Branch Accounting (including Foreign Branch)

Table of contents

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Branch Accounting

Branch is an extended location of an organisation, other than its head office, where businesses of similar or related to the organisation are conducted. Usually a organisation opens branches for the following purposes:

• For profit making organisations: Through opening a branch organisation can offer visibility and brand exposure which can positively influence its profits.
• For non-profit making organisations: To satisfy a large number of stakeholders needs by increasing its outreach.

The typical characteristics of a branch are:

• A branch is not a separate legal entity, but rather an extended unit of an organisation.
• All branches are controlled by their head office; hence a branch is completely dependent on its head office for its operation and decision making.
• An organisation can open a branch in the same country where it is registered or in any other country.
• Branches are opened by both profit making organisations (viz. departmental stores, hotels etc.) and nonprofit making organisations (viz. charitable institutions) as well.

 Classification of Branches

• On the basis of geographical area of operation branches are of two types
• Domestic Branch: Domestic branch is mainly opened and operated in the same country where the organisation is registered and has its head office.
  Example: State bank of India and its different branches all over the India
• Foreign Branch: Foreign branch is opened and operated in a country other than the country where the organisation is registered and has its head office.
  Example: Dubai branch of State bank of India.

Moreover, depending on the level of control between the branch and head office, a domestic branch can be further classified into the following two types:

• Dependent Branch: This type of branch is completely dependent on its head office in respect of its operation, administration and further maintenance of its accounts.
• Independent Branch: It maintains its own books of accounts and records its transactions independently.

Branch Accounting

• Branch accounting refers to the recording and maintenance of each transaction taken place by a branch to determine the financial results and also get to know the financial position of a branch.
•  For the dependent branch, accounting is done by the H.O and while for an independent branch the accounting is done at the branch itself.
• Branch accounting is based on ‘Responsibility Accounting’ system, where the branches act as a ‘Revenue Centre’ in addition to being ‘Cost Centre’.
• The transactions between branch and head office are recorded; and branch and other parties. At the end of each financial period it ascertains the financial result of each branch viz. profit and loss.

Some of the common transactions that are usually involved in branch accounting include goods sent by the H.O and return of the goods, if any, assets sent by H.O, cash remitted by H.O for meeting the branch expenses, sales effected by branch, branch proceeds sent to H.O at time intervals, Goods sent by the H.O for sale; such goods may be sent either at cost price or invoice price:

Methods of Branch Accounting

Accounting for Dependent Branches: The recording of transactions take place at branch and maintenance of accounts of each branch is done by the H.O. Any dependent branch follows any of the following four methods of accounting:

1. Debtors Method or Synthetic Method.
2.  Stock Debtors method or Analytical Method.
3.  Final Accounts Method (Cost Basis)
4.  Final Accounts Method (on Whole Sale Price Basis).

Debtor Method or Synthetic Method

Under this method of accounting, head office maintains separate branch account for each branch which appears as ‘Debtor’ in the books of the H.O; hence the H.O has the right to claim the money arising out of the operations carried out by the branch after meeting the necessary expenses of branch. Primarily H.O adopts Debtor Method or Synthetic Method for its dependent branch accounting which generally small scale and size. This method is also called the ‘Synthetic Method’

The typical characteristics of this method of accounting for dependent branches are:

• Two ledger accounts are maintained for recording the transactions, namely Branch Account and Goods Sent to Branch Account.
• In the Branch Account only the transactions between the H.O and branch are to be recorded.
• Under this method, all transactions relating to a branch are recorded and maintained in the Branch Account.

The Branch Account is by nature a nominal account which ascertains the net profit or loss of the branch.

When goods are sent by H.O to branch at ‘Cost’ that are to be accounted at cost price whereas, when goods sent by H.O at ‘Invoice Price’ that are to be accounted at Invoice Price and load thereof has to be cancelled to ensure the proper result. The journal entries of the various transactions under this method are:

 ● Common for Cost or Invoice Price

Goods sent to branch by the head office	Branch A/c
	To Goods sent to branch A/c
Cash sent to branch by head office for meeting different expenses.	Branch A/c
	To Bank/Cash A/c
Cash remitted by branch to head office on account of sale	Bank/Cash A/c
	To Branch A/c
Goods returned by branch to the head office.	Goods sent to branch A/c
	To Branch A/c
Abnormal loss in the branch.	Abnormal Loss A/c
	To Branch A/c
Claim received from insurance company on account of abnormal loss.	Bank/Cash A/c
	To Abnormal Loss A/c
Actual loss due to abnormal loss	General P&L A/c
	To Abnormal Loss A/c

● Additional entries (Only if goods sent at invoice price

To reduce load on opening stock.	Stock Reserve A/c
	To Branch A/c
To reduce load on goods sent to branch by the head office.	Goods sent to branch A/c
	To Branch A/c
To reduce load on goods returned by branch to the head office	Branch A/c
	To Goods sent to branch A/c
To reduce load on abnormal loss in the branch	Branch A/c
	To Abnormal Loss A/c
To reduce load on closing stock	Branch A/c
	To Stock Reserve A/c

Transactions which do not appear in Branch Account

The following transactions do not appear in the Branch Account:

1. Expenses incurred by Branch out of cash, since either reduced cash balance at the end is decreased or the liability at the end is increased.
2. Purchase of Goods/Fixed Assets by Branch, since book value of Goods/Fixed assets at the end is increased and either the amount of remittances is reduced or the Creditors at the end are increased.
3. Sale of Goods/Fixed Assets by Branch since book value of Goods/Fixed assets at the end is decreased and either the amount of remittances is increased or the Debtors at the end are increased.
4. Bad debts, discount allowed, sales returns by customers to branch, cash received by Branch from Branch Debtors, etc., since the debtors at the end appear at the adjusted figure.
5. Depreciation and Profit/Loss on sale of fixed assets since fixed assets at the end appear at the adjusted figure.
6. Abnormal Losses since stock at the end appears at the adjusted figure.

 Illustration 1

DK Traders of Assam has a branch at Mumbai. The branch receives all supply of goods from the head office (Assam). From the following particulars relating to Mumbai Branch for the year ending Mar.31, 20X2. Prepare a Branch Accounts and a Goods Sent to Branch Account in the books of the Head office.

Particulars	(₹)	Particulars	(₹)
Stock at Branch on 1.04.20X1 (at cost):	8,400	Bills Receivable received from Debtor	20,000
Branch Debtor on 1.04.20X1	6,200	Cash sent to branch for exp.
Petty Cash at Branch on 1.04.20X1:	200	- Salaries	3,800
Goods Sent to Branch		- Petty exp.	400
during the year (at cost):	80,000	Stock at Branch on 31.3.20X2 (at cost)	6,400
Goods returned by the branch	800	Petty Cash at Branch on 31.3.20X2	300
Cash Sales during the year	72,000	Branch Debtor on 31.3.20X2	?
Credit Sales during the year	46,000
Cash received from Debtor	18,800

Solution:

 Books of DK Traders (Assam H.O.) Mumbai Branch Account 

Dr.					Cr.
Particulars		(₹)	Particulars		(₹)
To, Balance b/f:		8,400	By, Bank A/c [Remittance by branch]
Stock (at cost)		6,200	Cash Sales	72,000
Debtors		200	Collection from Debtors	18,800	90,800
To, Goods Sent to Branch A/c [at  cost]		80,000	By, Goods Sent to Branch A/c		800
To, Bank A/c [Cash sent]			[Returned by branch]
Salaries	3,800		By, Balance c/f
Petty Expenses	400	4,200	Stock (at cost)		6,400
To, General P/L A/C [Branch Transfer]		32,700	Debtors [WN:1]		13,400
			Petty Cash		300
			Bills Receivable		20,000
		1,30,700			1,30,700

Goods Sent to Branch Account

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To Mumbai Branch A/c   [Returned by branch]	800	By Mumbai Branch A/c  [Cost of goods sent]	80,000
To Trading/ Purchases A/c [Transfer]	79,200
	80,000		80,000

Working Notes:

1. Closing Balance of Branch Debtors:

Memorandum Branch Debtors Account

Particulars	(₹)	Particulars	(₹)
To Opening Balance	6,200	By Cash collected	18,800
To Credit Sales	46,000	By Bills Receivable Received	20,000
		By Closing Balance [B/fig]	13,400
	52,200		52,200

Illustration 2

S Ltd. Sends goods to Siliguri Branch Account at an invoice price (IP) so as to show 20% profit on such IP. Branch sale are partly on cash and partly on credit. From the following details prepare Branch Account in the books of the Head Office

Opening stock at Branch at invoice price	8,000	Cash received from customers	6.50,000
Closing stock at Branch at invoice price	8,500	Discount allowed to customers	20,000
Goods sent to Branch at cost price	4,80,000	Closing balance of Debtor	92,000
Goods returned to H.O at invoice price	40,000	Opening balance of Debtor	1,00,000

Sales:

Credit – ₹6,80,000

Cash –   ₹1,10,000

Bad debts	2,000
Returns from Customers	14,000
Sundry Branch Exp.	1,50,000

Solution:

 Books of S Ltd. (……H.O.)

