WHAT IS BRANCH? The aim of every business is to grow and increase its sales volume so as to earn more and more profits. To achieve this objective the.

WHAT IS BRANCH?

The aim of every business is to grow and increase its sales volume so as to earn more and more profits. To achieve this objective the strategy is to make market its products/services over a large territory, which is possible only if the business decide to split its business into certain divisions or parts. These are called branches. For example, Bank of Punjab Ltd. With its registered head office at Chandigarh has opened up its branches in different sectors of Chandigarh as well as in different cities all over India. Likewise, Bata Shoe Co., State Bank of India LIC Housing Finance, Tata Finance Ltd., etc. have many branches all over the country.

TYPES OF BRANCHES

HOME BRANCHE

S

FOREIGN BRANCHES

DEPENDENT BRANCHES

INDEPENDENT BRANCHES

HOME BRANCHESWhen a branch is opened in the same

country where the head office is registered, it is called a home branch. Home branch are of two types-

(a) Dependent branches- The branch that do not maintain a complete record of its transactions are called ‘Dependent branches’.

(b) Independent branches- Independent branches are those branches which maintain a complete record of its transactions.

IMPORTANT TERMS1. INTER-BRANCH TRANSACTIONS- When a

branch sends goods or cash to another branch, it is called inter-branch transactions. Examples- Delhi branch sends goods to Agra branch etc.

Accounting treatment: The best way to deal with inter-branch transactions is to record these transactions by the concerned branches through the head office. This can be illustrated with the help of following example:

1. Agra branch sends goods to Delhi branch for Rs.5000.

This is a inter branch transaction and will be recorded by the head office and concerned branches as follows:

Head office books

Agra branch Delhi branch

Delhi branch A/c Dr. 5000

To Agra branch A/c 5000

(Being goods transferred from agra to delhi branch)

Head office A/c Dr. 5000

To goods sent to branch A/c 5000

(being goods sent to Delhi branch)

Goods from branch A/c Dr. 5000

To head office A/c 5000

(being goods received from Agra branch)

GOODS IN TRANSIT: When the goods sent by head office are not received by the branch till the date of closing of books of accounts, those goods are called goods in transit.

CASH IN TRANSIT: It is quiet common that the head office and the branch send cash to each other at regular intervals. Suppose, Ludhiana branch sends cash to head office on 30th march. The branch will immediately debit ‘Head office account’ and credit ‘cash account’. But the head office will not pas the entry for receipt of cash till cash is actually received. Now further suppose that the head office receives the cash on 2nd April. The head office will pass entry on 2nd April when the cash is actually received. For a few days, therefore, the two accounts will show different balances.

Procedure for reconciliation

• Compare the balance of ‘branch account’ in the head office books with the balance of ‘head office’ in the books of branch. If the two balances are same, there is no need for reconciliation. But in case of difference, the following steps must be followed.

• Find out the reason for the difference in balances.

• Pass the following adjustment entries either in the books of head office or in the books of branch, but not in both sets of books.

Reasons for the difference

If the adjustment entry is passed in the books of head office

If the adjustment entry is passed in the books of branch

(a) Goods in transit

Goods in transit A/c Dr.To branch A/c

Goods in transit A/c Dr.To head office A/c

(b) Cash in transit

Cash in transit A/c Dr.To branch A/c

Cash in transit A/c Dr.To head office A/c

THERE ARE THREE METHODS OF KEEPING ACCOUNTS OF DEPENDENT BRANCHES:

• DEBTORS SYSTEM

• FINAL ACCOUNT SYSTEM

• STOCK AND DEBTOR SYSTEM

This system is used for branches of small size. Under this method the head office prepares a ‘branch account’ separately for each branch. Branch account is a nominal account which gives us the profit or loss made at branch. The journal entries to be made at the head office under this system are as follows:

