Unit 3

Branch Accounts

Question Bank

Q1) Prepare Branch Account from the following particulars. Branch makes only cash sales:

Particulars                                                   Amount (T)

Opening stock                                                    2,450

Opening petty cash                                                70

Outstanding salary for previous year                250

Goods sent to branch                                        48,000

Cash sales                                                            58,500

Cash sent for branch expenses                        3,750

Closing balance of petty cash                            70

Closing stock has not been ascertained. Management gets commission10% on net profit before charging such commission. Branch sells goods after adding 25% profit on the cost prize.

A1)

Branch Account

Closing Stock = Opening Stock + Goods Sold -Cost of Goods Sold

2,450+48,000-(58,500 x 100)/125

= 2,450 +48,000-46,800 = 50,450-46,800  3,650

Commission = {250 + 58,500+3,660+70-(2,450+70 +48,000+3,750)) * 10/100 = 820

Q2)  What is Stock and Debtors Method?

 A2) Profit or loss of a Branch can be found out by preparing Branch Account which has been discussed earlier, but there is another method for the same purpose. This method is known as Stock and Debtors Method. When goods are supplied to Branch at Invoice Price only in that case this method is useful.

Under this method following accounts are opened in the books of Head Office for Branch:

1. Branch Stock Account.

2. Goods sent to Branch Account.

3. Branch Debtors' Account.

4. Branch Expenses Account.

5. Branch Adjustment Account.

6. Stock Reserve Account.

Branch Stock Account is debited with-(a) Opening Stock, b) Goods Supplied to Branch,

Goods Returned by Customers, (d) Goods transferred by another branch to the branch in

which this branch stock accountis prepared. It is credited with-(a) Cash Sales, (b) Credit Sales,

(c) Goods Spoiled or stolen away etc., (d) Goods Returned to Head Office by Branch, (e) Goods

transferred by this branch to another branch,  Closing Stock of this account and balance of this account is transferred to Branch Adjustment Account.

Branch Expenses Account: All expenses incurred by Branch are recorded in the debit side

Branch Debtors Account: This account is prepared in the same way as has been discussed

Branch Adjustment Account: This account is debited with-

(a) Balance of Branch Expenses Account.

(b) Goods Spoiled.

(c) Difference between Invoice Price and Cost Price of the Closing Stock.

(d) Difference between Invoice Price and Cost Price of goods returned by Branch to Head Office.

(e) Difference between Invoice Price and Cost Price of the goods transferred by this branch to another branch. It is credited with-{a) Difference between Invoice Price and Cost Price of Opening Stock.

(f) Difference between Invoice Price and Cost Price of Goods Supplied to Branch.

(g) Difference between Invoice Price and Cost Price of the goods transferred by another branch to this branch. Balance of this account indicates profit or loss.

Q3) What is Final accounts Method?

A3) FINAL ACCOUNTS METHOD-

This method is used by those branches which are either of medium category or higher category. In this method:

i) Branch Trading and Profit & Loss Account

i) Branch Account is prepared. The Branch Account prepared under this method is of the nature of personnel Account. The assets & liabilities are also shown in Branch Accounts.

The Branch Trading and Profit & Loss Account is prepared on the basis of cost. Hence opening stock, closing stock and goods sent to Branch account if given at invoice piece are always shown at cost. For this the inflated price is reduced from the invoice price. The goods in transit sent by head office to branch should be shown along with closing stock at original cost. The goods returned by the branch should be deducted from the value of goods supplied to branch and the balance should thus be shown in debit side.

Q4) What is WHOLESALE BRANCH METHOD?

A4) When the manufacturer sells goods to the whole seller then the manufacturer does not get the amount of profit which the whole seller gets by selling them to retailers or direct to eon summers. 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 whole seller 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 profit due to wholesale and profit

due to retail business of the branch. Wholesale price is always less than retail price. If for instance, the Cost Price is T 100 and Wholesale Price is F 115 and Retail Price is 123, in this case Branch has made a profit of F 23, i.e., 123- 100; but the fact is that real profit of the Branch is only ? 8, i.e., 123-ll5, because by selling to whole sellers F 15 profit would have been made by Head Office. Contribution of Branch is only F 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.

Q5) What is INDEPENDENT BRANCH?

A5) 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

ii) Receipt of Cash from Head Office: Cash Account is debited and Head Office Account is

iii) Receipt of Goods from Head Office: Goods received from Head Office Account is debited. If a lots of goods are taken from Head Office, such goods are recorded in a separate book credited. If a lots 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 Ofñce, in Head Office books Branch Account is debited and Cash Account is credited. When information of purchase of fixed asset by Head Ofice 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 Ofice is made for Branch fixed assets following is the entry for depreciation in the books of Head Ofice

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

Q6) What is foreign branch?

A6) FOREIGN BRANCH

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 open ingrate.

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 1rial Balance is prepare

with converted amounts, generally it does not tally, its balance is treated as Difference Exchange. If the amount of difference is less it is taken to Profit and Loss Account but if the difference is a big amount, it is transferred to Exchange Fluctuation Account and is taken to Balance Sheet.

Q7) What is branch account?

A7) 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 controlling 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 efficiency 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 whiCn

always above Cost Price.

4) Independent Branches: These Branches receive goods from the Head Office and may

manufacture or purchase goods from the market also. They are independent in all respects

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 whole seller 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 whole sellers.

Q8)  What is inter branch transaction?

A8) Inter branch transactions refer to the transfer of funds between the branches of the same bank. So if you hold an account in SBI and you have to transfer funds to someone else’s bank account that is also in SBI but the branch is different. It refers to the inter branch transactions. The process is same as RTGS and NEFT fund transfer.

An inter-branch transaction occurs when one branch of an organization is involved in a transaction with another branch of the same organization. Branches engaging in transactions with one another debit and credit each other as they would if there were no corporate relationship between them.

Q9) What is dependent branch ?

A9)  Dependent Branch-

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:

a)      The branch receives goods from Head Office. Only those goods supplied by the Head office will be dealt (sold) by branch.

b)     Goods may be supplied to Head office at Cost price/Invoice price

c)      Cash sales and collection from debtors are periodically remitted to the Head office.

d)     Branch expenses like salary, rent, etc. are paid/met by the Head office.

e)      The head office separately sends cash to the branch for meeting expenses.