Particulars	(₹)	Particulars	(₹)
To, Balance b/f		By, Stock Reserve A/c  [Load on opening Stock Reserve: ₹8,000×20%]	1,600
Stock [at IP]	8,000	By, Goods sent to branch A/c  [Load on goods sent: 6,00,000 × 20%]	1,20,000
Debtors	8,500	By, Goods sent to branch A/c [Returns by Branch to H.O: at IP]	40,000
To, Goods sent to branch A/c  [goods sent at IP: ₹ 4,80,000 ×100/80]	6,00,000	By, Bank A/c  [Remittance from branch]
To, Goods sent to branch A/c  [Load on goods returned : ₹40,000 × 20%]	8,000	Cash sales ₹ 1,10,000
To, Bank A/c [Remittance for branch expenses]	1,50,000	Receipt from customers ₹6,50,000	7,60,000
To, Stock Reserve A/c   [Load on closing Stock Reserve: 8500×20%]	1,700	By, Balance c/f Stock [at IP]	8,500
To, General P/L A/c [Branch NP transferred]	1,54,400	Debtors	92,000
	10,22,100		10,22,100

 Illustration 3

Prepare a Branch account in the books of Head Office from the following particulars for the year ended 31st March, 20X2 assuming that H.O. sold goods at cost price 25%.

Particulars	Amount ₹	Particulars	Amount ₹
Stock on 1.4.20X1 (I.P.)	12,500	Bad Debts	2,000
Debtors (,,)	5,000	Allowances to customers	1,000
Purchase (,,)	1,000	Returns Inwards	1,000
Goods sent to branch (I.P.)	40,000	Charges sent to Bank:
Goods return to H.O. (I.P.)	5,000	Rates & Taxes	3,000
Cash Sales	12,000	Salaries	8,000
Cash received from Debtors	30,000	Misc. Exp.	1,000
		Stock on 31.03.20X2 (I.P.)	15,000
		Debtors (,,)	4,000
		Petty Cash (,,)	1,000

Solution:

In the books of H.O.

Branch Account

Dr.					Cr.
Particulars	Amount (₹000)	Amount (₹000)	Particulars	Amount (₹000)	Amount (₹000)
To Balance b/d			By Stock Reserve (Loading)		2.5
Stock	12.5		,, Bank A/c:
Petty Cash	5		Cash Sales	12
,, Goods sent to branch	1	18.5	,, Cash Received from Debtors	30	42
,, Bank A/c:		40	,, Goods sent to branch (Return to H.O.)		5
Rates & Taxes	3		,, Goods sent to branch (Loading)		8
Salaries	8		By Balance c/d
Misc. Expenses	1	12	Stock	15
,, Goods sent to Branch (Loading on returns)		1	Debtors	4
,, Closing Stock Reserve (₹ 15,000*1/5)		3	Petty Cash	1	20
,, General Profit & Loss A/c		3
		77.5			77.5

Note: Here, loading is 25/125 = 1/5  of invoice price Hence, loading on opening stock will be ₹ 12,500 x 1/5

= ₹ 2,500 and so on.

Stock-Debtors Method or Analytical Method

Under this method, the two primary assets of a branch namely Stock and Debtors are accounted for in full details. All transactions relating to a branch are recorded and maintained in details through separate accounts; hence it is also called ‘Analytical Method’. Under this method, specific sets of following ledger accounts namely are maintained: Branch Stock Account, Branch Debtors Account, Goods Sent to Branch Account, Branch Adjustment Account, Branch Cash Account, Branch Expenses Account, Branch Profit and Loss Account; and Branch Fixed Assets Account. In addition to the above ledger account the Branch Stock Adjustment Account is required to be maintained in case when goods are sent at Invoice Price (IP) to eliminate the ‘load factor’ arising from IP. Branch Stock Adjustment Account records the transactions relating to stock/goods involving IP, (viz. Opening & Closing Branch Stock, Goods sent to Branch, Goods Returned to Branch Abnormal loss). Branch Stock Adjustment Account reflects the gross Profit/loss of the branch. Thus, this method determines both the gross profit/loss and net profit/loss of a branch.

Branches having large scale of operations and required detailed recording of transactions adopt Stock-Debtors Method or Analytical Method of Branch Accounting.

 Journal Entries

1.	For goods sent to branch
	Branch Stock A/c
	To, Goods Sent to Branch A/c
2	For goods returned by branch to head office
	Goods Sent to Branch A/c
	To, Branch Stock A/c
3	For goods received from other branches
	Branch Stock A/c
	To, Goods Sent to Branch A/c.
4	For goods transferred to other branches on advice of head office
	Goods Sent to Branch A/c
	To, Branch Stock A/c
5	For Cash Sales
	Bank A/c
	To, Branch Stock A/c
6	For Credit Sales
	Branch Debtors A/c
	To, Branch Stock A/c
7	For bills accepted by Branch Debtors
	Bills Receivable A/c
	To, Branch Debtors A/c
8	For cash collected from debtors
	Bank A/c
	To, Branch Debtors A/c
9	For bad debts, discount allowed, etc.
	Branch Expenses A/c
	To, Branch Debtors A/c
10	For depreciation on branch fixed assets
	Branch Expenses A/c
	To, Branch Fixed Assets A/c
11	For branch expenses incurred in cash
	Branch Expenses A/c
	To, Cash/Bank A/c
12	For transferring branch expenses to Branch Profit and Loss Account/Branch Adjustment Account
	Branch Profit and Loss A/c
	Or, Branch Adjustment A/c
	To, Branch Expenses A/c
13	For shortage in stock/pilferage/theft
	(i) Shortage in Stock/Pilferage/Theft A/c
	To, Branch Stock A/c
	(ii) Branch Adjustment A/c
	Branch Profit and Loss A/c
	To, Shortage in Stock/Pilferage/Theft A/c
14	For loss by fire/loss in transit
	(i) Accidental Loss A/c
	To, Branch Stock A/c
	(ii) Branch Adjustment A/c (Loading)
	Bank A/c (insurance claim received)
	Insurance Company (claim yet to receive)
	General Profit and Loss A/c
	To, Accidental Loss A/c
15	For loading on opening stock including stock in transit at the beginning
	Stock Reserve A/c
	To, Branch Adjustment A/c
16	For loading on net goods sent
	Goods Sent to Branch A/c
	To, Branch Adjustment A/c
17	For loading on closing stock including stock-in-transit at the end
	Branch Adjustment A/c
	To, Stock Reserve A/c
	[In the Balance Sheet of head office, the Stock Reserve is shown as a deduction from branch stock at the end]
18	For transferring gross profit
	(i) Branch Adjustment A/c
	To, Gross Profit A/c
	(ii) Gross Profit A/c
	To, Branch Profit and Loss A/c
19	For transferring net profit of the branch
	Branch Profit and Loss A/c
	To, General Profit and Loss A/c    (For net loss, reverse entry
20	For closing Goods Sent to Branch A/c
	Goods Sent to Branch A/c
	To, Purchases A/c [Trader]
	To, Trading A/c [Manufacturer]

 Illustration 4

M/S C and Sons has a branch at Kolkata where it sends goods at cost plus 50%. From the following particulars regarding the branch, prepare Branch Stock Accounts, Branch Adjustment Account, Branch Debtor Account and Branch Profit & loss Account as would appear in the books of C Ltd.’s head office. [Fig. in ₹]

	(₹)		(₹)
Stock at cost (1.04.20X1)	40,000	Sales returned to Branch	6,000
Debtors (1.04.20X1)	36,000	Bad Debts	400
Cash (1.04.20X1)	10,000	Cash remitted to H.O	1,60,000
Goods sent to Branch (at IP)	1,98,000	Expenses paid by H.O	10,000
Sales: Cash: ₹54,0000 credit:	1,58,000	Cash (31.3.20X2)	12,000
Normal loss at cost	4,000	Stock at IP (31.03.20X2)	54,000
		Debtor (31.03.20X2)	60,000

Solution:

Books of M/S C and Sons. (H.O.) Kolkata Branch Stock Account

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To Balance b/f [at IP ₹ 40,000 × 150/100]	60,000	By Branch Cash A/c [Cash sales]	54,000
To Goods Sent to Branch A/c [at IP]	1,98,000	By Branch Debtors A/c [Credit sales]	1,58,000
To Branch Debtors A/c [Sales return]	6,000	By Branch Adjustment A/c [Normal loss – at IP (₹4000 × 150/100)	6,000
To Branch Adjustment A/c [Apparent Gross Profit B/fig]	8,000	By Balance c/f [at IP] [B/fig]	54,000
	2,72,000		2,72,000

NB: The missing figure appearing in the debit-side of Branch Stock A/c has been considered as Apparent Gross Profit and NOT Stock Surplus as the branch has suffered normal loss of stock.

