SEMESTER 1 FINANCIAL ACCOUNTING

CHAPTER 3
ACCOUNTING FOR BRANCHES

Introduction – Meaning – Objectives – Types of Branches –Meaning and features of

Branches - Dependent Branches – Independent Branches – Foreign Branches – methods of
Maintaining books of Accounts by Head office – Meaning & Feature of Debtor system, stock
& Debtor system, wholesale branch system and Final Account system – Supply of Goods at
Cost Price & Invoice Price - Problems on preparation of Dependent Branch A/c in the books
of Head Office under Debtor system only.

INTRODUCTION
A branch can be described as any establishment carrying on either the same or substantially
the same activity as that carried on by head office of the company.
From the accounting point of view, branches may be classified as follows:
• Inland Branches which can be further classified as:
(a) Independent Branches which maintain independent accounting records
(b) Dependent Branches for which whole accounting records are kept at Head Office
• Foreign Branches
Difference between branch and department
Branch: Establishment at location different from Head Office to carry either same or
substantially same activity as carried on by Head Office
DEPENDENT BRANCHES
When the business policies and the administration of a branch are wholly controlled by the
head office and its accounts also are maintained by it, the branch is described as Dependent
branch. Branch accounts, in such a case, are maintained at the head office out of reports and
returns received from the branch
Dependent branches are usually sales depots selling goods received from the head office. The
features of such branches are:
1.They get their supplies of goods normally from the head office. Generally, they are not
allowed to make purchases independently.
2.The goods supplied by the head office are usually at cost price. Sometimes, however, they
are supplied at invoice price also.
3. Petty expenses of the branch like cartage, entertainment, postage and telegram etc., are
paid
by the branch manager out of Petty Cash Balance.
4. Any Cash collected by the branch is deposited by the branch into the bank account of the
head office
5. Sales are made by such branches usually for Cash but occasionally credit sales are also
made.
6.Such branches do not maintain complete set of books. They usually maintain a Cash book
a Petty Cash book, a sales book on double entry system and a stock Register. In addition, they
also maintain ledger accounts of the customers, to whom goods are sold on credit.
7. The accounts of the branches are maintained by the head office, in its books. The system of
maintaining such accounts depends upon the size of the branch and the degree of control that
the head office, exercises over the branch office.

At Cost or Selling
Debtors method
Price

Stock and Debtors

Trading and P& L

methods
method

Wholesale Branch
At wholesale Price
method

The head office can keep the branch accounts in any one of the following ways:
1. Debtors system
2. Final account system
3. Stock and debtors system
4. Wholesale branch system.

METHODS OF CHARGING GOODS TO BRANCHES

Goods may be invoiced to branches
(1) at cost; or
(2) at selling price; or
(3) in case of retail branches, at wholesale price.
ACCOUNTING FOR DEPENDENT BRANCHES

Debtors method

This method of accounting is suitable for small sized branches. Under this method, separate
branch account is maintained for each branch to compute profit or loss made by each branch.
Various accounting adjustments to respective branch account are as follows:
• 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 any direct purchases made by
 branch (for which Head Office makes the payment), expenses of the branch paid by the head
office, e.g., salaries, rent, insurance, etc., are also debited to it.

IN THE BOOKS OF HO
BRANCH ACCOUNT

Debit Credit
• To Balance b/d By B
Bank A/c (Cash remitted)
y
Cash By B
Return to H.O.
Stock y
Debtors By B
Balance c/d

y
Petty Cash By Cash
Fixed Assets Stock
Prepaid Expenses Debtors
To Goods sent to Branch Petty Cash
To Bank A/c Fixed Assets
Salaries Prepaid Expenses
Rent
Sundry Expenses ByProfit
B and Loss A/c—Loss
y
To Profit & Loss A/c—Profit (if debit side is larger)
(if credit side is larger)

Conversely, amounts remitted by the branch and the cost of goods returned by the
branch are credited.
• At the end of the year, the value of unsold stock, the total of customers’ balances
outstanding and that of petty cash are brought into the branch account on the credit side.
• Accordingly, the branch account will reveal profit or loss; Debit ‘balance’ will be the
loss suffered by the working of the branch and vice versa.
If the branch is allowed to make small purchases of goods locally as well as to incur expenses
out of its cash receipts, it will be necessary for the branch to supply to the head office a copy
of the Cash Account, showing details of cash collections and disbursements.

