Unit III
Branch Accounts
Many business concerns open branches at various places for selling their goods. These branches may be opened in the town, in the state and in the country at various places and also in foreign countries.
Branch Accounts record the trading transactions of different branches of the same business whether such branches are situated in the same town or at other towns in lndia or abroad.
Meaning of Branch Accounts : Account which are opened in the books of head office and branches, related to branches are called Branch Accounts. The main objective of these accounts is to know the working ability and profit and loss of branches. The also include the final accounts related to them, by which their financial condition is known.
OBJECTS OF BRANCH ACCOUNTS:
Objects of keeping Branch Accounts are determined by the owner of the business, but here only those objects have been mentioned which are normally the objects of maintaining Branch Accounts:
(i) Profit or loss of each branch can be found out; (ii) They help in controling branches (iii) Actual financial position of the business can be found out on the basis of Head Office and Branch accounting records; (iv) Branch requirements of goods and cash can be estimated; (v) Suggestions for increasing the eficiency of the Branch can be made on the basis of Branch Accounts; (vi) They help in complying the requirements of law because according to the Companies Act, 1956, maintenance of accounting record of branches by companies is essential.
TYPES OF BRANCHES-
(1) Branches Receiving goods from Head Office at Cost Price and making Cash Sales only These Branches receive goods from Head Office at cost and make cash sales only. All sale proceeds are sent to head Office. Head Office sends amount separately for the expenses of the Branch.
(2) Branches Receiving Goods from Head Office at Cost Price and making Cash and Credit Sales. These Branches are like the first type of Branch, the only difference is that they sell goods on credit also.
(3) Branches Receiving Goods from Head Office at Selling Price or Invoice Price and making Cash and Credit Sales : These Branches are like the second type of Branches with the on difference that goods to these Branches are sent by the Head Office at Invoice Price which always above Cost Price.
(4) Independent Branches: These Branches receive goods from the Head Ofice and may manufacture or purchase goods from the market also. They are independent in all respect except that they are under the control of Head Office and thus they have to follow the instruction of Head Office.
(5) Foreign Branches: These Branches may be of any type discussed above. They are Known as Foreign Branches because they work in foreign countries.
Accounting Records of Branches in the Head Office Books-
In case of dependent branch the accounting records as regard to branch are kept in her office books as per following methods:
(1) Simple System or Debtors System: When branches are very small than this method is adopted. In this method only branch account is prepared in the books of Head Office whose credit balance indicates profit and debit balance indicates loss. This method is also called as Debtor method. The Branch account prepaid under this method is of the nature of nominal account.
(2) Final Accounts System : In this method, the Branch Trading Account and Profit & Loss Accounts prepared in the books of Head Office along with Branch Account. The Branch account prepared under this method is of the nature of personnel account. The object of preparing the branch account is to know what the Branch owes from head office or what Branch owes to head office, hence, the balance in Branch account is showed as By Balance c/d or To Balance c/d.
(3) Stock Debtor System: In this method, various accounts are prepared in the books of Head office viz. Branch Stock Account, Goods Supplied to Branch, Branch Debtor Account, Branch Expenses Account, Stock Reserve Account, Branch Adjustment Account, Branch Assets Account etc.
(4) Wholesale Branch Method: This method is applied when the manufacturer supplies the goods to the wholeseller and also to the consumers from their own branches. The goods are transferred to branch at the same value at which it is transferred to wholesellers.
Dependent branches are the branches that do not keep their records but all the records are maintained by head office. It is a branch that is dependent upon the Head Office mainly for “Goods and Cash”. They are not authorized to act solely without the prior permission of the head office. The activities of branch are controlled by head office and usually, it carries on the same functions as of the enterprise. All the plans, policies, rules and regulations of these branches are totally formulated and executed by the head office. When the policies and administration of a branch are totally controlled by the head office, who also maintains its accounts, the branch is called a dependent branch. In other words, all the functions of the dependent branch are totally controlled by the head office. Books of accounts relating to such a branch also will be maintained by Head Office. All major expenses of the branch are paid, as far as possibles by the Head Office.
Under the dependent branch, two types of branches are included, which is termed as service branch and retail branch.
Features of Dependent Branch:
SIMPLE OR DEBTOR SYSTEM.