Kolkata Branch Adjustment Account

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Branch Stock A/c [Normal loss]	6,000	By, Balance b/f [Load on opening stock: ₹ 60,000×50/150]	20,000
To, Branch P/L A/c  [Gross profit transferred - B/fig ]	70,000	By, Goods Sent to Branch A/c [Load on goods sent: ₹ 1,98,000 × 50/100]	66,000
To, Balance c/f [Load on closing stock: ₹ 54,000 × 50/150]	18,000	By, Branch Stock A/c [Apparent Gross Profit]	8,000
	94,000		94,000

Kolkata Branch Debtors Account

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Balance b/f	36,000	By, Branch Stock A/c [Sales return]	6,000
To, Branch Stock A/c [Credit sales]	1,58,000	By, Bad Debts A/c	400
		By, Branch Cash A/c [Collection from Debtors B/fig]	1,27,600
		By, Balance c/f	60,000
	1,94,000		1,94,000

Kolkata Branch Profit & Loss Account

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Bad Debts A/c	400	By, Branch Stock Adjustment A/c	70,000
To, Branch Expenses A/c [WN:1]	29,600	[Gross Profit Transferred]
To, General P/L A/c [Branch Net Profit]	40,000
	70,000		70,000

Working Notes:

1. Branch expenses paid by branch 

Kolkata Branch Cash Account 

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Balance b/f	10,000	By, Bank A/c[Cash remitted to Branch]	1,60,000
To, Branch Stock A/c [Cash sales]	54,000	By, Branch Expenses A/c [b/fig]	19,600
To, Branch Debtors A/c [Collection from debtors]	1,27,600	By, Balance figure c/f	12,000
	1,91,600		1,91,600

Kolkata Branch expenses for the year Kolkata Branch Expense Account

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Bank A/c [Paid by H.O]	20,000	By, Branch Profit & Loss A/c – B/fig 39,600	39,600
To, Branch Cash A/c [Paid by Branch-WN1]	19,600
	39,600		39,600

 Illustration 5

Green Ltd. with their H.O. at Kolkata, invoiced goods to their Patna Branch at 20% less than the list price, which is Cost plus 100% with instruction that cash sales are made at invoice price and credit price at list price. From following particulars, prepare Branch Stock account and Branch Stock Adjustment Account for the year ended on 31.3.20X2

Particulars	(₹)	Particulars	(₹)
Stock at cost (1.4.20X1)	4,800	Cash received from Debtors	34,254
Debtors (1.4.20X1)	4,000	Expenses at Branch	6,946
Goods received from H.O. (at IP)	52,800	Remitted to H.O	48,000
Goods returned to H.O.	400	Debtor (31.3.20X2)	9,746
Sales: Credit	40,000	Stock at IP (31.3.20X2)	7,040
Cash	18,400

Solution:

Books of Green Ltd. (Kolkata H.O.) Patna Branch Stock Account 

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Balance b/f [at IP]	4,800	By, Goods Sent to Branch A/c [Goods returned (at IP) – assumed]	400
To, Goods Sent to Branch A/c [at IP]	52,800	By, Branch Cash A/c	18,400
To, Branch Adjustment A/c[Excess Contribution to Gross Profit - WN:3]	8,000	By, Branch Debtors A/c	40,000
To, Stock Surplus A/c [B/fig]	240	By, Balance c/f [at IP]	7,040
	65,840		65,840

NB: Balancing figure appearing in the debit-side of Branch stock A/c has been considered as ‘Stock Surplus’ as the problem involves ‘Excess Contribution to Gross Profit’. 

Patna Branch Adjustment Account

Particulars	(₹)	Particulars	(₹)
To, Goods Sent to Branch A/c [Load: 400 × 60/160]	150	By, Balance b/f [Load on opening stock: ₹4800 × 60/160]	1,800
To, Branch P/L A/c  [Gross Profit transferred – B/fig]	26,900	By, Goods Sent to Branch A/c [Load on goods sent: ₹52,800 × 60/160]	19,800
To, Balance c/f [Load on closing stock: ₹7,040 × 60/160]	2,640	By, Branch Stock A/c [Excess Contribution to Gross Profit]	8,000
		By, Stock Surplus A/c  [Load: ₹240 × 60/160]	90
	29,690		29,690

Working Notes:

1. Relation between Cost Price(CP), Invoice Price(IP) and List Price(LP):

Considering CP=100, LP=100+100% thereof=200. Hence IP= LP Less 20% thereof = 200 – 20% =160.

2. Transactions relating to Branch Debtors:

Patna Branch Debtors Account

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Balance b/f	4,000	By, Bank A/c [Cash received from Debtors]	34,254
To, Branch Stock A/c [Credit sales]	40,000	By, Balance c/f	9,476
	44,000		44,000

3. Excess Contribution to Gross Profit:

Here, the difference between the LP and IP results ‘Excess Contribution to Gross Profit’. It arises only out of the credit sales which have been made at list price.

⸫ Excess Contribution to Gross Profit = ₹ 40,000 × 40/200 = ₹ 8,000

Final Accounts Method

● This method of Branch accounting is applicable for every branch whether dealing with goods or services.

● Features:

• Under this method, a Branch Trading and Profit & Loss Account and a separate Branch Account for recording branch related transactions are prepared and maintained.
• Branch Trading and Profit & Loss Account determines both Gross Profit/Loss and Net Profit/Loss
• This Branch Account follows double entry system which is by nature a personal account.Performa of Branch Trading and Profit & Loss Account

Branch Trading and Profit & Loss Account for the year ended…. 

Dr.					Cr.
Particulars	(₹)	(₹)	Particulars	(₹)	(₹)
To, Opening Stock		***	By, Sales: Cash	***
To, Goods Sent to Branch	***		Credit	***
Less: Returns by Branch	***	***	Less: Returns	***	***
To, Gross Profit  c/d		***	By, Goods-in-Transit		***
			By, Abnormal Loss		***
			By, Closing stock		***
			By, Gross Loss c/d (if any)		***
		***			***

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Gross Loss b/d	***	By, Gross Profit b/d	***
To, Salaries	***	By, Net Loss (if any)
To, Rent & Salaries	***
To, Petty Cash Exp.	***
To, Abnormal loss	***
Less, Insurance claim	***
To, Net Profit	***
	***		***

Branch Account

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Balance B/f		By, Bank A/c (remittance to H.O.)	***
Stock	***	By, Goods Sent to Branch A/c	***
Debtor	***	(Returns by Branch)	***
Petty Cash	***	By, General Profit & Loss A/c	***
To, Goods Sent to Branch A/c	***
To, Bank A/c (remittance)	***	By, Balance c/f	***
To, General Profit & Loss A/c	***
	***		***

Final Accounts Method (on Wholesale Price basis)

● This method of accounting is adopted by those mercantile organisations where both the H.O and Branch sell goods to the customers hence both contributes to the organisation’s total profit.

● Here H.O gets the due credit for profit arising out of the ‘Goods sent to Branch’ and ‘Goods sold to Customers’; whereas Branch gets credit for ‘Goods sold to Customers’ only.

● Under this method, the transactions involving goods movement are valued at different ways in the books of H.O and branch; According to the values different profits take place

• At Cost: Price at which H.O has purchased the goods.
• At Retail Price: It also referred as List Price or Catalogue Price; the value at which goods are sold by the H.O and Branch to the customers.
  • Profit made by H.O from sale of goods to customers at Retail Price Retail Profit = Retail Price  (–)Less Cost.
  • Profit made by from sale of goods to customers Retail Price, Retail Profit = Retail Price (–)Less Wholesale Price.
• At Wholesale Price: It is same as Invoice Price at which Goods are sent by the H.O to its Branch. Profit made by the H.O is, Wholesale Profit = Wholesale Price (–)Less cost.