Dependent branches are usually sales depots selling goods received from the head office.
The proforma of a Branch Account is shown below:

Debtors system

Journal entries

1. When goods are sent to Branch

Branch account Dr
To Goods sent to Branch Account

2. When the branch returns the goods sent to it

Goods sent to Branch Account Dr
To Branch Account.

3. When the head office sends cheques to the Branch for meeting the branch expenses
Branch Account
To Bank Account
4. When the head office receives any remittance of cash from the branch:

Bank Account Dr.

To Branch Account
5. When there are closing balances of stock, debtors or Petty Cash or other assets the branch:

Branch Stock Account

Branch Debtors Account
Branch Petty Cash Account
Branch Assets Account

To Branch Account

6) When there are branch liabilities at the close:

Branch AccountDr.
To Branch liabilities Account

After passing the above entries, the Branch Account should be balanced to find out whether
there are profit or loss which would be transferred to General Profit and Loss account.

Any balance in Goods sent to Branch account should be transferred to trading account.

When goods are invoiced at selling price

Sales Price or Invoice Price is cost price plus a margin of profit added to the cost price is
called "Loading" When goods are sent at a loaded price . the load should be removed from
such of the items which have been entered at the loaded price before ascertaining the profit
or loss.
1) For removing the loading on opening stock:

Stock Reserve Account" Dr.

To Branch Account

2) For removing the loading on goods sent to Branch: Goods sent to Branch Account

Goods sent to Branch Account

To Branch Account

3) For removing the loading on goods returned to the Head Office by Branch Account
Branch Account DR
To Goods sent to Branch Account

4) For removing the loading on closing stock at the branc Branch Account
Branch Account
To Stock Reserve Account*

Stock and Debtors method

If it is desired to exercise a more detailed control over the working of a branch, the accounts
of the branch are maintained under Stock and Debtors Method. According to this method, the
following accounts are maintained by the Head Office:
 Account Purpose
1. Branch Stock Account (or Ascertainment of shortage or surplus
BranchTradingAccount)
2. Branch Debtors Account Ascertainment of closing balance of debtors

3. Branch Expenses Account Ascertainment of total expenses incurred

4. Goods sent to Branch Ascertainment of cost of goods sent to branch

Account Know about cash flow at branch (eg: where branch is allowed to
5. Branch Cash / Bank incur expenses locally) Control over branch Fixed Assets
Account
6. Branch Fixed Asset
Account
7. Branch Profit and Loss Account Calculation of net profit or loss

The manner in which entries are recorded in the above method is shown below:

Transaction Account debited Account credited

(a) Cost of goods sent to the Branch Branch Stock A/c Goods sent to
Branch A/c
(b) Remittances for expenses Branch Cash A/c Cash A/c

(c) Any asset (e.g. furniture) provided by Branch Asset (Furniture) A/c Asset A/c
H.O.

(d) Cost of goods returned by the branch Goods sent to Branch A/c Branch Stock A/c

(e) Cash Sales at the Branch Branch Cash A/c Branch Stock A/c

(f) Credit Sales at the Branch Branch Debtors A/c Branch Stock A/c

(g) Return of goods by debtors Branch Stock A/c Branch Debtors A/c

to the Branch
(h) Cash paid by debtors Branch Cash A/c Branch Debtors A/c
(i) Discount & allowance to debtors, bad Branch Expenses A/c Branch Debtors A/c
debts
(j) Remittances to H.O. Cash A/c Branch Cash A/c

Branch Trading and Profit and Loss Account (Final Accounts Method)
In this method, Trading and Profit and Loss accounts are prepared considering each branch as
a separate entity. The main advantage of this method is that, it is easy to prepare and
understand. It also gives complete information of all transactions which are ignored in the
other methods. It should be noted that Branch Trading and Profit and Loss account is merely
a memorandum account and therefore, the entries made there in do not have double entry
effect.

