UNIT 4

Accounting  for branch and departments

4.1 Accounting for branch and department

Accounting for branch

INTRODUCTION: -

A branch may be defined as section of an enterprise, geographically separated from the rest of the business, controlled by head office, and generally carrying on the same activities as of the enterprise. As a business grow, it may open up branches in different towns and cities in order to market its product/services over a large territory and thus increase its profit.

For example, Bata shoe Co. Ltd has branches in various cities all over the country. The same example holds good for a commercial bank also.

As per the provision of Companies Act, branch office in relation to a company means-

a)     Any establishment described as a branch by the company; or

b)    Any establishment carrying on either the same or substantially the same activity as that carried on by the head office of the company; or

c)     Any establishment engaged in any production, processing or manufacture.

It should be mentioned that a branch is not a separate legal entity it is simply a segment of a business. From an accounting standpoint, a branch is a clearly identifiable profit centre. In order to exercise greater control over the branches it is necessary to ascertain profit or loss made by such branches separately. Apart from this, specialised accounting techni9have to be adopted for controlling various branches activities and for their smooth running both at the branch level and at the head office level. The system of accounting varies between different enterprises in accordance with their type of activities, methods of operation and the preference of their managements.

NEED FOR BRANCH ACCOUNTING

1. Ascertain the profitability of each branch separately for particular accounting period. 
2. Ascertain the financial position of each branch separately at the end of that accounting period.
3. Assess the progress and performance of each branch
4. Incorporate the profit or loss made by the branch and its assets and liabilities in the firm's final accounts
5. Ascertain the requirements of cash and stock for each branch,
6. Ascertain whether the branch should expended or closed

TYPES OF BRANCHES

From accounting point of view, the branches can be divided into the following main cases:

1) HOME BRANCHES: -

a)     Dependent Branches (Where the head office maintains all the accounts)

b)    Independent Branches (Where the branch keeps its own accounts)

2) FOREIGN BRANCHES: -

They almost invariably trade independently and record their transaction in foreign currency. 

Dependent Branches

When the policies and administration of a branch are totally controlled by the head office, who also maintains its accounts, the branch is called as dependent branch.

Independent Branches

Independent Branches are those which make purchases from outside, get goods from Head Office, supply goods to Head Office and fix the selling price by itself Thus an independent Branch enjoys a good amount of freedom like an American Son.

ACCOUNTING SYSTEM OF BRANCHES

The accounting arrangement of a branch depends upon its size, the type of activities, the methods of operation and the degree of control to be exercised by the head office. There are three main system of accounting for branches transaction, viz.

1. Debtors System
2. Stock and Debtors System
3. Final Account system

This system of accounting is suitable for the small- size branches. Under this, a Branch Account is opened for each branch in the head office ledger. All the transaction relating to that branch is recorded in this account. The branch account is prepared in such a way that it discloses the profit or loss of the branch.

Head office may send goods to branch either at "cost price" or "selling price".

Cost price method: - under this method at the beginning of the year the branch Account is debited with the opening balances of asset such as stock, petty cash, furniture, prepaid expenses, etc. lying with the branch. Similarly, it is credited with the opening balance of liabilities of the branch such as, creditors, ots salary, rent, etc.

The branch is then debited with the amount of goods sent to the branch and other amounts remitted to meet various expenses such as, salaries, rent, rates, taxes, etc. Likewise, the branch account is credited with the return of goods by the branch and receipts from branches. At the year end, Branch Account is debited with the closing values of liabilities and credited with the closing values of assets. The difference between the two sides represents profit or loss for the branch for a particular period.

DEBTORS METHOD

Journal entries

1) For goods sent to branch

Branch A/c _______Dr. 

To Goods Sent to Branch A/c

(Being goods sent to branch)

2)For goods returned by the branch

Goods Sent to Branch A/c _______Dr.

To Branch A/c

(Being goods returned by the branch)

3) For amount sent to branch for expenses

Branch A/c _______ Dr.

To Bank A/c

(Being cheque sent to branch for expenses)

4) For amount received from branch

Bank A/c _______  Dr.

To Branch A/c

(Being cash or cheque received from branch)

5) For closing goods sent to branch account

Goods Sent to Branch Alc Dr.

To Purchase A/c

(Being balance transferred to Trading Account)

6) For closing balances of assets at the branch

Branch Assets A/c ________  Dr. (Individually)

To Branch A/c

(Being closing balances of assets brought into account)

7) For closing balances of Liabilities at the branch

Branch A/c ________Dr.

To Branch Liabilities A/c (Individually)

(Being closing balances of liabilities brought into account)

8) For transferring Profit or Loss to General Profit and Loss Account

i) If Profit

Branch A/c _______   Dr.