Accounting Record for Branches Receiving goods from Head Office at Cost Price and Making
Cash Sales only
(i)Books: It is not necessary for these Branches to keep books of accounts, but normally they keep Cash Book, a Stock Book and a Petty Cash Book.
(ii)Statements: These Branches have to send a Stock Statement every week or every month
or after such period which is prescribed by the head office. In this Statement following
description is recorded: (a) Opening Stock, (b) Goods received from Head Office during this period, (c)Sales during this period, (d) Goods spoiled during the period, (e) Closing Stock, (f) In the last column of this Statement, informations regarding cash deposits made in the bank and balance of Cash are given.
(iii) Branch also sends a copy of petty cash transactions of this period to the Head Office.
Head Office keeps a book in which record of all the goods sent to the Branch is kept. This
book is known as Goods Supplied to Branches Book.
Goods Supplied to Branches Book
Date | Particulars | Total | Branch A | Branch B | Branch C |
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This book is totalled up at the end of a certain period (mostly a year) and this total amount
is taken to Goods Supplied to Branch Account, Balance or this account is transferred to Trading Account.
Accounting Record in Head Office Books: In the books of Head Office one separate account
is opened for each Branch. Following record is made in lead Office books in order to find out profit or loss of the Branch
(i) On Supply of Goods
Branch A/c ..Dr.
To Goods Supplied to Branch A/c
(ii) If the goods supplied are returned by Branch to H. O.
Goods Supplied to Branch A/c Dr.
To Branch A/c.
Stock Debtor System: In this method, various accounts are prepared in the books of Head office viz. Branch Stock Account, Goods Supplied to Branch, Branch Debtor Account, Branch Expenses Account, Stock Reserve Account, Branch Adjustment Account, Branch Assets Account etc.
The term ‘Final Accounts’ is a broader term. The three following financial statements are prepared for the preparation of final accounts:
(1) Trading account: It shows gross profit/ loss of the business.
(2) Profit & loss account: It shows the net profit/loss of the business.
(3) Balance sheet: It shows the financial position of the business.
Out of the above three statements, trading, profit & loss accounts are prepared, together, and balance sheet is prepared, independently. Here, it is very necessary to remember that these accounts are not prepared in the ledger rather than on the plain sheets or papers. These papers are filed for future reference.
The method of preparing these accounts is different from other accounts like personal, real, nominal accounts.
As stated above, the term ‘final accounts’ refer to trading account, profit & loss account and balance sheet. Balance sheet is a statement but even then it is included in final accounts. Now, here the question arises that why they are named final accounts?
Every businessman is, ultimately, interested to know the final result of the business. These are called final accounts because they are the last accounts, prepared at the end of the year. They serve the ultimate purpose of keeping accounts. Their purpose is to analyze the effect of various incomes and expenses during the year and the result and profit or loss.
Trading, profit & loss account and balance sheet, all these three together, are called as final accounts. Final result of trading is known through Profit and Loss Account. Financial position is reflected by Balance Sheet.
PREPARATION OF FINAL ACCOUNTS-
Final balances of all the accounts in the ledger are transferred to trial balance. From trial balance, expenses and income accounts are transferred to trading account and profit and loss account.
Its, with balances, which are to be carried forward to the next year, are shown in the balance sheet. The balance sheet constitutes the final stage of accounting.
Final accounts have to be prepared, every year, in every business. Trading and profit & loss accounts are prepared, after all the accounts have been completely written and trial balance is extracted. Before preparing final accounts, it becomes necessary to examine whether all the expenses and incomes for the year for which accounts are prepared have been duly provided for and included in the accounts. Circumstances and items are common where adjustments, at the end of the accounting period, are to be made. In such items, no cash is involved hence no record has been kept till year-end.
Form of Final Accounts: There is a standard format of final accounts only in the case of a limited company. There is no fixed prescribed format of financial accounts in the case of a proprietary concern and partnership firm.
Transactions
Trading & Profit & Loss Account Balance Sheet
Journal
Ledger
Cycle of Final Accounts
WHOLESALE BRANCH METHOD
When the manufacturer sells goods to the wholesaler then the manufacturer does not get
the amount of profit which the wholesaler gets by selling them to retailers or direct to
consumers. Hence, in order to earn this profit the manufacturer sends goods to their branches at wholesale price so that their branches may be able to sell the goods to the retailers or direct to consumers at price at which wholesaler use to sell. In this way, the Head Office may generate extra profit. However, this increases the cost of control.