● Features:

• Under this method, a Branch Trading and Profit & Loss Account and a separate Branch Account for recording branch related transactions are prepared and maintained.
• Branch Trading and Profit & Loss Account determines both Gross Profit/Loss and Net Profit/Loss.
• This Branch Account follows double entry system which is by nature a personal account.

● Values at which the transactions relation to movement of goods are recorded in the books of accounts of the H.O are hereunder:

Transactions	Value
Opening stock of goods	At Cost
Purchase (less Purchase)	At Cost
Goods Sent to Branch	At Wholesale Price
Sales by H.O to customers	At Retail Price
Goods lost abnormally	At Cost
Closing stock of goods	At Cost

● Values at which the transactions relation to movement of goods are recorded in the books of accounts of the H.O are hereunder:

Transactions	Value
Opening stock of goods	At Wholesale Price
Goods Sent by H.O to Branch Less Returns	At Wholesale Price
Goods-in-transit	At Wholesale Price
Sales by H.O to customers	At Wholesale Price
Goods lost abnormally	At Wholesale Price
Closing stock of goods	At Wholesale Price

Illustration 6

Blue Ltd has a retail branch at Mumbai. Goods are sold at 60% profit on cost. The wholesale price is cost plus 40%. Goods are invoiced from Pune H.O. to Mumbai Branch at wholesale price. From the following particulars ascertain the profit made at H.O. and Branch for the year ended on 31.3.2019. 

Particulars	H.O	Branch	Particulars	H.O	Branch
Stock on 1.4.2018	7,00,000	-	Sales	42,84,000	14,40,000
Purchases	42,00,000	-	Stock on 31.3.2019	16,80,000	2,52,000
Goods sent to Branch (at IP)	15,12,000	-

Sales at H.O are made only on wholesale basis and that at Branch only to consumers.

Solution:

Problem Note:

Blue Ltd. (H.O.)

Trading and Profit & Loss account for the year ended 31.3.2019

Particulars	H.O (₹)	Branch (₹)	Particulars	H.O (₹)	Branch (₹)
To, Opening Stock	7,00,000	-	By, Sales	42,84,000	14,40,000
To, Purchase	42,00,000	-	By, Goods Sent to Branch	15,12,000	-
To, Goods Received from H.O		15,12,000	By, Closing Stock	16,80,000	2,52,000
To, Gross Profit c/d	25,76,000	1,80,000
	74,76,000	16,92,000		74,76,000	16,92,000
To, Stock Reserve [WN:2]	72,000		By, Gross Profit b/d	25,76,000	1,80,000
To, Net Profit	25,04,000	1,80,000
	25,76,000	1,80,000		25,76,000	1,80,000

Working Notes:
1. Relationship Between Cost Price (CP), Selling Price (SP) and Wholesale Price (WP)

 Let CP be ₹100. Thereof SP =₹(100+60) = ₹160; and WP = (100+40) = 140

2. Unrealised profit in Unsold stock

Unrealised profit on closing stock of branch = ₹(2,52,000 * (40/140))= ₹72,000

Branch Petty Cash under Imprest System

● H.O allowed its branches to maintain petty cash in respect of small amount of expenses incurred by the concerned branch; such petty cash is reimbursed by the H.O to branch to meet the expenses from time to time. Under ‘Imprest System’ such petty cash balance has been maintained by the branch-

• The Imprest balance of petty cash is determined by the H.O and sent to the branch at the beginning of the period.
• Branch petty expenses are incurred out of the Imprest balance.
• This method ensures the maintenance of original balance of Branch Petty Cash.

Accounting for Independent Branch

When there are voluminous transactions in a Branch, they prepare the accounts independently. They purchase and  sell goods independently and also sell the goods which are sent by H.O.. As the branches are owned by H.O., the profit or loss so made by the branch is enjoyed by H.O.

These independent branches maintain a complete set of books of account for recording its transactions. They prepare a Trial Balance, Trading and Profit and Loss Account and a Balance Sheet at the end of the year. As such, they maintain a Head Office Account and on contrary H.O. maintains a Branch Account. All sorts of transactions, e.g., remittance of cash, transfer of goods etc. are to be passed through these accounts.

Needless to say that where H.O. receives the accounts from the branches, it incorporates profit of the branches as –

Branch A/c	At Wholesale Price
To, Profit & Loss A/c	At Wholesale Price

Sometimes, the balance of branch account in H.O. books and H.O. accounts in branch books do not agree. If that be so, the same must be adjusted accordingly i.e., Goods-in-Transit or Cash-in-Transit etc. At last the Branch Balance Sheet is amalgamated with H.O. Balance Sheet by eliminating inter-branch/H.O. transaction as per the respective heads of assets and liabilities.

At the Branch Level all transactions that take place in the branch are recorded in the books of Branch like Cash Book, Subsidiary Books etc.). All necessary ledger accounts and after that the trial balance are prepared and maintained by the Branch itself. The independent branch may at times draft its final accounts and send it to the H.O  At the H.O transaction between branch and H.O are also recorded in the books of the H.O. Moreover, the H.O also maintains ‘Goods Sent to Branch Account’ and ‘Branch Account’ separately for each independent branch.

The relevant journal entries are:

	Transactions	HO Books	Branch Books
1	Goods sent by H.O. to Branch	Branch A/c	Goods Recd. from H.O. A/c
		To, Goods Sent to Branch A/c	To, H.O. A/c
2	Goods returned by Branch to H.O.	Goods Sent to Branch A/c	HO A/c.
		To, Branch A/c	To, Goods Recd. From H.O. A/c
3	Branch Expenses incurred at  Branch Office	—	Expenses A/c
			To, Cash / Bank A/c
4	Branch expenses paid for by the Head Office	Branch A/c	Expenses A/c.
		To, Cash / Bank A/c	To, H.O. A/c
5	Purchases made from parties other than H.O. by Branch	—	Purchases A/c
			To, Bank/ Creditors A/c
6	Sales effected by the BranchCash/Debtors A/c		Cash/Debtors A/c
			To, Sales A/c
7	Collection from Debtors received directly by the H.O.	Cash/Bank A/c	H.O. A/c
		Cash/Bank A/c	To, Sundry Debtors A/c
8	Payment by H.O. for Purchase made by the Branc	Branch A/c	Purchases/Creditors A/c
		To, Bank A/c	To, H.O. A/c
9	Purchase of Asset by Branch	—	Sundry Assets A/c
			To, Bank/Liability
10	Asset account maintained at H.O. and asset purchased by Branch	Branch Asset A/c	H.O. A/c
		To, Branch A/c	To, Bank/Creditors A/c
11	Depreciation when asset account is maintained by H.O.	Branch A/c	Depreciation A/c
		To, Branch Asset A/c	To, H.O. A/c
12	Remittance of Funds by H.O. to Branch	Branch A/c	Bank A/c
		To, Bank A/c	To, H.O. A/c
13	Remittance of Funds to H.O. by Branch	Bank A/c	H.O. A/c
		To, Branch A/c	To, Bank A/c
14	Remittance of Funds to H.O. by Branch	Recipient Branch A/c	i. Supplying Branch A/c
		To, Supplying Branch A/c	To, Goods recd. from H.O. A/c
			ii. Goods recd. from H.O. A/c
			To, H.O. A/c
15	Charging the Branch service charges by H.O.	Branch (Expenses) A/c	Expense A/c
		To, Service Charges A/c	To, H.O. A/c
16	Cash-in-transit	Cash-in-transit A/c.	Cash-in-transit A/c.
		To, Branch A/c.	To, H.O. A/c
17	Goods-in-transit	Goods-in-Transit A/c.	Goods-in-Transit A/c.
		To, Branch A/c.	To, H.O. A/c

Illustration 7 

Journalise the following transactions in the books of Kolkata Head Office. Delhi Branch and Agra Branch :

(a) Goods worth ₹ 50,000 are supplied by Delhi Branch to Agra Branch under the instructions of Head Office.

(b) Delhi Branch draws a bill receivable for ₹ 40,000 on Agra Branch which sends its acceptance.

(c) Delhi Branch received ₹ 10,000 from Agra Branch.

(d) Goods worth ₹ 20,000 were returned by a customer of Agra Branch to Delhi Branch.

(e) Agra Branch collected ₹ 20,000 from a customer of Delhi Branch.