To General Profit and Loss A/c

(Being branch profit transferred to General P & L A/c)

ii) If Loss

General Profit and Loss A/c  ________ Dr.

To Branch A/c

(Being branch loss transferred to General P & L A/c)

The closing balances of branch assets and liabilities are shown in the Balance Sheet

of the head office. At the beginning of the next year, the entire numbers 6 and 7 are

reversed so as to show opening balances in the Branch Account.

STOCK AND DEBTORS METHOD:

Under this method accounts relating to branch are maintained in a more comprehensive and detailed manner as compared to Debtors method. This method keeps a better control stock. Under this method separate accounts are prepared for various accounting function

This accounting procedure under this method depends upon the policy of head office with regard to pricing of goods send to branch. Head office may adopt one of the following methods for invoicing goods to branch. 

1. At cost price to head office.
2. At selling price of the branch.
3. At cost price plus fixed margin of profit. In this case branch may sell goods at higher or lower than the invoice price.

When goods have been invoiced to branch at cost price.

In this case following accounts are prepared.

a)     Branch Stock Account

b)    Goods sent to Branch Account

c)     Branch Debtors Account

d)    Branch Expenses Account

e)     Branch Profit & Loss Account

f)       Branch Cash Account

I) When goods are sent to the branch (at invoice price)

Branch Stock A/c  _____ Dr.

To Goods Sent to Branch A/c

2) When goods are returned by the branch to the H.O. (at invoice price)

Goods Sent to Branch A/c _______   Dr.

To Branch Stock A/c

3) When sales are made by the branch

i) For Cash Sales

Cash A/c _______  Dr.

To Branch Stock A/c

ii) For Credit Sales

Branch Debtors A/c _______ Dr.

To Branch Stock A/c

4) When Cash is Received from Debtors

Cash A/c  ______ Dr.

To Branch Debtors A/c

5) For Sales Returns

Branch Stock A/c   ________  Dr.

To Branch Debtors A/c

6) For discount allowed, bad debts, etc.

Branch Expenses A/c  ________ Dr.

To Branch Debtors A/c

7) For Shortage of Stock

Branch Adjustment A/c ________ Dr.(with amount of loading)

Branch P & L A/c ________ Dr. (with cost of shortage)

To Branch Stock A/c

For surplus at branch, the reverse entry will be passed.

8) For Branch Expenses paid in Cash

Branch Expenses A/c   ______ Dr.

To Cash A/c

9) For Closing Branch Expenses Account

Branch P&L A/c ______ Dr.

To Branch Expenses A/c

10) For Adjustment of Loading on the Opening Stock

Stock Reserve A/c ______  Dr.

To Branch Adjustment A/c

11) For Adjustment of Loading on the Closing  Stock

Branch Adjustment A/c ______ Dr.

To Stock Reserve A/c 

12) For Adjustment Loading Goods sent to Branch

Goods Sent to Branch A/c ________   Dr.

To Branch Adjustment A/c

13) For Transfer of Gross Profit

Branch Adjustment A/c _______ Dr.

To Branch P & L A/c

Examples

Q.1 (AT COST)

Suri is having his Head office at Mumbai and Branch Office at Nasik. Prepare the branch Account in the books of the Head Office from the following transaction with the branch:

SOLUTION: -

IN THE BOOKS OF H.O.

Dr.     NASIK BRANCH ACCOUNT.     Cr.

Q.2 (INVOICE PRICE)

D of Delhi have a branch at Madras. Goods are sent by the Head Office at Invoice Price which is at the Profit of 25% on Cost Price. All the Expenses of the branch are paid by the Head Office. From the following particulars, prepare Branch Account in Head Office Books

Goods sent to branch at invoice price Rs. 20,000.

Expenses made by head office: -Rent Rs.600, Wages Rs.200, Salaries Rs.900

Remittance made to Head Office: - Cash Sales Rs. 2,650, Cash collected from debtors Rs. 21,000

Goods Returned by Branch at Invoice Price Rs.400

SOLUTION: -

IN THE BOOKS OF HEAD OFFICE

 Dr.    MADRAS BRANCH A/c.      Cr.

Note: Goods are sent by Head Office at @ 25% on Cost Price.

So, Cost + Profit   = Invoice Price

         100 + 25         = 125

Profit charged by Head Office is 1/5 or 20% of Invoice Price.

Q.3 (INVOICE PRICE)

One M.P. Head Office has a branch at Berhampur to which goods are invoiced at cost plus 20% .from the following particulars prepare the Branch Account in the Head Office Books :

SOLUTION: -

IN THE BOOKS OF M.P. HEAD OFFICE

Dr.                   BERHAMPUR BRANCH ACCOUNT.   Cr.             