Wholesale and Retail Profit of the Branch
Sometimes it is necessary to make a distinction between due to wholesome and profit
due to retail business of the branch. Wholesale price is always less than retail price. For, instance, the Cost Price is 100 and Wholesale Price is 7 115 and Retail Price is 123, in this case Branch has made a profit of 23, i.e., 123 -100; but the fact is that real profit of the Branch is only 7 8, i.e., 123-115, because by selling to wholesellers7 15 profit would have been made by Head Office. Contribution of Branch is only 8. Hence, when Head Office wants to know retail profit of the Branch, it charges the branch with wholesale price. Head Office Trading Account is credited with goods supplied to Branch at wholesale price and thus retail profit of the Branch is found out.
These Branches receive goods from Head Office but they are allowed to manufacture and purchase goods also. They are completely independent for all the activities but their owner is Head Office and they have to follow the instructions of Head Office. Accounting Record in Branch Books These Branches keep all the books of accounts and records are made on double entry system.
Each branch at the end of a certain period, generally a year, prepares its Profit and Loss Account-
i) Payment of Cash to Head Office: Head Office Amount is debited and Cash Account is credited.
ii) Receipt of Cash from Head Office: Cash Account is debited and Head Office Account is credited.
iii) Receipt of Goods from Head Office: Goods received from Head Office Account is debited. If a lot of goods are taken from Head Office, such goods are recorded in a separate book credited. If a lot of goods are taken from Head office, such goods are recorded in a separate book specially kept for this purpose and after a certain period Head Office Account is credited with its total. Balance of goods received from Head Office Account is transferred to Trading Account and thus this account is closed.
iv) Sending of Goods to Head Office: Sometimes Branches send goods to Head Office. In such a case Head Office Account is debited and Goods Account is credited.
Record of Fixed Assets
When fixed assets are purchased by the Branch for the Head Ofīice and payment is made by
branch, then following record is made in Branch Books:
Head Office A/c Dr.
To Cash A/c
(Being purchase of fixed assets for Head Office)
When information of purchase of fixed assets by Branch is received in Head Office, following entry is made in the books of Head Office
Br. Asset Alc .Dr.
To Branch A/c
(Being purchase of assets by the Branch)
If payment for purchase of asset by Branch is made by Head office, in Head Office books Branch Account is debited and Cash Account is credited. When information of purchase of fixed asset by Head Office is received by Branch then
Branch makes the following record:
Asset A/c ..Dr.
To Head Office A/e
(Being asset purchased by H.O.)
Depreciation of Branch Fixed Assets
When accounting record in the books of Head Office is made for Branch fixed assets following is the entry for depreciation in the books of Head Office
Branch Ac Dr.
To Branch Fixed Assets A/c
Following entry is made in the books of Branch for such depreciation:
Depreciation A/c Dr.
To Head Office A/c
This depreciation is transferred to Profit and Loss Account
P.&L. A/c Dr.
To Depreciation Ac A 1o19t2
Head Office Expenses
No doubt, branch is independent, yet some work is done by Head Office. Hence, some portion of Head Office expenses are charged to Branch. In such a case following entry is made in Head Office books.
Branch Ac
To Expenses A/c
To P. &L. A/c
For such expenses, following entry is made in the books of the branch:
Head Office Expenses A/c Dr.
To Head Office A/c
When Head Office opens its Branch in foreign country, such Branch is called Foreign
Branch. These Branches keep their accounts in foreign currency and when Head Office receives their Trial Balance, which is in foreign currency, it is to be converted in home currency Conversion of Branch Trial Balance.
If the rate of exchange of the Currency of Head Office country and of the currency of Branch
country is highly stable, for conversion one fixed rate may be used. But if the rate of exchange
of the currency of these countries is not stable, following three rates are used for conversion
(i) Opening Rate: Fixed assets and fixed liabilities of the Branch are converted at opening
rate. Opening stock is converted at opening rate, Depreciation is also converted at opening rate.
(ii) Closing Rate: Floating assets and floating liabilities are converted at closing rate.
Closing stock and Reserve for bad and doubtful debts are converted at closing rate.
(iii) Average Rate : Balances of nominal accounts are converted at average rate, i.e., items
which are taken to Trading and Profit & Loss Account are converted at average rate.