5.2 When goods are invoiced at selling price

Whenever, goods sent to branch are invoiced at selling price, certain considerations need to
be kept in mind such as:
(a) It would be obvious that, if Branch Account is debited with the sales price of goods
and subsequent to the debit being raised there is a change in the sale price, the amount of
debit either has to be increased or reduced on a consideration of the quantity of unsold stock
that was there at the branch at the time the change took place. Such an adjustment will be
necessary as often as the change in sale price occurs.
(b) Moreover, the amount of anticipatory or unrealized profit, included in the value of
unsold stock with the branch at the close of the year will have to be eliminated before the
accounts of the branch are incorporated with that of the head office. This will be done by
creating a reserve.
It may also be necessary to adjust the value of closing stock on account of the physical losses
of stock due to either pilferage or wastages which may have occurred during the year. This
adjustment is made by debiting the cost of such goods to Goods Lost Account and the amount
of loading (included in the lost goods), to the Branch Adjustment Account.

ACCOUNTING FOR FOREIGN BRANCHES

Integral Foreign Operation (IFO)
It is a foreign operation, the activities of which are an integral part of those of the reporting
enterprise. The business of IFO is carried on as if it were an extension of the reporting
enterprise’s operations. For example, sale of goods imported from the reporting enterprise
and remittance of proceeds to the reporting enterprise.
Non-Integral Foreign Operation (NFO)
It is a foreign operation that is not an Integral Foreign Operation. The business of a NFO is
carried on in a substantially independent way by accumulating cash and other monetary
items, incurring expenses, generating income and arranging borrowing in its local currency.
An NFO may also enter into transactions in foreign currencies, including transactions in the
reporting currency. An example of NFO may be production in a foreign currency out of the
resources available in such country independent of the reporting enterprise.
The following are the indicators of Non- Integral Foreign Operation-
• Control by reporting enterprises - While the reporting enterprise may control the
foreign operation, the activities of foreign operation are carried independently without much
dependence on reporting enterprise.
• Transactions with the reporting enterprises are not a high proportion of the foreign
operation’s activities.
• Activities of foreign operation are mainly financed by its operations or from local
borrowings. In other words, it raises finance independently and is in no way dependent on
reporting enterprises.
• Foreign operation sales are mainly in currencies other than reporting currency.
• All the expenses by foreign operations are primarily paid in local currency, not in the
reporting currency.
• Day-to-day cash flow of the reporting enterprises is independent of the foreign
enterprises cash flows.
• Sales prices of the foreign enterprises are not affected by the day-to-day changes in
exchange rate of the reporting currency of the foreign operation.
• There is an active sales market for the foreign operation product.
The above are only indicators and not decisive/conclusive factors to classify the foreign
operations as non-integral.
 Problems
1. The head office sends goods to its branch at a profit on 20% on cost. If the head office sends
goods at Rs 120000, calculate cost price
2. Calculate loading which is 25% of invoice price of goods when cost is Rs.60000
3. Calculate cost when sales is 420000 and rate of gross profit on cost is 20%
4. Calculate Branch profit from the following information
Opening balance
Branch Furniture 40000
Branch stock 600000
Goods sent to branch 1200000
Cheques sent to branch for expenses 50000
Goods returned by branch 20000
Remittance by branch 1385000
Closing balance
Branch Furniture 35000
Branch stock 650000

5. Pass journal entries in the book of HO for the transactions with Tumkur Branch
Opening balance
Branch Debtors 20000
Branch Petty cash 5000
Branch stock 60000
Goods sent to branch 100000
Cheques sent to branch for expenses 9000
Cash collected from debtors 200000
Cash sales 100000
Closing balance
Branch Debtors 15000
Branch Petty cash 3000
Branch stock 10000

6. Mumbai traders has a branch in Agra. HO sends goods to branch at cost plus 50%, Prepare
branch account
Opening balance
Branch stock 10000
Goods sent to branch at invoice price 50000
Goods returned by branch 1000
Cash sales 35500
Credit sales 8000
Branch stock closing balance 11000

