ACCOUNTING FOR BRANCHES BAF 102- FINANCIAL ACCOUNTING II 1

ACCOUNTING FOR BRANCHES

ILLUSTRATION FOUR:
Senka runs a company with a Head Office located in Moshi and branch at Arusha. Accounting
records are centralized in Moshi where all goods which are invoiced to branch are invoiced at cost.
Both Head Office and Branch sell goods at cost plus 25%. The following information was obtained
in relation to branch transactions.
DETAILS AMOUNT
Balance as at 1st January 2023 TZS “000”
Stock at cost 12,000
Branch Account Receivables 8,000
Branch Bank 34,000

During the year ended 31st December 2023

Goods sent to Arusha at cost price 420,000
Branch expenses paid by the branch 10,000
Goods returned to Moshi from branch at cost 16,000
Branch sales; - Credit 280,000
-Cash (All paid in the bank) 160,000
Returned by branch customers at selling price: -
To Moshi 54,000
To Arusha 5,000
Discount allowed to branch customers 4,000
Bad debts written off 2,100
Cheques collected from branch customers 205,000
Goods stolen at cost price (Compensation from insurance company TZS. 6,000) 7,200
Remittance to Head Office 350,000
Branch stock 31st December at cost 13,000

Required:
Show the following accounts for the branch in head office books; -
i. Branch Stock Account
ii. Branch Account Receivable Account
iii. Goods sent to branch Account
iv. Branch Bank Account
v. Branch Statement of Profit or Loss.

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1.1.WHEN GOODS TRANSFERRED TO BRANCH AT A PRICE HIGHER THAN COST

 The transfer price usually called an invoice price which includes cost of goods and a percentage
of profit added by the Head Office.
 Such a transfer can be; A cost and selling price to branch that is cost to branch for goods
received and also a selling price to branch if the branch sells the goods without adding anything
to the transfer price. Cost to branch but not selling price if and only if the branch also adds a
certain amount to the transfer price.
 When goods are invoiced to branch at a price higher than cost, there are two (2) common
method which are used to record the books, These are:-
i. Branch adjustment method or full integrated system.
ii. Memorandum column method.

1.1.1. BRANCH ADJUSTMENT METHOD

Under this method the branch stock account is maintained with only one column and the
transaction are recorded at their invoice price for both goods sent to branch and when goods
are sold by the branch. The Branch stock account will be used to determine any shortage
(wastage) or surplus (Excess).

THE BRANCH ADJUSTMENT (BRANCH MARK-UP) ACCOUNT

 Apart form adjustment of the profit for goods sent to branch, opening and closing stock of
goods in the branch, the transaction like, a reduction in selling price, apparent shortage, surplus
and any difference of the amount received as a compensation from goods lost in transit (i.e.,
difference between its selling price and amount received are also recorded in a branch mark-
up account).
 This account is also opened to record the profit margin of goods at a branch. This account is
used to ascertain a gross profit which will be posted to branch Statement of Profit or Loss.

ACCOUNTING ENTRIES
S/N ENTRIES S/N ENTRIES
1 For the balance of stock at start of period 2 When goods sent to the branch
DR: Branch stock account @ Invoice Price (IP) DR: Branch Stock account @ Invoice Price
CR: Branch Adjustment A/C-with Profit Margin CR: Goods sent to branch account @ cost price
CR: Branch Adjustment A/C with Profit Margin
3 When branch returns goods to Head Office 4 When goods are sold at branch
DR: Goods sent to branch account@ cost price DR: Branch cash/ receivable @selling price
DR: Branch Adjustment A/C-with profit margin CR: Branch stock account @ selling price
CR: Branch Stock A/C @Invoice price

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5 When branch customers return goods to the 6 When branch customers return goods direct to the
branch Head Office
DR: Branch stock Account @ selling price DR: Branch Adjustment A/C- with profit margin
CR: Branch receivable Account @ selling price DR: Goods sent to branch account @ cost price
CR: Branch receivables account @ selling price