Solution:

Journal of Head Office

	Particulars		L.F.	Amount (₹)	Amount (₹)
(a)	Agra Branch A/c	Dr.		50,000
	To Delhi Branch A/c				50,000
	(Being the goods supplied by Delhi Branch to Agra Branch)
(b)	Delhi Branch A/c	Dr.		40,000
	To Agra Branch A/c				40,000
	(Being a B/R drawn by Delhi upon Agra Branch)
(c)	Delhi Branch A/c	Dr.		10,000
	To Agra Branch A/c				10,000
	(Being Cash sent by Agra Branch to Delhi Branch)
(d)	Delhi Branch A/c	Dr.		20,000
	To Agra Branch A/c				20,000
	(Being the goods returned by customer of Agra Branch to Delhi Branch)
(e)	Agra Branch A/c	Dr.		20,000
	To Delhi Branch A/c				20,000
	(Being the Cash collected by Agra Branch from a customer of Delhi Branch

Journal of Delhi Branch

	Particulars		L.F.	Amount (₹)	Amount (₹)
(a)	H.O. A/c	Dr.		50,000
	To Goods sent to Branch A/c				50,000
	(Being the goods supplied to Agra Branch)
(b)	Bills Receivable A/c	Dr.		40,000
	To H.O. A/c				40,000
	(Being the acceptance of a B/R received from Agra Branch)
(c)	Cash A/c	Dr.		10,000
	To H.O. A/c				10,000
	(Being the cash received from Agra Branch)
(d)	Goods Sent to Branch A/c	Dr.		20,000
	To H.O. A/c				20,000
	(Being the goods received from a customer of Agra Branch)
(e)	H.O. A/c	Dr.		20,000
	To Debtors A/c				20,000
	(Being the cash collected by Agra Branch from our customer)

Journal of Agra Branch

	Particulars		L.F.	Amount (₹)	Amount (₹)
(a)	Goods sent to Branch A/c	Dr.		50,000
	To H.O. A/c				50,000
	(Being the goods received from Delhi Branch)
(b)	H.O. A/c	Dr.		40,000
	To Bill Payable A/c				40,000
	(Being a B/P accepted for Delhi Branch)
(c)	H.O. A/c	Dr.		10,000
	To Cash A/c				10,000
	(Being cash paid to Delhi Branch)
(d)	H.O. A/c	Dr.		20,000
	To Debtors A/c				20,000
	(Being the goods returned by customer of Delhi Branch)
(e)	Cash A/c	Dr.		20,000
	To H.O. A/c				20,000
	(Being the Cash received from a customer of Delhi Branch)

 Illustration 8

X Ltd. of Assam has a Branch at Darjeeling. From the given information, reconcile Darjeeling Branch Current A/c with Assam H.O. Current A/c by preparing Branch Current A/c in the books of H.O.

Particulars	Assam H.O.		Darjeeling Branch
	Dr. (₹)	Cr. (₹)	Dr. (₹)	Cr. (₹)
Goods sent to branch		13,02,400
Goods received by branch			12,80,400
Cash sent by branch				1,86,500
Cash received by H.O.	1,00,000
Darjeeling Branch Current A/c	4,11,100
Assam H.O. Current A/c				3,02,600

Solution:

Books of X Ltd. (Assam H.O.) Darjeeling Branch Current Account 

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Balance b/f	4,11,100	By, Goods-in-Transit A/c [WN:1]	22,000
		By, Cash-in-Transit A/c [WN:2]	86,500
		By, Balance c/f [B/fig]	3,02,600
	4,11,100		4,11,100

NB: The Darjeeling Branch Current A/c (in the books of H.O.) Assam H.O. Current A/c (in the Branch books) reflects the same but opposite balance; hence H.O. can proceed with incorporation of the Branch accounts in its books.

Working Notes

Assam H.O. Current Account
Goods sent to Branch	13,02,400	Journal Entry:
Less: Goods received by Branch	12,80,400	Goods-in-Transit A/c Dr.	22,000
	22,000	To, Darjeeling Branch A/c	22,000

 

Cash-in-Transit Account
Cash sent to Branch	1,86,500	Journal
Less: Cash received by H.O.	1,00,000	Cash-in-Transit A/c……. Dr.	86,500
	86,500	To Darjeeling Branch A/c	86,500

llustration 9

A Delhi head office passes one entry at the end of each month to adjust the position arising out of inter-branch transactions during the month. From the following inter-branch transactions in March 2013, make the entries in the books of Delhi Head office.

(a) Kolkata Branch :

(i) Received goods from Patna branch ₹ 9,000 and Ahmedabad branch ₹ 6,000.

(ii) Sent goods to Ahmedabad branch ₹ 15,000 and Patna branch ₹ 12,000.

(iii) Sent acceptances to Patna branch ₹ 6,000 and Ahmedabad branch ₹ 3,000.

(b) Kanpur branch [apart from (a) above] :

(i) Sent goods to Ahmedabad branch ₹ 9,000.

(ii) Recived B/R from Ahmedabad branch ₹ 9,000.

(iii) Recived cash from Ahmedabad branch ₹ 5,000

Solution:

Journal of Head Office

Particulars		L.F.	Amount (₹)	Amount (₹)
Kanpur Branch A/c	Dr.		5,000
Patna Branch A/c	Dr.		9,000
Ahmedabad Branch A/c	Dr.		7,000
To Kolkata Branch A/c				21,000

Statement of Inter-branch Transactions

Particulars	Kolkata		Kanpur		Patna		Ahmedabad
	Dr. (₹)	Cr. (₹)	Dr. (₹)	Cr. (₹)	Dr. (₹)	Cr. (₹)	Dr. (₹)	Cr. (₹)
Goods Received	15,000	-	-	-	-	9,000	-	6,000
Goods Sent	-	27,000	-	-	12,000	-	15,000	-
Acceptance	-	9,000	-	-	6,000	-	3,000	-
Goods Sent	-	-	-	9,000	-	-	9,000	-
B/R Received	-	-	9,000	-	-	-	-	9,000
Cash	-	-	5,000	-	-	-	-	5,000
	15,000	36.000	14,000	9,000	18,000	9,000	27,000	20,000
Balance	21,000	-	-	5,000	-	9,000	-	7,000
	36,000	36,000	14,000	14,000	18,000	18,000	27,000	27,000

Incorporation of Branch Trial Balance in Head Office Books

An branch prepares its own trial balance and the same is sent to the H.O. for incorporation. As such, after receiving the same from the branch, the H.O. has to incorporate the branch’s accounts with that of its own accounts to prepare and ascertain the net financial result of the concern. There are two methods for incorporating branch trial balance in H.O. Book:

(a) First Method
All revenue items are passed through Branch Trading and Profit & Loss Account and Profit or Loss so made (in the Profit and Loss Account) together with assets and liabilities are passed through Branch Account for the purpose of preparing consolidated Balance Sheet in the Books of H.O.

 Incorporation Entries

(a) For all revenue expenses related to Trading A/c 

Branch Trading A/c	i.e. Opening stock, Purchase, Return Inwards, Wages and other items appearing in the debit side.
To, Branch A/c

 (b) For all revenue incomes related to Trading A/c

Branch A/c	i.e. Sales, Closing Stock and Return Outwards and other items that appear in the credit side.
To, Branch Trading A/c

(c) For gross profit of the Branch 

Branch Trading A/c
To, Branch P&L A/c

 In case of gross loss, the entry will be reversed

(d) For all revenue expenses related to P&L A/c

Branch P&L  A/c	i.e. items that appear in the debit side of the P & L Account.
To, Branch (All Revenue Expenses) A/c

(e) For all revenue incomes related to P & L A/c

Branch (All Revenue Expenses) A/c	i.e. items that appear in the credit side of the P & L Account.
To, Branch P&L A/c

 (f) For net profit of the Branch

Branch P&L A/c
To, General P&L A/c

In case of net loss, the enry will be reversed

(g) For branch assets.

Branch Assets A/c

To, Branch A/c

(h) For branch liabilities.

Branch A/c

To, Branch Liabilties A/c

(b) Second Method / Abridged Method

This method is applicable only when net profit or net loss is given instead of detailed information about all  revenue expense and income. Under this method, only net profit/net loss will be transferred to Branch Account. Branch Assets and Branch Liabilities will not appear in branch account and this branch account will show a balance. The same must be equal to the difference between assets and liabilities, i.e., in other words, net worth of the business.

 Illustration 10

Salt Lake Corporation presented the following trial balance on 31.03.20X2 to the H.O. at New Delhi.

Particulars	Debit Amount (₹)	Particulars	Credit Amount (₹)
Delhi H.O.	6,480	Sales	76,000
Stock 1.4.20X1	12,000	Goods supplied to H.O.	12,000
Purchase	35,600	Creditors	3,700
Goods Return From H.O.	18,000
Salaries	3,000
Debtors	7,400
Rent	1,920
Misc. Expense	940
Furniture	2,800
Cash and Bank	3,560
	91,700		91,700

Additional Information:

The branch account on H.O. books on 31.03.20X2 stood at ₹ 920 (Debit).