(iv) Head Office balance is treated as converted amount of Branch balance in the absence
of contrary information.
(v) If Branch has made remittances to Head Office, they should be converted at the
corresponding figures in Head Office Books, or they are converted as per instructions given in the problem.
(vi) If converted amount of some assets and liabilities is given, it should be taken into
consideration and under these circumstances opening or closing rates should not be used.
Preparation of Trial Balance after Conversion
After conversion of all the items of Branch Trial Balance a new Trial Balance is prepare
with converted amounts, generally it does not tally, its balance is treated as Difference n
Exchange. If the amount of difference is less it is taken to Profit and Loss Account but if tne
difference is a big amount, it is transferred to Exchange Fluctuation Account and is taken
Balance Sheet.
Departmental Accounting refers to maintaining accounts for one or more branches or departments of the company. Revenues and expenses of the department are recorded and reported separately. The departmental accounts are then consolidated into accounts of the head office to prepare financial statements of the company.
The departmental stores are the example of large-scale retail selling just under a single roof. Different departments involve in different goods to be sold out. To calculate the net result of the whole organization, full-fledged trading, and profit, and loss account are to prepare. But to evaluate individual department, it will be creditworthy to prepare individual trading and profit and loss account.
For example, a textile mill which is having head office and factory. Separate accounts are maintained for production facilities and then the final results are sent to the head office which then incorporates by the head office in their accounts. Maintenance of separate accounts for each branch of a bank or financial institution also falls under the category of departmental accounting. The bank then prepares its financial statement after consolidating accounts of all branches.
A departmental accounting system is an accounting information system that records the activities and financial information about the department. Departmental Accounting is a vital one for large prosperous business organizations. It controls wastage & misusing, compensates the employee in terms of profit and commission, compares performance and progress of year to year or department to department or similar type of firm to firm.
Meaning of Departmental Accounting:
Where a big business with diverse trading activities conduct under the same roof the same usually divide into several departments and each department deals with a particular kind of goods or service. For example, a textile merchant may trade in cotton, woolen and jute fabrics. The overall performance for this type of business depends, however, on departmental efficiency.
As a result, it is desirable to maintain accounts in such a manner that the result of each department can be known—together with the result as a whole. The system of accounting follows for this; the purpose knows as Departmental Accounts. This system of accounting helps the proprietors to:
a) Compare the results among the different departments together with the previous results thereof,
b) Formulate policy to extend or to develop the enterprise in the proper line; and
c) Reward the departmental managers based on departmental results.
The Concept of Departmental Accounting:
Departmentalization enables big firms to determine the areas needing special attention to the achievement of overall objectives. The units or departments needing more funds and more attention than others and the one(s) contributing more toward goal attainment could be identified with good departmentalization. The purpose is basically to find out the performance and capability of the units or departments to make adjustments for the achievement of the firm’s objectives.
Each unit, department or subsidiary gives the free use of some of the assets of the firm and some responsibilities which can be profit-making, revenue generation or cost control. As expenses incur by the firm on behalf of all its departments, indirect expenses are to apportion to the departments, if each department is to present a financial statement or if the statement is to prepare by the company on a departmental basis.
Departmental accounting is about the preparation of final accounts taking into consideration divisional performance before the overall performance. With that system of accounting, companies that departmentalize can easily conclude as they are very well’ performing units, averagely or moderately performing units. Departmental accounting aims at separating the several activities of a business to compare results and to assist the proprietors/owners in formulating policies.
Objectives of Departmental Accounting:
The main objectives of departmental accounting are:
Methods & Techniques of Departmental Accounting:
Departmental accounts are prepared in such a manner that all desired information is available and departmental profit can correctly make.
There are two methods:
They are as explained below:
Where Individual Set of Books are maintained:
Under this method, the accounts of each department independently maintain. The departmental results of all the departments collect and take into consideration to find out the net result of the organization.
Where All Departmental Accounts are maintained Columnar-Wise Collectively:
A Departmental Trading and Profit and Loss Account open for each department in a columnar form together with a separate column for ‘Total’ to ascertain the individual result of the different departments and also as a whole. But the Balance Sheet prepares in a combining form.
And to incorporate the purchase and sale of goods, the subsidiary books and also the nominal accounts into the ledger must be ruled out with extra columns for each department in arriving at the desired departmental figures to prepare departmental final accounts. If there is a larger volume of cash purchase and cash sales, the Cash Book also must maintain separate columns for cash purchases and cash sales of various departments.