7. XP Ltd opened a new branch at Delhi. XP Ltd sent goods costing ` 50,000 to Delhi branch.
Delhi branch sold entire goods in cash at ` 70,000. Branch paid expenses of` 8,000. No other
transaction occurred at the branch. Prepare branch account in HO Books and find out the
profit.
8. Prepare branch account and find out profit earned by branch if transactions are as under:

Opening stock 1000

Goods sent to branch 50000
Cash sales 55000
Expenses 3000
 Closing stock could not be ascertained but the branch usually sells at cost plus 25%. The
manager is entitled to a commission of 10% on the profit of the branch before charging such
commission

9. Manju Traders, Bangalore have a Branch at Mangalore. From the following particulars,
prepare the Mangalore Branch Account in the looks of Bangalore Head Office:

Stock on hand at Branch (01-04-2013) 10,000

Debtors at Branch (01-04-2013) 4,000
Petty Cash at Branch (01-04-2013) 500
Furniture at Branch (01-04-2013) 2,000
Pre-paid Insurance (01-04-2013) 150
Outstanding Salaries (01-04-2013) 200
Goods sent to Branch 80,000
Cash Sale by Branch 1,30,000
Credit Sale by branch 40,000
Amount received from Debtors 35,000
Amount received by HO directly from Debtor 2000
Discount allowed 100
Cash sent to branch
For rent 2100
For salaries(200 pm) 2400
For petty expenses 1000
For insurance Premium (upto 30.6.2014) 600
Goods returned to HO by Branch 1000
Goods returned to Branch by debtors 2000
Petty cash expenses at Branch 700
Closing Stock 5000
Depreciation on furniture is 10%

10. The Head office at Bombay usually sends goods at its Ahmedabad Branch at cost plus 25%.
The branch sends to the Head Office, Cash, received daily. Cash is sent for expenses by the
Head Office except in some special circumstances. From the following details, prepare the
Branch Account on 31st March, 2014 in the books of the Head Office:
`
Stock on hand on 01-04-2013 12,500
Debtors on 01-04-2013 12,000
Goods sent by the head office 10,000
Cash remitted to Bombay:
Recovered from Debtors 29,500
Cash Sale 10,000 39,500
Goods returned to Bombay 2,400
Cheques received from Bombay:
For Salaries 11,0000
For Rent 3,000
For petty Expenses 510 14,510
Stock on hand on 31-03-2014 15,000
Debtor on 31-03-2014 22,500

The Branch Manager had purchased furniture for `5,500 and kept ` 500 for petty
expenses out of the total cash sale and with the permission of the head office. Do not
depreciate furniture.
11. The Bangalore H.O of Shining Shoe Company invoiced goods to its Madras Branch at
20% profit on sales price. The H.O. sends cash to the branch, and all expenses, are met by the
Branch Manager. From the following particulars, prepare the Branch Account (with
necessary workings) in the books of Shining Shoe Company.
`
Stock on 01-04-2013 (Invoice price) 15,000
Debtors on 01-04-2013 9,000
Cash 01-04-2013 400
Furniture on 01-04-2013 1,200
Goods received from H.O. (Invoice Price) 80,000
Goods returned to H.O. (Invoice Price) 1,000
Goods received by Debtors 480
Cash received from Debtors 30,000
Cash Sales 50,000
Total Sales 80,000
Discount allowed to Debtors 300
Expenses paid by H.O. 300
Rent 1,200
Salary 2,400
Stationery 300
Petty Expenses paid by Branch 3,900
Stock on31-03-2014 (Invoice Price) 280
Depreciation on Furniture at 10% per annum 14,000