7 For bad debts and discount allowed to customers 8 For branch expenses paid by the branch
DR: Branch profit or Loss DR: Branch profit or Loss
CR: Branch account receivables account CR: Branch cash/ Bank account

9 For branch expenses paid by the Head Office 10 For goods lost in transit but the compensation is
DR: Branch Profit or Loss received
CR: Head Office cash/ Bank Account DR: Branch bank/ Cash account with the Cash/
cheque received
DR: Branch Adjustment A/C
CR: Branch Stock A/C @ Invoice Price
11 For goods lost in transit but compensation is not 12 At the end of the accounting period.
received The deficit in the branch stock account should be
DR: Goods lost A/C @ Cost price transferred to branch adjustment account i.e.
DR: Branch Adjustment A/C- with profit margin DR: Branch Adjustment A/C
CR: Branch Stock A/C @ Invoice price DR: Branch Statement of Profit or Loss
CR: Branch Stock A/C @ Invoice price
13 Then Branch Adjustment account will be closed
by getting either profit or loss
DR: Branch Adjustment A/C with the profit
CR: Branch Statement of Profit or Loss
OR
DR: Branch Statement of Profit or Loss
CR: Branch Adjustment A/C with the Loss

ILLUSTRATION FIVE:
ABC CO. Ltd with Head Office in Same Kilimanjaro has a branch at Arusha; all goods are invoiced
by the head office at cost plus 33 1/3% which is also a selling price to branch. The following data
relate at Arusha branch for the year ended 31st December 2023.
DETAILS AMOUNT
Balance as at 1st January 2023 TZS “000”
Branch stock at Invoice price 147,600
Branch Accounts Receivables 62,000
Branch Cash 24,000

Transactions during the year; -

Goods sent to Arusha at Invoice price 500,000
Return by customer to branch 16,200
Returns by customer to Head Office 8,800

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Returns by branch to Head Office at Invoice price 12,000

Cash sales 240,000
Credit sales 328,400
Receipts from Accounts receivables 316,200
Bad debts & discount allowed 18,700
Branch Expenses: -
Paid by Head Office 52,000
Paid by branch 28,000
Remittance to Head Office 300,000
On 31st December 2023: Stock on trade at invoice price 81,800

You are required to show: -

i. Branch Stock Account
ii. Branch adjustment account
iii. Branch Account Receivables account
iv. Branch cash Account
v. Branch Statement of Profit or Loss

1.1.2. MEMORANDUM COLUMN METHOD

This method shows the branch stock account with two columns, BASE and MEMO Column.
BASE COLUMN
Sometimes it is called cost column records goods at cost when they are sent to the branch and a
selling price when they are sold by the branch. The difference is profit or loss made by the branch.
This column follows double Entry system.
MEMO COLUMN
 Sometimes called selling price column used for recording goods at their invoice price when
they are sent to the branch and when they are sold by the branch. This column does not follow
the double entry system.
 The MEMO Column is prepared in order to control the stock movement at branch. At the end
of the period two columns should be closed, stating with the MEMO Column, any difference
shows either shortage (Deficit) or Surplus (Excess) of stock at branch.

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ALLOWANCE FOR DEFICIENCY

In every business there will be:
a. Wastage of goods for some reason- goods may be damaged or broken, or they may be kept too
long or somehow waste away;
b. Stealing by customers, especially in the retail business;
c. Theft by employees.
 No one can be certain how much stock is wasted or stolen during a period. Only experience
will enable a firm to make a good estimate of these losses
The stock shortage may be either normal or abnormal loss.
i. Normal Loss
We mean such loss is bound to occur due to inherent nature of goods such as loss of weight due to
leakage, evaporation. Normal Loss is treated as direct charge which affects gross profit margin
only, hence normal loss will not be split into Loading and Cost of goods lost.
ii. Abnormal loss
Is incurred in excess of the predicted losses such as fire, floods, theft or loss in transit and for this,
the cost price of it should be debited to Profit or Loss Account.

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