Working Note:

Dr.   BERHAMPUR BRANCH DEBTORS ACCOUNT.                   Cr.             

(2)

Total Sales  =2,06,400

Less: - Cash Sales =1,10,400

Credit Sales   =96,000

(3)

Goods are sent by Head Office at @ 20% on Cost Price.

So, Cost + Profit   = Invoice Price

         100 + 20         = 120

Profit charged by Head Office is 1/6 of Invoice Price.

Q.4 (AT COST)

The Canada commercial company invoiced goods to its Jaipur Branch at cost. The head office paid all the branch expenses from its bank except petty cash expenses which were Paid by the branch. From the following details relating to the branch, prepare

(1): Branch Stock A/c

(2)Branch Debtors A/c

(3)Branch Expenses A/c

(4)Branch P&L A/c

SOLUTION: -

Dr.     BRANCH STOCK A/c.    Cr.

Dr.     BRANCH DEBTORS A/c.                    Cr.

Dr.     BRANCH EXPENSES A/c.                   Cr.

Dr.     BRANCH PROFIT & LOSS A/c.     Cr.

Q.5 (AT COST)

The following are the details of ‘Indore Branch’ for the year 2018

Prepare: (1) Branch Stock A/c (2) Branch Debtors A/c (3) Branch Expenses A/c      

(4) Branch P&L A/c (5) Branch Cash (6) Goods sent to Branch A/c

SOLUTION: -

Dr.     BRANCH STOCK A/c.    Cr.

Dr.     BRANCH DEBTORS A/c.                    Cr.

Dr.     BRANCH CASH A/c.       Cr.

Dr.     BRANCH EXPENSES A/c.                   Cr.

Dr.     BRANCH EXPENSES A/c.                    Cr.

Dr.    GOODS SENT TO BRANCH A/c.                   Cr.

Dr.    BRANCH PROFIT & LOSS A/c.      Cr.

Q.6  Mumbai Textile Mills Ltd. Has branch at Agra. Goods are invoiced to branch at cost plus 50%. Branch remits all cash received to the head office and all expenses are met by head office. From the following particulars, prepare the necessary accounts under the Stock and Debtors system to Show the Profit Earned at the Branch:

SOLUTION: -

Dr.     BRANCH STOCK A/c.    Cr.

Dr.    BRANCH ADJUSTMENT A/c.      Cr.

Dr.    BRANCH PROFIT & LOSS A/c.      Cr.

Dr.    GOODS SENT TO BRANCH A/c.                   Cr.

Dr.     BRANCH DEBTORS A/c.                    Cr.

Dr.     BRANCH CASH A/c.         Cr.

SOLUTION: -

BRANCH STOCK RESERVE A/C

Independent branches: concept-accounting treatment: important adjustment entries and preparation of consolidated profit and loss account and balance sheet.

Steps to maintain an independent branch account

The independent branch, like the headquarters, keeps all records individually and independently in the double-entry bookkeeping system. Dependents have little power, rely on headquarters for supplies and expenses, and are like a minor son.

An independent branch is a branch that purchases from outside, receives goods from the head office, supplies the goods to the head office, and fixes the selling price on its own. Therefore, an independent branch enjoys considerable freedom like an American son.

Features of independent branches:

1. The Independent Branch holds a complete set of books. Such branches receive goods from headquarters and external parties. I have my own bank account. Therefore, the branch maintains an accounting frill system.

2. Create your own trial balance, transaction and income statement and balance sheet. A copy of these statements is sent to headquarters for inclusion in the headquarters books.

3. The books contain accounts called "head office accounts" or "head office checking accounts". This account will be credited with everything received from headquarters and debited with everything sent to headquarters. That is, all transactions related to headquarters are recorded in this account. Therefore, the checking account at the head office is the account of the sole proprietor (that is, the capital account).

Despite their independence, branches cannot function without resources, and resources are provided by headquarters, especially in the early stages. Therefore, the investment by the headquarters from the perspective of the headquarters account is essentially a personal account.

Similarly, the head office opens a "branch checking" account on the books. It is also the executive account between the branch and the headquarters, which includes all transactions between the branch and the headquarters.

The feature is that the head office current balance of the branch books and the branch current balance of the head office books are mutually maintained.

The balance of these accounts on any date is equal to the difference between the assets and liabilities of the branch on that day. The branch recurring balance of the head office book and the head office recurring balance of the branch book show the same but opposite balances on a particular date.

4. There may be inter-branch transactions. That is, goods are transferred from one branch to another at the same headquarters. We'll talk about such entries later.