12. Sagar operate a Branch at Mysore Goods are invoiced to the Branch at 20% profit on sales.
Branch is advised to deposit cash every day into the Head Office Account and payments
made by the Head Office except petty expenses which are met by the Branch Manager. From
the foll particulars, prepare Branch Account to ascertain profit or loss at the branch.
`
Stock on 01-04-2013 (IP) 15,000
Petty Cash 01-04-2013 300
Debtors on 01-04-2013 8,500
Furniture on 01-04-2013 2,000
Cash Sales 56,000
Total Sales 88,000
Cash from Debtors 28,500
Goods sent to Branch 80,000
Discount allowed 250
Petty Expenses 360
Goods returned by branch 1,000
Salary due on31-03-2014 1,000
Payment made by Head Office: 400
For rent 2,400
For salary 4,200 6,600
Furniture bought on01-10-2013 1,600
Stock on31-03-2014 (IP) 12,000
Bills receivable on31-03-2014 2,000
Sale of Furniture on 01-10-2013 (Book value on the date of sale ` 950) 900
Depreciate Furniture at 10% p.a.
13. A Shoe Company at Kanpur has its Branch at Delhi. Goods are invoiced to the Branch at cost
plus 25%. The Branch has been instructed to deposit daily, all cash received by it in the Head
Office except petty expenses which are met by the Branch Manager from the Petty cash
amount sent by the Head Office from time to time.
From the following particulars, prepare Delhi Branch Account in the books of the
Head Office at Kanpur The Branch sells the goods at invoice price only
`
Stock on 01-04-2013 (Invoice price) 30,000
Sundry Debtors on01-04-2013 18,000
Cash in Hand on 01-04-2013 800
Office Furniture on 01-04-2013 2,400
Goods invoiced from Head Office (IP) 1,60,000
Goods returned to Head Office (IP) 2,000
Cash received from Debtors 60,000
Discount allowed to Debtors 1,00,000
Goods returned by Debtors 600
Expenses paid by Head Office: 960
For rent 2,400
For salary 4,800
For Printing & Stationery 600 7,800
Petty expenses paid by the Branch Manager 560
Depreciation is to be provided on Branch Furniture at 10% pa.

14. Rasha Company has branches at several places the following information relates to the
Branch which does not maintain its Books of Accounts, for the year ended March 31, 2014
`
Opening balances as on April 1, 2013:
Stock 18,750
Debtors 10,500
Transactions during the year at the branch:
Cash Sales 81,000
Credit Sales 52,500
Cash remitted to Head Office 1,12,500
Goods invoiced to the Branch 1,36,500
Expenses paid by the Head Office 12,300
Expenses paid by the Branch 900
Cash sent to the Branch by the H.O for the purchase of Billing Machine 9,750
Closing balances on March 31, 2014:
Stock 22,500
Debtors 13,500
Goods are always sent to the Branch at 125% of the cost price. All the Branch expenses are
paid the H.O except that the Petty Expenses are paid by the Branch Manager.

15. Prepare branch account and find out profit earned by branch if transactions are as under:
Goods sent to branch ` 50,000
Furniture sent to branch ` 10,000 (at the beginning of year)
Credit sales at branch ` 62,000
Bad Debts ` 1,000
Other information:
Closing stock at branch ` 10,000
Furniture (after depreciation@20%) ` 8,000
16. Buckingham Bros, Bombay have a branch at Nagpur. They send goods at cost to their branch
at Nagpur. However, direct purchases are also made by the branch for which payments are
made at head office. All the daily collections are transferred from the branch to the head
office.From the following, prepare Nagpur branch account in the books of head office by
Debtors method:

Opening balance (1-1-20X1) Bad Debts 1000

Imprest Cash 2,000
Sundry Debtors 25,000 Discount to Customers 2,000
Stock: Transferred from H.O. 24,000 Remittances to H.O.
Direct Purchases 16,000 (received by H.O.) 1,65,000
Remittances to H.O.
(not received by H.O. so
far) 5,000
Branch Exp. directly paid
Cash Sales 45,000 by H.O. 30,000
Closing Balance (31-12-
Credit Sales 1,30,000 20X1)
Direct Purchases 45,000 Stock: Direct Purchase 10,000
Returns from Customers 3,000 Transfer from H.O. 15,000
Goods sent to branch from H.O. 60,000 Debtors ?
Transfer from H.O. for Petty 4,000 Imprest Cash ?
Cash expenses Petty Cash expenses 4,000