JOURNAL ENTRIES

1 For recording branch assets at the beginning of the year

Branch A/c Dr.To Branch Assets A/c

2 For recording branch liabilities at the beginning of the year

Branch liabilities A/c Dr.To branch A/c

3 For goods sent to branch

Branch A/c Dr.To goods sent to branch A/c

4 For goods returned by branch to H.O.

Goods sent to branch A/c Dr.To Branch A/c

5 For cash sent to branch for expenses

Branch A/c Dr.To cash/bank A/c

6 For cash remitted by branch to H.O.

Cash/bank A/c Dr.To branch A/c

7 For recording branch assets at the end of the year

Branch assets A/c Dr.To branch A/c

8 For recording branch liabilities at the end of the year.

Branch A/c Dr.To branch liabilities

9 For closing branch account

(a)If profit (i.e. credit side total > debit side total)Branch A/c Dr.To general P & L A/c(b) If loss (i.e. credit side total < debit side total)General P & L A/c Dr.To Branch A/c

Let us take an example to understand the format of branch account:

The Atlas Cycles Co. has a branch at Rohtak. Goods are invoiced to the branch at cost plus 25%. Branch is instructed to deposit cash every day in the head office account in the bank. All the expenses are paid by cheque by the H.O. except petty cash expenses which are paid by the branch manager. From the following particulars, prepare the branch account in the books of head office:

Stock on 1st April, 2000 5000Stock on 31st March, 2001 6000Sundry debtors on 1st April, 2000 2800Sundry debtors on 31st March,2001

3600

Cash sales for the year 21600

Credit sales for the year 14000

Cash remitted to the H.O. 30000

Machinery purchased by the branch

2400

Goods invoiced from the H.O. 36400

Expenses paid by the branch 240Expenses paid by the H.O. 3280H.O. sent cash to purchase safe for the branch

2600

BRANCH ACCOUNTSolution:

To branch stock 5,000

By cash remitted 30,000

To branch debtors

2,800

By St. reserve (5000 x 1/5)

1,000

To goods sent to branch

36,400

By goods sent to branch (36400 x 1/5)

7,280

To bank (expenses)

3,280

By branch stock 60,000

To bank (safe) 2,600

By branch debtors 3,600

To stock reserve (6000 x 1/5)

1,200

By branch machinery

2,400

To general P&L A/c (Profit)

3,760

By branch safe 2,600

By branch cash 2,160

55,040

55,040

Working notes:

(i) calculation of cash received from debtors:

To balance b/d

2,800

By cash (bal. fig.)

13,200

To sales (credit)

14,000

By balance c/d

3,600

16,800

16,800

DEBTORS ACCOUNT

(ii) Calculation of closing cash balance:

To sales 21600 By cash remitted to H.O.

30000

To debtors

13200 By machinery purchased

2400

By petty expenses

240

By balance c/d

2160

34800 34800

Under this system the profit or loss made by the branch is ascertained by preparing the ‘branch trading and profit & loss account’. This account is prepared on memorandum basis and do not form the part of the double entry system. After preparing this account, the next step is to incorporate profit or loss made by branch as well as the branch assets and liabilities in the books of head office. This is done by preparing the ‘Branch Account’ in the books of head office. The branch account under the present system will be in the nature of a personal account and must be distinguished from the branch account prepared under the debtors system in which case is a nominal account.

This method can be explained by an example which is given below:

A Delhi merchant has a branch at madras to which he supplies goods at cost + 25%. The branch keeps its own sales ledger and transmits all cash received to head office every day. All expenses are paid from the H.O. for the year ended 31st December 1999, the transactions of the branch were as follows:

Stock on 1-1-1999

11000

Return inwards 500

Debtors on 1-1-1999

1700

Cheques sent to branch:

Petty cash on 1-1-1999

100 Rent 600

Cash sales 2650

Wages 200

Goods sent to branch

20000

Other expenses 900

Collection on ledger accounts

21000

Stock on 31-12-1999

13000

Goods returned to H.O.

400 Debtors on 31-12-1999

2000

Bad debts 300 Petty cash on 31-12-1999

125

Allowances to customers

250 (including miscellaneous income of Rs. 25 not

remitted to H..O.)

Prepare the branch trading and profit & loss A/c and branch account for the year ended 31st Dec, 1992.