5. When the head office receives the account and statement, the head office checks the balance. The balance is displayed in the head office accounts in the branch books and in the branch accounts in the head office books. The difference will be adjusted. This is treated individually.

Accounting journals for regular transactions

Inter-branch transactions:

If the head office has multiple branches, transactions may take place between them, and such transactions are called inter-branch transactions. A branch does not need to have an account at another branch. Inter-branch transactions are treated as transactions with the head office.

The entries are:

Example

Solution:

Items in transit:

Generally, the balance of the branch's checking in the head office's books is the same as the balance of the head's checking in the branch's books. The balances of these current accounts must be the same, but on the opposite side of both books.

The difference occurs in the following situations:

1. If the branch sends goods or cash to the head office, the branch will enter it in the head office account. However, the same is recorded in the headquarters books only upon receipt of goods or cash. For example, goods or cash sent by a branch just before the end of a fiscal year may not reach headquarters in the same fiscal year.

Therefore, the branch accounts are not credited in the head office books, but the head office accounts are debited in the branch books at the same time. Therefore, there is a difference between the two books.

2. Similarly, the head office may send cash or goods to the branch office. When you submit them, the branch checking account will be debited to the headquarters books. If the item is not received by the branch book, the corresponding entry will not be passed to the branch book.

In this way, goods or cash sent from the head office to the branch office or from the branch office to the head office and not received by the recipient are called in transit.

1. If the goods or cash sent by the branch is in transit, the following entry will be passed.

Goods or cash sent from the branch are in transit

The above entries will remain on the books for a short period of time or until the cash or goods in transit arrive. If the recipient receives the goods or cash in transit, the shipping account will be closed because you need to cancel the entry.

Incorporation of branch trial balances into head office books:

If a branch is dependent, it is relatively easy to incorporate the branch results because the accounting for such a branch is done at the headquarters itself. Profit is transferred from the branch account under the debtor system or the branch adjustment account under the stock debtor system to the general profit and loss account. An independent branch with its own accounting system creates a trial balance and sends a copy to the headquarters.

After receiving the trial balance from the branch, the head office passes a built-in entry to prepare the balance sheet combined with the branch's transactions and income statement. With the help of the branch trial balance, the head office records in a book about the branch. This process is known as the integration of branch trial balances.

There are two ways:

(A) Incorporation of all items into the trial balance:

The item is divided into two parts.

(A) Items related to trading and income statement

(B) Items related to the balance sheet.

After passing the above six journals, Headquarters creates branch transactions and P & L accounts.

Closing entries if head office wants

Items related to the balance sheet

After passing all eight of these entries, the total debit of the branch accounts equals the total of the crediting branch accounts, so the branch accounts in the head office books are automatically balanced. That is, if branch assets and liabilities are included, the branch accounts in the head office books created and incorporated after adjustment do not leave a balance.

If the assets and liabilities of the branch are not included, the branch accounts in the head office books created by the above method will leave a closing balance equal to the net assets (assets minus liabilities) as of the closing date.

(B) Incorporation of branch net income / loss, liabilities and assets:

Instead of transferring all items, the branch can create transactions and profit and loss accounts and transfer only net income or net loss to headquarters with or without assets and liabilities.

If assets and liabilities are transferred, the headquarters will not leave a balance. However, if assets and liabilities are not transferred, the head office account will have a balance equal to net worth. However, at the time the consolidated balance sheet was created, this account was replaced by branch assets and liabilities.

Example:

The Chennai company has two branches in Mysore and Bangalore. Headquarters and branches will close their books on December 31st.

The next adjustment is not yet enabled, so you need to enter the next adjustment entry.

(A) A remittance of 4.500 rupees sent to the head office by Mysore on December 30 received by the head office on January 5th.

(B) A product worth 2,000 rupees shipped from the Bangalore branch on December 27 and received by the Mysore branch on December 30 based on instructions from the head office.

(C) The depreciation of the assets of the Mysore branch is Rs 1,100 and the account for such assets is maintained by the head office.

(D) A product worth Rs 9,000 shipped from the head office to the Mysore branch on December 30 was received by that branch on January 7.

Display the entry in the head office book.

Solution:

Example

Mangalore's headquarters had branches in Putter and Udupi. Assuming the book was closed on March 31, 2006, enter an entry in the book at headquarters to correct or adjust the following:

(1) Expenses, Rupees 4,800, will be charged for work done by the head office on behalf of the Udupi branch.

(2) Puttur Branch paid Rs. Salary for visiting headquarters staff is 3,600. The branch credited the amount to the payroll account.