On 31.03.20X2, the H.O. forwarded goods to the value of ₹5,000 to the branch which are received on 3rd July.

A cash remittance of ₹2,400 by branch on 29th March 20X2, was received by the H.O. on 2nd April 20X2.

Closing Stock was valued at ₹5,400

Show the incorporation entries in the books of H.O. showing separate Branch Trading and Branch Profit and Loss Account, and Prepare Branch Account and Branch Balance Sheet also in H.O. books.

Solution:

(a) First Method

In the Books of H.O.

Journal

Date	Particulars		L/F	Amount (₹)	Amount (₹)
31.03.X2	Branch Trading A/c			65,600
	To Branch A/c				65,600
	(Items of Br. Trading incorporated) ₹ 12,000 + ₹ 35,600 + ₹ 18,000)
	Branch A/c			93,400
	To Branch Trading A/c				93,400
	(Items of Br. Trading incorporated i.e., ₹ 76,000 + ₹ 12,000 + ₹ 5,400)
	Branch Trading A/c			27,800
	To Branch Profit & Loss A/c				27,800
	(Gross Profit transferred) [₹ 93,400 – ₹ 65,600]
	Branch Profit and Loss A/c			5,860
	To Branch A/c				5,860
	(Item of Branch Profit & Loss incorporated i.e., ₹ 3,000 + ₹ 1,920 + ₹ 940)
	Branch Profit and Loss A/c			21,940
	To General Profit & Loss A/c				21,940
	(Net Profit Transferred) [₹ 27,800 – ₹ 5,860]
	Goods-in-Transit A/c			5,000
	To Branch A/c				5,000
	(Goods-in-Transit adjusted)
	Remittance (Cash)-in-Transit A/c			2,400
	To Branch A/c				2,400
	(Remittance-in-Transit adjusted)
	Branch Asset A/c			19,160
	To Branch A/c				19,160
	(Branch Asset incorporated) [₹ 2,800 + ₹ 5,400 + ₹ 7,400 + ₹ 3,560
	Branch A/c			3,700
	To Branch Liabilities A/c				3,700
	(Branch liabilities incorporated)

Branch Trading and Profit and Loss Account

Dr.					Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To, Branch A/c			By, Branch A/c
Stock	12,00		Sales	76,000
Purchase	35,600		Goods supplied to H.O.	12,000
Goods from H.O	18,000	65,600	Closing Stock	5,400	93,400
To, Branch Profit and Loss A/c (Gross Profit transferred)		27,800
		93,400			93,400
To, Branch A/c			By, Branch Trading A/c - Gross Profit		27,800
Salaries	3,000
Rent	1,920
Office Expenses	940	5,860
To, General Profit and Loss A/c(Net Profit transferred)		21,940
		27,800			27,800

Branch Account

Dr.					Cr.
Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
01.04.X1	To Balance b/d	920	31.03.X2	By Branch Trading A/c	65,600
				,, Branch P&L A/c	5,860
31.03.X2	,, Branch Trading A/c	93,400		,, Goods-in-Transit A/c	5,000
	,, Branch Liabilities A/c Creditors	3,700		,, Remittance-in-Transit A/c	2,400
				,, Branch Assets A/c
				Furniture : 2,800
				Stock : 5,400
				Debtors :7,400
				Cash :3,560	19,160
		98,020			98,020

Branch Balance Sheet as at 31st March, 20X2

Liabilities		Amount ₹		Amount ₹
H.O. A/c			Furniture	2,800
Opening balance (Dr.)	6,480		Stock	5,400
Less: Net Profit	21,940	15,460	Debtors	7,400
Creditors		3,700	Cash at Bank	3,560
		19,160		19,160

(b) Second Method/Abridged Method

Branch Account

Dr.					Cr.
Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
01.04. X1	To Balance b/d	920	31.03.X2	By Goods-in-Transit A/c	5,000
31.03.X2	,, Branch P&L A/c	21,940		,, Remittance-in-Transit A/c	2,400
				,, Balance c/d	15,460*
		22,860			22,860

* Note: This is the difference between Branch Assets and Branch Liabilities

(₹19,160 – ₹3,700) = ₹15,460.

Closing of Branch Books

Branch closes its accounts at the end of the financial year by passing the following entries: In this situation, accounts can be prepared by two methods

Method – 1 All revenue items are passed through H.O. Account. Journal entries
(a) For all revenue expenses that appear in the debit side of Branch Trading A/c
H.O. A/c	Actual amount
To, Opening Stock A/c
To, Purchase A/c
To, Goods Received from H.O. A/c
To, All revenue expenses A/c
(b) For all revenue incomes that appear in the credit side of Branch Trading A/c
Sales A/c	Actual amount
Closing Stock A/c
All revenue incomes A/c
To, H.O. A/c
(c) For all Branch Assets:
H.O. A/c	Actual amount
To, Branch Assets A/c
(d) For all Branch Liabilities:
Branch Liabilities A/c	Actual amount
To, H.O. A/c
Method - 2 In this case, net profit or net loss is transferred to Head Office Account, but treatment of branch assets and branch liabilities will remain the same.
(a) For Net Profit:
Profit & Loss A/c	with the amount of net loss
To, H.O. A/c
(b) For Net Loss
H.O. A/c	with the amount of net loss
To, Profit & Loss A/c

 Illustration 11

A Chennai Head Office has an independent Branch at Ahmedabad. From the following particulars, give journal entries to close the books of the Ahmedabad Branch. Show also the Chennai Head Office account in the branch books.

Ahmedabad Branch

Trial Balance as at 31st December 20X1

Liabilities	Amount ₹	Assets	Amount ₹
Stock on 1st January	8,200	Creditors	2,700
Purchases	12,800	Sales	34,950
Wages	6,550	Head Office	14,000
Manufacturing Expenses	3,400	Discount	150
Rent	1,700	Purchase Returns	300
Salaries	5,500
Debtors	4,000
General Expenses	2,000
Goods received from H.O.	7,200
Cash at Bank	750
	52,100		52,100

(a) Closing Stock at Branch ₹ 14,350.

(b) The branch fixed assets maintained at H.O. books were: Machinery ₹ 25,000, Furniture ₹ 1,000 Depreciation are to be allowed at 10% on Machinery and 15% on Furniture.

(c) Rent due ₹ 150.

(d) A remittance of ₹ 4,000 made by the Branch on 29th Dec. 20X1 was received by Head Office on 4th January 20X2.

Solution:

(i) As per Method 1

In the books of Branch
Journal

Date	Particulars		L/F	Amount (₹)	Amount (₹)
31.12.X2	Depreciation A/c	Dr.		2,650
	To Head Office A/c				2,650
	(Depreciation on fixed assets maintained in head office books @ 10% on Machinery and 15% on Furniture)
	Rent A/c	Dr.		150
	To Outstanding Rent A/c				150
	(Rent Outstanding)
	Cash-in-Transit A/c	Dr.		4,000
	To Head Office A/c				4,000
	(Cash remitted to H.O. but not received within 31st December)
	Head Office A/c	Dr.		50,150
	To Opening Stock				8,200
	,, Purchases				12,800
	,, Wages				6,550
	,, Manufacturing Expenses				3,400
	,, Rent (1,700 + 150)				1,850
	,, Salaries				5,500
	,, General Expenses				2,000
	,, Goods received from H.O.				7,200
	,, Depreciation				2,650
	(Above items transferred to H.O. A/c)
	Discount A/c	Dr.		150
	Sales A/c	Dr.		34,950
	Purchase Returns A/c	Dr.		300
	Closing Stock A/c	Dr.		14,350
	To Head Office A/c				49,750
	(Above items transferred to H.O. A/c)
	Head Office A/c	Dr.		23,100
	To Closing Stock A/c				14,350
	,, Debtors A/c				4,000
	,, Bank A/c				750
	,, Cash-in-Transit A/c				4,000
	(Assets transferred to H.O. A/c)
	Creditors A/c	Dr.		2,700
	Outstanding Rent A/c	Dr.		150
	To Head Office A/c				2,850
	(Liabilities transferred to H.O. A/c)

Head Office Account

Dr.					Cr.
Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
31.12.X2	To Sundries- (debit balance of Revenue items)	50,150	31.12.X1	By Balance b/d	14,000
	,, Sundry Assets	23,100		,, Depreciation A/c	2,650
				,, Cash-in-Transit A/c	4,000
				,, Sundries –Credit Balance of Revenue items	49,750
				,, Sundry Liabilities	2,850
		73,250			73,250

