dependent Branch (Branch not keeping full system of accounting). The following are the main features of such branches: I. Such branches sell only those goods which are received from the head office and are not usually allowed to make purchases in the open market except with the express permission of the head office. Goods are supplied by the head office to such branches either at cost price or at invoice price. All expenses of the branch such as rent, salary of staff, advertisement etc., are paid by the head office.

II. III.

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V. VI.

Petty expenses such as cartage, entertainment, freights etc. are paid by the branch manager out of petty cash book balance. Such book is maintained at the branch either as simple petty cash book or on imprest system. The amount received from cash sales or cash received from debtors is either remitted to the head office daily or deposited in the account of the head office in some local bank. The branch manager is normally expected to sell the goods for cash only but he may be authorized to sell goods on credit as well.

Accounting records for branch: The branch with the above features, do not keep proper set of books of accounts. In order to supply the requisite accounting information to the head office at regular interval, each branch keep some memoranda of records, such as Stock Register, the Cash Book and the Petty Cash Book. Stock Register : It is maintained with a view to keep a record of all goods received from the head office, or returns made to the head office during that period, sales made at the branch during the period, breakages and losses of goods and balances of stock available in hand at the close of the accounting period. Cash Book: It is maintained to keep records of cash transactions such as cash sales, receipts from debtors, & cash remitted to head office from time to time. Petty Cash Book: It is maintained to record small paymen of expenses such as carriage, postage, conveyance and entertainment etc. If however the branch is authorized to make credit sales, a Sales Day Book and a Debtors Ledger will also be required to be maintained.

Accounting Records For Head Office or System Of Accounting For Branch: A dependent branch does not keep proper accounts but accounts are maintained in the head office books only. Thus the system of accounting for the branch to be adopted by the head office depends on: y y y y The size of the branch The degree of control sought to be exercised The nature and volume of business transactions The special circumstances under which the branch is operating

The following are the main ways in which the head office may keep the branch accounts in its books     Debtor System (Synthetic Method Final Account System Stock & Debtor System (Analytical Method) Wholesale Branch System

 Debtor System This system is also called synthetic methods, is adopted generally in those branches which are fairly small in size. Under this system, the head office opens a separate account for each branch in order to record all transactions relating to the 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 the 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.

Transactions 1) When goods are sent to branch 2) For return of goods to H.O. 3) For transferring the balance of goods sent to branch A/c 4) When cheque or draft is sent for branch expenses 5) When cheque or draft is received for remittance 6) For closing balances of Assets 7) For beginning balances of assets next year 8) For closing balances of liabilities A/c 9) For opening balances of liabilities A/c nest year 10) For branch profit 11) For Branch Loss

Debit Branch A/c Goods Sent to Branch A/c Goods Sent to Branch A/c Branch A/c Bank A/c Branch Asset A/c Branch A/c Branch A/c Branch Liabilities A/c Branch A/c General Profit & Loss A/c

Credit Goods sent to branch A/c Branch A/c Purchases (in Trading Concerns) or Trading A/c (in mfg. concern) Bank A/c Branch A/c Branch A/c Branch Assets A/c Branch Liabilities A/c Branch A/c General Profit & Loss A/c Branch A/c

It should be carefully noted that sales, discounts, bad debts, expenses paid by branch and return from debtors to the branch are not direct transactions between the branch and the head office, and therefore they are not taken care off while preparing for the Branch Account in the books of the head office according to this system. Moreover, losses due to pilferages, wastage and other losses of stock due to normal or abnormal reasons are also completely ignored under this method.

The main defect of this method is that it does not provide full information for analysis of branch profit & loss. To overcome this problem, a separate Branch Trading & Profit and Loss Account has to be prepared, which is, of course, a memorandum account not forming a part of the full system of accounting. In short, branch account is debited with the opening balance and branch assets, goods sent to branch account less returns, cheque received for remittance and closing balances of branch assets. The difference between the two sides will be profit or loss of the branch. Branch account (In the books of the head office) will appear as under after posting of the entries. Branch Accocunt (IN H.O. BOOKS)
To To To To To To Branch Cash in Hand Branch Stock Branch Debtors Branch Furniture Branch Prepaid Insurance .etc Goods Sent to Branch A/c Less Goods returned to Head Office To Bank (Expense paid by H.O.) To Branch Liabilities By Branch Liabilities A/c By Bank (Remittances by the branch i.e. , cash sales + cash received from debtors either through branch debtors or direct from branch debtors - any amount spent by branch manager By branch cash in hand By Branch Stock By Branch Debtors By Branch Furniture By Branch Prepaid Rent/Insurances.etc *By General Profit & Loss A/c (Loss)

*To General Profit & Loss A/c (Profit) *Balancing figure is either or loss Treatment of of Certain Branch Transactions

1) Branch Expenses paid by the branch out of Petty Cash. Such expenses will be deducted from the branch cash and at the close reduced balance of cash will be shown on the credit side of the branch account. Such expenses need not be shown in the branch account. If such expenses are re-imbursed by the head office to the branch (if the petty cash is maintained on imprest system), then these must be debited to the branch account. However, same opening and closing balances of petty cash will be shown on the debit and credit side respectively of the branch account. 2) Depreciation of Fixed assets. This is not shown in the branch account. But the closing balance of the fixed assets will be shown on the credit side of the branch account after deduction of the amount of depreciation.