Advantages of Departmental Accounting-
The most significant advantages of departmental accounts are:
Principles of Departmental Accounting
Preparation of final accounts of a departmentalized business requires the following:
Sometimes control accounts have to resort to determine the creditors’ or debtors’ value to the business. In any case, as the departmental values show the total figures, for the business as a whole, are, to sum up.
Basis of Allocation of Common Expenditure among different Departments
Expenses should be allocated among different departments on a rational basis while preparing departmental accounts.
Individual Identifiable Expenses: Expenses incurred specially for a particular department are charged directly thereto, e.g., insurance charges of stock held by the department.
Common Expenses: Common expenses, the benefit of which is shared by all the departments and which are capable of precise allocation are distributed among the departments concerned on some equitable basis considered suitable in the circumstances of the case.
Allocation of Expenses
Sr No | Expenses | Basis of Allocation |
1. | Rent, rates and taxes, repairs and maintenance, insurance of building | Floor area occupied by each department (if given) otherwise on time basis |
2. | Lighting and Heating expenses (e.g., energy expenses) | Consumption of energy by each department |
3. | Selling expenses, e.g., discount, bad debts, selling commission, freight outward, travelling sales manager’s salary and other costs | Sales of each department |
4. | Carriage inward/ Discount received | Purchases of each department |
5. | Wages/Salaries | Time devoted to each department |
6. | Depreciation, insurance, repairs and maintenance of capital assets | Value of assets of each department otherwise on time basis |
7. | Administrative and other expenses, e.g., salaries of managers, directors, common advertisement expenses, | Time basis or equally among all departments |
8. | Labour welfare expenses | Number of employees in each department |
9. | PF/ESI contributions | Wages and salaries of each department |
Note: There are certain expenses and income, most being of financial nature, which cannot be apportioned on a suitable basis; therefore they are recognised in the combined Profit and Loss Account, for example, interest on loan, profit/loss on sale of investment, etc.
Appropriateness of some of the apportionment methods – key points:
Types of Departments-
There are two types of departments: Dependent and Independent Departments.
Independent Departments-
Departments which work independently of each other and have negligible inter- department transfers are called Independent Departments.
Dependent Departments-
Departments which transfer goods from one department to another department for further processing are called dependent departments. Here, the output of one department becomes the input for the other department. These transfers may be done at cost or some pre-decided selling price. The price at which this is done is known as transfer price. In these departments, unloading is required if the transfer price is having a profit element. The method of eliminating unrealised profit will be discussed later.
Inter Departmental Transfers-
Whenever goods or services are provided by one department to another, their cost should be separately recorded and charged to the department benefiting thereby and credited to that providing the goods or services. The totals of such benefits (inter-departmental transfers) should be disclosed in the departmental Profit and Loss Account, to distinguish them from other items of expenditure.
Basis of Inter-Departmental Transfers-
Goods and services may be charged by one department to another usually on any of the following three bases:
(i) Cost,
(ii) Current market price,
(iii) Cost plus agreed percentage of profit.
Elimination of Unrealised Profit
When profit is added in the inter-departmental transfers the loading included in the unsold inventory at the end of the year is to be excluded before final accounts are prepared so as to eliminate any anticipatory (internal) profit included therein.
Stock Reserve
Unrealised profit included in unsold stock at the end of accounting period is eliminated by creating an appropriate stock reserve by debiting the combined Profit and Loss Account. The amount of stock reserve will be calculated as:
Transfer price of unsold stock × Profit included in transfer price
Transfer price
Journal Entry
At the end of the accounting year, the following journal entry will be passed for elimination of unrealised profit (creation of stock reserve):
Profit and Loss Account Dr.
To Stock Reserve
(Being a provision made for unrealised profit included in closing stock)
In the beginning of the next accounting year, the aforesaid journal entry will be reversed as under:
Stock Reserve Dr.
To Profit and Loss Account
(Being provision for unrealised profit reversed.)
Disclosure in Balance Sheet
The unsold closing stock acquired from another department will appear on the assets side of the balance sheet as under:
(An extract of the assets side of the balance sheet)
Current assets xxx
Stock xxx
Less: Stock reserve xxx
xxx