(3) Depreciation at an annual rate of 10% Rs will be charged to Puttur furniture. 10,000, that account is at headquarters.

(4) Products that cost Rs. Headquarters purchased 2,400 from D'Souza Brothers, paid by Puttur Branch.

(5) Remittance of rupees. The 3,750 created at headquarters from the Udupi branch on March 28, 2006 was received at headquarters on April 1, 2006. (B.Com, Mangalore)

Solution:

Example

Eve Ltd in Calcutta and Delhi branches. You need to prepare your trading and P & L accounts and your consolidated balance sheet. After incorporating the assets and liabilities, create a journal to include the Delhi branch account in the headquarters and the branch account in the headquarters books.

Example

Departmental accounts

Introduction

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 & Concept of Departmental Accounting

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, woollen 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:

1. Compare the results among the different departments together with the previous results thereof,
2. Formulate policy to extend or to develop the enterprise in the proper line; and
3. 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:

1. To check out an interdepartmental performance.
2. To evaluate the performance of the department with the previous period result.
3. The gross profit of each department can ascertain.
4. Unprofitable departments will reveal.
5. The result of operations can use to determine the remuneration of managers of each department.
6. The progress of each department can monitor for appropriate actions to take.
7. To help the owner formulating the right policy for the future.
8. To assist the management in deciding to drop or add a department.
9. It helps in determining the commission of the department manager when it links to profit achieved by their department.
10. It can help the management in deciding which department should develop more and which should close to maximize the profitability of the whole company.
11. To provide detail information about the entire organization, and.
12. To assist management for cost control.
13. It also helps in allocating costs to various departments and therefore helps in better control of the cost of the departments of the company.
14. For a company that is dealing with multiple products, it is much easier to control and monitor several departments based on the products they sell rather than controlling it as one single business.

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:

1. Where the individual set of books maintains, and.
2. Where all departmental accounts maintain columnar- wise collectively.

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:

1. Individual results of each department can know which helps to compare the performances among all the departments, i.e., the trading results can compare.
2. Departmental accounts help to understand or locate the success, failure, rates of profit, etc.
3. It helps the management to make a proper plan of action, policies to increase profit after analyzing the results of the operation of various departments.
4. Departmental accounting helps us to understand which department should be expanded further or which one should close down as per the results of the operation.
5. It also helps to encourage a healthy competitive spirit among the various departments which, ultimately, helps to increase profits of the firm as a whole.
6. For additions or alterations of various departments, departmental accounts help a lot as it supplies the necessary information.
7. As detailed information about the firm is available from departmental accounting the users of accounting information, particularly, the auditors and investors widely benefit.
8. Since departmental accounting presents separate departmental results, the Performance, of a successful department encourages the management, employees and increases the motivation of the staff as a whole.
9. The percentage of gross profit on sales and stock turnover ratio of each department helps to make a comparative study among all departments.

Principles of Departmental Accounting

Preparation of final accounts of a departmentalized business requires the following:

• That the gross profit or loss and the net profit or loss of each department determine separately before taking. The totals to the appropriate account or the balance sheet of the business, and.
• That there should be some bases of apportioning gains and expenses to the departments or units of the business. And, that should be done as fair and equitable as possible.

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

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:

• It can be a very subjective process.
• The best way to apportion costs base on the greatest benefit- i.e. the department who gets the greatest benefit from the cost must take the greatest amount of the cost.
• This makes the apportionment process very time consuming and expensive.
• The more appropriate basis may be for depreciation to base on the book value of assets in each department.
• Insurance of the assets based on the book value of the assets.

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

Key takeaways:

1. Branch accounting is a bookkeeping system that maintains a separate account for each branch or location of an organization.
2. Technically, branch accounts are temporary or nominal ledger accounts that last for a specified period of time.
3. Branch accounting improves accountability and control because you can closely track profitability and efficiency by location.
4. Branch accounting has a long history, dating back to 14th century Venetian banks.

References

1. Gupta R.L. and Radhaswamy. M, Sultan chand & Sons, New Delhi.
2. Shukla M. C. Grewal T. S and Gupta S.C., S. Chand & Sons. New Delhi.
3. Shukla S. M., Sahitya Bhawan Publication, Agra.
4. Murti Guru Prasad, Himalaya Publishing House, Mumbai.
5. Jain and Narang, Kalyani Publisher, New Delhi.
6. S. N. Maheswari, Vikas Publishing House, New Delhi.
7. Sharma and Gupta, RBD Publishing House, Jaipur.
8. Khatik S. K., Jitendra Saxena K, Extol Publication, Bhopal.
9. Gangwar Sharda, Himalaya Publishing House, Agra.