(ii) As per Method 2

In the books of Branch
Journal

Date	Particulars		L/F	Amount (₹)	Amount (₹)
20X2
Dec. 31.	Depreciation A/c	Dr.		2,650
	To Head Office A/c				2,650
	(Depreciation on fixed assets @ 10% Monthly and @ 15% or Furniture in H.O. Books.)
	Rent A/c	Dr.		150
	To Outstanding Rent A/c				150
	(Rent Outstanding)
	Cash-in-Transit A/c	Dr.		4,000
	To Head Office A/c				4,000
	(Cash remitted to H.O. but in transit)
	Head Office A/c	Dr.		400
	To Profit & Loss A/c				400
	(Net Loss Transferred.) [50,150 – 49,750]
	Head Office A/c	Dr.		23,100
	To Closing Stock				14,350
	,, Debtors				4,000
	,, Cash at Bank				750
	,, Cash-in-Transit				4,000
	(Asset transferred to H.O. A/c)
	Creditors A/c	Dr.		2,700
	Outstanding Rent A/c	Dr.		150
	To Head Office A/c				2,850
	(Various Liabilities transferred to H.O. A/c)

Head Office Account

Dr.					Cr.
Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
31.12.X2	To Profit & Loss A/c (Net Loss)	400	31.12. X2	By Balance b/d	14,000
	,, Closing Stock A/c	14,350		,, Depreciation A/c	2,650
	,, Debtors A/c	4,000		,, Cash-in-Transit A/c	4,000
	,, Cash at Bank	750		,, Credit A/c	2,700
	,, Cash-in-Transit A/c	4,000		,, Outstanding Rent	150
		23,500			23,500

 Illustration 12

Puskar Enterprise has its H.O. in Ranchi and a branch in Imphal. The following Trial Balance has been extracted from the books of accounts as at 31st March, 20X2 :

Particulars	Head Office		Branch Office
	Dr. (₹000)	Cr. (₹000)	Dr. (₹000)	Cr. (₹000)
Capital	-	1,650	-	-
Debtors	300	-	180	-
Creditors	-	150	-	-
Purchases	2,742	-	-	-
Sales	-	2,550	-	1,311
Goods sent to Branch at I.P.	-	1,140	1,125	-
Fixed Assets (Net)	1,050	-	200	-
Stock (1.4.20X1)	24	-	60	-
Stock Adjustment (Unrealized Profit)	-	12	-	-
H.O./Branch Current A/c	525	-	-	360
Administrative & Selling Expenses	841.5	-	74.5	-
Cash and Bank	46.5	-	39	-
Provision for Bad Debts	-	27	-	7.5
	5,529	5,529	1,678.5	1,678.5

Other relevant information :

(1) All goods are purchased by the H.O. Goods are sent to the branch at cost plus 25%.

(2) Stock 31.3.20X2 are valued at: H.O. ₹ 36,000, Branch ₹ 45,000 (Invoice Price)

(3) Depreciation is to be provided on fixed assets at 10% on book value.

(4) Bad debts provision is to be maintained at 5% on debtors as at the end of the year.

(5) Cash-in-transit from branch to H.O. at 31st March 20X2 was ₹1,50,000.

(6) Goods-in-transit from H.O. to branch at 31st March, 20X2 at invoice price was ₹15,000.

Prepare in Columnar from, the branch and H.O. Trading and Profit and Loss Accounts for the year ended 31st March, 20X2 and a combined Balance Sheet of Puskar Enterprises as on that date.

Solution:

In the books of H.O.

Columnar Trading and Profit and Loss Account

Dr.					Cr.
Particulars	H.O.	Branch	Particulars	H.O.	Branch
	(₹000)	(₹000)		(₹000)	(₹000)
To Opening Stock	24	-	By Sales	2,550	1,311
,, Purchases	2,742	-	,, Goods Sent to Branch	1,140	-
,, Goods from H.O.	-	-	,, Closing Stock	36	45
,, Gross Profit c/d	960	-		-	-
	3,726	3,726		3,726	3,726
To Adm. & Selling Exp.	841.5	74.5	By Gross Profit b/d	960	171
,, Depreciation	105	20	,, Stock Adjustment (for opening)	12	-
,, Stock Adjustment (for closing) 20% of (45,000+15,000)	12	-	,, Provision for Bad Debts (old)	27	7.5
,, Provision for Bad Debts (new)	15	9		-	-
Net Profit	25.5	75		-	-
	999	178.5		999	178.5

Balance Sheet (Combined) as at 31st March 20X2

Dr.					Cr.
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Capital	16,50,000		Fixed Assets	12,50,000
Add: Net Profit (25,500 + 75,000)	1,00,500	17,50,500	Less: Depreciation	1,25,000	11,25,000
Current A/c – H.O.	5,25,000		Current Assets
Less: Branch (Cr.): 3,60,000			Stock	36,000
Cash-in-transit: 1,50,000			H.O.	36,000
Goods-in-transit :15,000	5,25,000	Nil	Branch	45,000
				81,000
Creditors		1,50,000	Less: Stock Adj.	12,000	69,000
			Goods-in-Transit		15,000
			Debtors
			H.O.	3,00,000
			Branch	1,80,000
				4,80,000
			Less; Prove. For Bad Debts	24,000	4,56,000
			Cash at Bank
			H.O.	46,500
			Branch	39,000
			Cash-in-transit	1,50,000	2,35,500
		19,00,500			19,00,500

Foreign Branch

Foreign branch is opened and operated in a country other than the country where the organisation is registered and has its head office. Example: Dubai branch of State bank of India.

A foreign branch maintains its own books of accounts. It drafts the trial balance (in foreign currency) and sends the same to the head office. The H.O. converts the items of the trial balance in the domestic currency of the H.O. and thereafter drafts the final accounts. The branch trial balance is converted into H.O. currency under the following methods:

1. Net Investment Method: As per this method, all items of the trial balance except H. O. Account are converted using closing rate. H.O. Account is represented at the figure at which Branch Account appears in H.O. books, subject to adjustment for goods and cash-in-transit.

2. Current and Non-current Method: In this case, different rates are applied for current assets and liabilities, and fixed assets and liabilities. For current assets and current liabilities closing rate is used, and historical rates are applied on fixed assets and long-term liabilities.

3. Temporal Method: This method is considered applicable when exchange rate is fluctuating. 

Differences between foreign branch and domestic branch

	Domestic Branch	Foreign Branch
Location	A domestic branch is established and carried out in the same country where its H.O is situated.	A foreign branch is always established and carried out its operations in a country other than the country of its H.O
Nature	It can be either dependent or independent.	It’s always independent.
Currency	H.O and Branch both follow the same currency for recording the transactions and preparing accounts.	Whereas the transactions and accounting for foreign branches happen to be different than its H.O.

 Illustration 13

SS Textiles Ltd. have a branch in Auckland, New Zealand. The trial balance of the branch as on 31.03.2022 was as given below:

	Dr. (NZ $)	Cr. (NZ $)
Head Office Account		18,000
Sales		1,20,000
Goods from the Head Office Account	90,000
Opening Stock	15,000
Office furniture	20,000
Cash	100
Bank	1,900
Expenses outstanding		2,000
Salaries	6,000
Taxes & Insurance	500
Rent	2,000
Debtors	1,40,000	1,40,000

The Branch Account in the head office showed a debit balance of ₹ 13,20,000 and ‘Goods sent to Branch Accounts’ a credit balance of ₹ 80,00,000.

Office furniture were acquired in 2005 when NZ $1 = ₹ 80.

The exchange rates were (NZ $1): January 1, 2020 - ₹ 88; December 31, 2020 - ₹ 92; Average – ₹ 90.

The stock at branch on December 31, 2022 was valued at NZ $9,000.

Convert the Branch Trial Balance into rupees and prepare the Branch Trading and Profit and Loss Account for 2022, and the Branch Account in Head Office books. Depreciation is to be written off the office furniture @ 10%.