3) Credit sales, bad debts, sales returns, allowances, and discount allowed pertaining to branch. These items are pertaining to debtors account and will not be shown in the branch account. However, these items will be taken into consideration while ascertaining the amount of opening or closing balance of debtors or amount received from debtors which are shown in the branch account. 4) Goods in transit. Goods in transit is the difference between goods sent by head office and received by the branch. Such goods will be shown either on the both sides of the branch account or will be ignored totally while preparing the branch account. 5) Purchase of fixed asset by the branch. If the branch has purchased any fixed assets, then on one hand branch account will be credited by the head office and on the other the remittance from the branch will be reduced by the amount. If branch has purchased the asset on credit basis and liability arising from such purchase will be shown on the debit side of branch account. 6) Sale of Fixed Asset. If the sale is for cash, cash remittance will increase from the branch but asset will reduce in value to be shown on the credit side of the branch account as this is automatically adjusted through the above adjustments.

Invoice Price Method

When the goods are sent by the head office to the branch at invoice price i.e. cost plus some percentage of profit, the branch manager is required to sell the goods at invoice price only. Goods are marked on invoice price to achieve the following objectives. I. In order to keep secret from the branch manager the cost price of the goods and profit made, so that the branch manger may not start a rival and competitive business with the concern. In order to have effective control on stock i.e. stock at any time must be equal to opening stock plus goods received from the head office minus sales made at the branch.

II.

Accounting Adjustments 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 or loss made by branch, some accounting adjustments, as stated below, are required to be passed in the books of the HO for eliminating the profit element included in (i) branch opening stock, (2) goods sent to branch less returns made by branch to head office and (3)branch closing stock. I. For adjustment of excess price of the opening stock at branch Stock reserve A/c To Branch A/c Dr.

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For adjustment of excess price of the closing stock of unsold goods at branch Branch Account To Stock Reserve A/c Dr.

III.

For adjustment of excess price of goods sent to branch less returns to head office Goods sent to branch A/c To Branch A/c Dr.

Closing stock should always be valued at cost or market price whichever is lower. This is based on the principle sof conservatism, i.e. no profit should be anticipated and all losses should be provided. Moreover the unsold stock lying in the branch will not earn any profit unless sold. Therefore, it is necessary to make provision for the profit element included in the unsold stock.

Calculation of Mark up or Load

For calculating excess price, the following procedure is adopted: Suppose the good are invoiced at cost plus 25%. If the cost is Rs. 100, profit is Rs. 25, and then selling price would be Rs. 125. The ratio of profit to selling is 25/125 or 1/5. The adjustments for the difference or the excess price in value between the invoice price and cost price therefore will be made on the basis of 1/5 of the invoice price. If the percentage is given on sale price as 25% on sale price, then suppose the sale price is Rs. 100, the profit will be Rs. 25. Therefore, cost will be Rs. 75. So the percentage on cost will be 33.33% (1/3 of cost).

 Final Account System

According to this system, the profit or loss made by the branch is determined by preparing Branch Trading & Profit Loss Account at cost price. It should be carefully noted that all expenses whether paid by the head office or by the branch are debited to the Trading and Profit & Loss Account prepared for the branch.The profit or loss as disclosed by this account is exactly same as that of the branch account prepared according to Debtor/ Synthetic system. It should be further noted that the branch trading and profit loss account is only a memorandum account not forming part of the full accounting system. If the branch account is also prepared in addition to the Branch Trading & Profit and Loss A/c, then such a branch account will be treated as a personal account and not considered in the nature of a nominal account under the debtor system. Then Branch account under such circumstances, will show a debit balance which will be equal to net worth or net asset available at branch at the end of the accounting period.

 Stock and Debtors System

There is yet another method of calculating profit and loss of a branch which is popularly known as Stock & Debtors system or Analytical Method. It is an elaborate method of keeping branch accounts and is considered very useful where the branch turnover is sufficiently large and where a greater degree of control is sought to be exercised by the head office over the branch. According to this system, instead of opening one branch account, as is done in case of debtors system, separate accounts are opened for various transactions at branch. According to this system, a separate ledger for each branch will have to be maintained at head office for keeping accounts such as Branch Stock, Branch Debtors, and Goods Sent to Branch, Branch Expenses, and Branch Assets etc. Branch Cash or petty Cash Account may sometimes be required to be maintained if the branch is permitted to use the available cash for making certain payments. Preparation of Branch Stock Account will however, vary from branch to branch depending upon the method of charging goods sent to branch.