Branch trading and profit and loss accountfor the year ended 31st December 1999

To opening stock (cost)

8800

By sales:

(11000-2200)

Cash 2650

To goods sent to branch

Credit 22350

(20000-4000) 16000

25000

Less: returns to H.O. 320

15680

Less: returns inward 500

24500

(400-80) By closing stock 10400

To wages 200 (13000-2600)

To gross profit c/d

10220

Solution:

34900

34900

To bad debts 300 By gross profit b/d

10220

To allowances 250 By miscellaneous income

25

To rent 600

To other expenses

900

To net profit 8195

10245

10245

BRANCH ACCOUNT (Personal)

To balance b/d 10600

By remittances to H.O.

23650

(8800+1700+100)

(2650+21000)

To goods sent to branch less returns (at cost)

15680

To bank (expenses)

1700

By balance c/d 12525

To profit 8195

(10400+2000+125)

36175

36175

Working notes: Calculation of credit sales

Branch debtors A/cTo balance b/d

1700 By cash 21000

To sales (credit) (bal. fig.)

22350

By bad debts 300

By return inwards

500

By allowances

250

By balance c/d

2000

24050

24050

Under this system, the H.O. maintains the following accounts for keeping records of branch transactions:

1.Branch stock account

2.Branch debtors account

3.Branch expenses account

4.Branch adjustment account (for calculation of gross profit or gross loss)

5.Branch profit & loss account (for calculation of net profit or net loss)

6.Goods sent to branch account

The journal entries to be made at the head office under this system are as follows:

JOURNAL ENTRIESThe journal entries to be made at the head office under this system are as follows:

1 For goods sent to branch

Branch stock A/c Dr. To goods sent to branch A/c

2 For goods returned by branch to H.O.

Goods sent to branch A/c Dr. To branch stock A/c

3 For sales made by branch

(a) If cash sales:Cash/bank A/c

Dr. To branch

stock A/c(b) If credit sales:Branch debtors A/c

Dr. To branch

stock A/c

4 For goods returned by branch debtors

Branch stock A/c Dr. To branch debtors A/c

5 For cash received from debtors

Cash/bank A/c Dr. To branch debtors A/c

6 For discount allowed to debtors

Branch expenses A/c Dr. To branch debtors A/c

7 For bad debts Branch expenses Dr. To branch debtors A/c

8 For goods returned by branch directly to head office

Goods sent to branch A/c Dr.Branch adjustment A/c Dr. To branch debtors A/c

9 For agreed allowances to customers off selling price already taken into account while invoicing

Branch adjustment A/c Dr. to branch Stock A/c

10 For loss or shortage of stock

( i) if normal lossBranch adjustment A/c Dr. To branch stock A/c(ii) If abnormal lossBranch adjustment A/c Dr.Branch profit & loss A/c Dr. To branch stock A/c

11 For insurance claim recoverable

Insurance claim recoverable A/c Dr. To branch P & L A/c

12 For surplus in stock

Branch stock A/c Dr. To branch adjustment A/c To branch P & L A/c

13 For goods sent by one branch to another branch

Goods sent to branch A/c Dr.Branch adjustment A/c Dr. To branch stock A/c

14

For goods received by one branch to another branch

Branch stock A/c Dr. To goods sent to branch A/c to branch adjustment A/c

15

For apparent profit over the invoice price

Branch stock A/c Dr. To branch adjustment A/c

16

For branch expenses paid in cash

Branch expenses A/c Dr. To cash A/c

17

For closing ‘branch expenses A/c’

Branch adjustment A/c Dr.Branch P & L A/c Dr. To branch expenses A/c

18

For closing ‘goods sent to branch A/c’

Goods sent to branch A/c Dr. To purchases or trading A/c

19

For loading (a)For loading of opening stock:

Stock reserve A/c Dr.

To branch Adjustment A/c

(b) For loading of goods sent to branch

Goods sent to branch A/c Dr.

T o branch adjustment A/c

(c) For loading of closing stock

Branch adjustment A/c Dr.