Solution:

Auckland Branch Trial Balance as at December 31, 2022

Item	Rate (₹)	Dr. (NZ $)	Cr. (NZ $)	Dr. (₹)	Cr. (₹)
H.O. Account			18,000		13,20,000
Sales	90		1,20,000		108,00,000
Goods from H.O. A/c		90,000		80,00,000
Stock on Jan. 1, 2021	88	15,000		13,20,000
Office Furniture	80	20,000		16,00,000
Cash	92	100		9,200
Bank	92	1,900		1,74,800
Expenses outstanding	92		2,000		1,84,000
Salaries	90	6,000		5,40,000
Taxes & Insurance	90	500		45,000
Rent	90	2,000		1,80,000
Debtors	92	4,500		4,14,000
		1,40,000	1,40,000	1,22,83,000	1,23,04,000
Difference in exchange				21,000
				123,04,000	123,04,000
Closing stock	92	18,000		8,28,000

Auckland Branch Trading and Profit & Loss Account for the year ended December 31, 2022

Particulars	(₹)	Particulars	(₹)
To, Opening Stock	13,20,000	By, Sales	108,00,000
To, Goods from H.O	80,00,000	By, Closing Stock	8,28,000
To, Gross Profit c/d	23,08,000
	116,28,000		116,28,000
To, Salaries	5,40,000	By, Gross Profit b/d	23,08,000
To, Taxes & Insurance	45,000
To, Rent	1,80,000
To, Difference in exchange	21,000
To, Depreciation	1,60,000
To, Net Profit	13,62,000
	23,08,000		23,08,000

Auckland Branch Account 

Dr.					Cr.
Particulars		(₹)	Particulars		(₹)
To, Balance b/d		13,20,000	By, Branch Trading A/c (₹)
To, Branch Trading A/c (₹)			Opening stock	13,20,000
Sales	108,00,000		Goods from H.O.	80,00,000	93,20,000
Stock	8,28,000	116,28,000	By, Branch P & L A/c (Sundry expenses )		9,46,000
			By, Balance c/d		26,82,000
		1,29,48,000			1,29,48,000

Exercise

 Numerical Questions 

CMA book unsolved questions solution

1. Mr. A, a cloth trader of Kolkata opened a Branch at Kanpur on 1-4-2021. The goods were sent by Head Office to the Branch and invoiced at selling price to the Branch, which is 25% of the cost price of Head Office. The following are the particulars relating to the transactions of the Kanpur Branch:

Particulars	₹
Goods sent to Branch (at cost to H.O.)	4,50,000
Sales — Cash	2,10,000
— Credit	3,20,000
Cash collected from Debtors	2,85,000
Return from Debtors	10.000
Discount Allowed	8,500
Cash sent to Branch-
for Freight	30,000
for Salaries	8,000
for other expenses	12,000
Spoiled clothes written off at invoice price	10,000
Normal loss estimated at	15,000

Prepare Nagaon Branch Stock Account, Branch Debtors Account and Branch Adjustment Account showing the net profit of the branch for the year 2021-22.

Solution:

In the books of Mr. A

Branch Stock Account

Dr.					Cr.
Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
	To, Goods Sent to Branch A/c (₹ 4,50,000+25% of ₹ 4,50,000	5,62,500		By, Cash Sales A/c	2,10,000
	To, Branch Debtors A/c	10,000		By, Branch Debtors (Cr. Sales)	3,20,000
				By, Branch adjustment A/c (Normal Loss)	15,000
				By, Branch adjustment A/c (Spoiled)	2,000
				By, Profit & Loss A/c (Spoiled)	8,000
				By, Stock Shortage	17,500
		5,72,500			5,72,500

Branch Debtors Account

Dr.					Cr.
Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
	To, Goods sent to Branch	3,20,000		By, Cash A/c	2,85,000
				By, Discount A/c	8,500
				By, Branch stock (return)	10,000
				By, Balance c/d	16,500
		3,20,000			3,20,000

Branch Adjustment Account

Dr.					Cr.
Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
	To, Branch A/c (Spoilage)	2,000		By, Stock Reserve A/c	1,12,500
	To, Stock Shortage (of ₹17,500)	3,500
	To Normal Loss	15,000
	To Gross Profit c/d	92,000
		1,12,500			1,12,500

Branch Profit and Loss Account

Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
	To, Freight	30,000		By, Gross Profit b/d	92,000
	To, Salaries	8,000
	To, Other expenses	12,000
	To, Spoilage	8,000
	To, Stock shortage	14,000
	To, Net Profit c/d	20,000
		92,000			92,000

2. A Nagpur merchant has a branch at Noida to which he charges out the goods at cost plus 25%. The Noida branch keeps its own sales ledger and transmits all cash received to the head office every day. All expenses are paid from the head office. The transactions for the Branch were as follows: (all figures in ₹) 

Stock on 1.1.2022	22000	Allowances to customers	500
Debtors on 1.1.2022	200	Returns inward	1000
Petty cash on 1.1.2022	200	Cheques sent to branch:   Rent: ₹ 1,200; Wages: ₹ 400: Salaries : ₹ 1800
Cash sales	5300	Stock on 31.12.2022	26000
Goods sent to branch	40000	Debtors on 31.12.2022	4000
Collections on ledger accounts	42000	Petty cash on 31.12.2022 (includingmiscellaneous income not remitted ₹ 50)	250
Goods returned to head office	600
Bad debts	600

Prepare the Noida Branch Trading and Profit and Loss Account for the year ending 31.12.2022 in the head office books

Solution: 

Noida Branch Trading and Profit & Loss Account

For the year ended 31st December, 2022

Dr.					Cr.
Particulars		₹	Particulars		₹
To Opening Stock (22,000 - 4,400)		17,600	By Sales:
To Goods sent to Branch (Cost)	32,000		Cash	5,300
Less: Returns to H.O. (Cost)	480	31,520	Credit	47,900
To Wages		400		53,200
To Gross Profit c/d		23,480	Less: Returns Inward	1,000	52,200
			By Closing Stock (26,000 - 5,200)		20,800
		73,000			73,000
To Rent		1,200	By Gross Profit b/d		23,480
To Salaries		1,800	By Miscellaneous Income		50
To Bad Debts		600
To Allowances to Customers		500
To General Profit & Loss A/c		19,430
		23,530			23,530

Tutorial Note: At the time of preparing Branch Trading and Profit and Loss Account, all figures should be converted into cost.

Working Notes:

(1) 25 / 125 × ₹22,000 = ₹ 4,400.

(2) 25 /125 × ₹ (40,000 -600) = ₹ 7,880.

3. A Mumbai head office passes an entry at the end of each month to adjust the position arising out of inter-branch transactions during the month. From the following inter-branch transactions in April, 2022, make the entry in the books of Mumbai head office:

(a) Jaipur branch:

(i) Received goods from Pune branch ₹ 9,000 and Ajmer branch ₹ 6,000.

(ii) Sent goods to Ajmer branch ₹15,000 and Pune branch ₹ 12,000.

(iii) Received bills receivable from Ajmer branch ₹ 9,000.

(iv) Sent acceptances to Pune branch ₹ 6,000 and Ajmer branch ₹ 3,000.

(b) Kolkata branch [apart from (a) above]:

(i) Received goods from Pune branch ₹ 15,000 and Jaipur branch ₹ 6,000.

(ii) Cash sent to Pune branch ₹ 3,000 and Jaipur branch ₹ 6,000.

(c) Pune branch [apart from (a) and (b) above]:

(i) Sent goods to Ajmer branch ₹ 9,000.

(ii) Received bills receivable from Ajmer branch ₹ 9,000.

(iii) Received cash from Ajmer ₹ 5,000

Solution:

Statement showing net effect of Inter-branch Transactions

	Jaipur	Kolkata	Pune	Ajmer
(a) Jaipur Branch:
(i)	(-) 15,000		(+) 9,000	(+) 6,000
(ii)	(+) 27,000		(-) 12,000	(-) 15,000
(iii)	(-) 9,000			(+) 9,000
(iv)	(+) 9,000		(-) 6,000	(-) 3,000
(b) Kolkata Branch :
(i)	(+) 6,000	(-) 21,000	(+) 15,000
(ii)	(-) 6,000	(+) 9,000	(-) 3,000
(c) Pune  Branch :
(i)			(+) 9,000	(-) 9,000
(ii)			(-) 9,000	(+) 9,000
(iii)			(-) 5,000	(+) 5,000
Net Adjustment	(+) 12,000	(-) 12,000	(-) 2,000	(+) 2,000

Note :

Values received by a branch are to be debited to it and have been indicated by (-) sign. Similarly, values given by a branch are to be credited to it and have been, indicated by (+) sign.

In the books of Head Office

Journal

Date	Particulars		Dr. (₹)	Cr.(₹)
30 Apr. 20X1	Kolkata Branch A/c	Dr.	12,000
	Pune Branch A/c	Dr.	2,000
	To JaipurBranch A/c			12,000
	" Ajmer Branch A/c			2,000
	(Adjustment for inter-branch transactions during April, 20X1)