To stock reserve A/c

20

For closing ‘branch adjustment A/c’

Branch adjustment A/c Dr. To branch P & L A/c

21

For ‘branch P & L A/c’

Brasnch P & L A/c Dr. To General P & L A/c

This method can be explained by taking an example:Indian Soap Mills Ltd. Has two branches at Agra and Goa. Goods are invoiced to branches at cost + 50%. Branches remit all cash received to H.O. and all expenses are met by H.O. from the following particulars, prepare the necessary accounts, on the Stock & Debtors System, to show the profit earned at the branches:

AGRA GOA

Stock on 1st April, 1990 (invoice price)

9300 15600

Debtors on 1st April, 1990 6800 8700

Goods sent to branch (cost price)

34000 36000

Sales at branches:

Cash sales 25010 35000

Credit sales 31000 30100

Cash collected from debtors 30400 29800

Goods returned by debtors 1200 1500

Goods returned by branch to H.O.

1500

Goods transferred from Goa to Agra

2100 2100

Surplus of stock 300

Shortage of stock 450

Discount allowed to customers 200 350

Expenses at branches 5400 6700

BRANCH STOCK ACCOUNT

Particulars Agra

Goa Particulars Agra

Goa

To bal b/d 9300

15600

By cash 25010

35000

To goods sent to branch

51000

54000

By branch debtors

31000

30100

To braqnch debtors

1200

1500

By goods sent to branch

1500

-

To goods sent to branch A/c

By goods sent to branch

(goods received from Goa)

2100

- (goods sent to Agra)

- 2100

To branch adjustment

By branch adjustment

(loading of surplus)

- 100 (loading of shortage)

150 -

To branch P & L A/c

By branch P & L A/c

(cost of surplus)

- 200 (cost of shortage)

300 -

By balance c/d 5640

4200

63600

71400

63600

71400

Branch Debtors A/cTo balance b/d

6800

8700

By cash 30400

29800

To branch stock A/c

31000

30100

By branch stock (returns)

1200

1500

By branch exp. (discount)

200 350

By balance c/d

6000

7150

37800

38800

37800

38800

Branch expenses A/cTo branch debtors

200 350 By branch P & L A/c

5600

7050

To cash 5400

6700

5600

7050

5600

7050

Branch adjustment A/cTo stock reserve

1880

1400

By stock reserve

3100

5200

To branch stock

By goods sent to branch A/c

17200

17300

(loading of shortage)

150 - By branch stock A/c

To branch P& L

18270

21200

(loading of surplus)

- 100

20300

22600

20300

22600

Branch P & L A/cTo branch expenses A/c

5600

7050 To branch adj. A/c

To branch stock A/c

(gross profit)

18270

21200

(cost of shortage)

300 - By Br. stock A/c

To net profit 12370

14350

(cost of surplus)

- 200

18270

21400

18270

21400

A branch is said to be independent when it keeps a full system of accounting and maintains its own books of accounts. In other words, the branch carries on business as an independent unit, records all the transactions in its own books, extracts its own trial balance and prepare its own trading and profit & loss account and balance sheet.

Books of accounts: an independent branch generally maintains the following books of accounts:

(a)Journal (e) petty cash book

(b)Cash book (f) purchase book

(c)Ledger (g) sales book

(d)Stock register

Procedure for incorporating branch accounts in the books of H.O.

Under this method the following journal entries are passed:

1.For incorporation debit side items of trading account

Branch trading A/c Dr.

To Branch A/c

2.For incorporating credit side items of trading account

Branch A/c Dr.

To branch trading A/c

3. For closing branch trading account

(a) If gross profit

Branch trading A/c Dr.

To branch P & L A/c

(b) If gross loss

Branch P & L A/c Dr.

To branch trading A/c

4.For incorporating debit side items of P & L A/c

branch P & l A/c Dr.

To Branch A/c

5. For incorporating credit side items of P & L A/c

Branch A/c Dr.

To branch P & L A/c

6. For closing branch P & L A/c

(a) If net profit

Branch P & L A/c Dr.

To general P & L A/c

(b) If net loss

General P & L A/c Dr.

To branch P & L A/c

7. For incorporating branch assets

Branch assets A/c Dr. (individually)

To Branch A/c

8. For incorporating branch liabilities

Branch A/c Dr.

To branch liabilities A/c (individually)