FINANCIAL ACCOUNTING (PART - 43) BRANCH ACCOUNTS - 1

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1 FINANCIAL ACCOUNTING (PART - 43) BRANCH ACCOUNTS INTRODUCTION Dear students, I welcome you back on the lecture series of Financial accounting, today we are going to discuss Unit 8, and under Unit 8 we shall learn in detail all the accounting as well as procedure aspect of branch accounting, it s the first lecture in branch accounting where we will discuss the introductory part of accounting. we shall learn in detail the meaning and significance of branch accounting, then various types of branches which are being classified on the basis of location, on the basis of accounting procedure, we shall also learn various methods of accounting to be followed for doing the branch accounting of the dependent branch, there are certain methods about them, the important one are Branch account method, Stock and debtors method, Final accounts cost price method and Final account whole sale price method. The objective of this lecture is to have an insight of all the accounting as well as the procedure aspect of the branch accounting. 1

2 2. SIGNIFICANCE OF BRANCH ACCOUNTING As the business grows the significance of branch accounting increases because a business can grow by tapping more customers, if customers are scattered all over and cannot be tapped from one place, the objective can be achieved by opening branches at far flung places because more the tapping of customers would be our production or our market share will increase, so in order to enhance the market share ; in order to enhance the productivity, in order to enhance the production; the turnover, we need to open the branches at various states or at various places, so where the expansion of business is there we can take the help of branches and we can expand our business to capture more customers. So in order to maintain this records that where the accounting is being done that how inflows are been there how outflows are there at various branches, we need to follow certain set of accounting principles which we have to abide by for finding out the results of the operations of branch. First of all we have classified the braches on the basis of location. So when we talk of location we will classify the branches as Inland branches and Foreign branches. Inland braches when we talk about they are branches which are within the territories of the country. For example when we talk of India these branches can be in different states one can be in Maharashtra other can be in West Bengal. So as per the location they are known as inland branches as they are situated within the territory of the specified country. Second one is foreign branches. 2

3 Foreign branches are those branches which are situated outside country. For example when we talk of India its foreign branch can be a branch which situated in Singapore a branch situated in USA. So these are the two important classifications on the basis of location. Now form accounting point of view further classification can be made. 3. CLASSIFICATION OF BRANCH AS PER ACCOUNTING PROCEDURE On the basis of accounting procedure we will classify branches as Dependent branches Independent branches. Dependent branches: These are the branches which depend on headquarter for an ascertainment of their results of operation because they do not maintain their own set of accounting records. Branches keep records only of some information s required for their activities. Such as debtors, stock position etc. now these dependent branches have to be accounted for. So the headquarter may follow any of the following systems to know the results of branches and these systems can be stock and debtor method, branch account method, final account system on the cost basis or the final account system on whole sale price basis. So basically these four accounting system is followed have to be followed to do the accounting of dependent branch. As we have right now discussed the dependent branches are those branches which do not maintain their own accounting record there are only certain relevant information they furnished to the head office so that in the books of head office proper accounting of the transaction of the branches can be done. 3

4 To extract the relevant information so we have to prepare certain memorandum accounts. These memorandum accounts can be of Memorandum branch stock Memorandum debtors, Memorandum fixed assets in relation to the branches. This information if not furnished by the branches the complete accounting aspect cannot be fulfil so in order to complete the record/the transaction head office has to take this information from the branches. So this the manner in which we have to prepare the accounts of the dependent branches following the either of the method. Entire procedure has to be recorded in the head office journal. So among these all method we will learn in detail the Branch account method. But before that let us understand what is independent branch. These are the branches which maintain their onset of accounting book enhanced are in a position extract Trial balance and certain there results through there accounting system. So we can say that the accounting sets are being prepared by the independent branch at their own level. So for those branches which are independent they will prepare Trial balance. So independence would be in relation to the preparation of books of accounts only and not of the operations. For their operations again they have to be dependent on the head office. So we can say that independence or autonomy is only with regard to maintenance to accounting system and not for their operation under independent branch. Trial balance of branch in the books of head office at the end of the accounting is to be incorporated. Since we know that independent branch will prepare its own accounts so there will be a Trial balance at their own end. So when we finalized the accounts of head office we need to incorporate the Trial balance of the branch into our accounts so that we can finalize the accounts of head office. 4

4. BRANCH ACCOUNT METHOD Now we shall learn in detail Branch Account method, under branch account method head office maintains separate branch account in its book of each branch.

5 4. BRANCH ACCOUNT METHOD Now we shall learn in detail Branch Account method, under branch account method head office maintains separate branch account in its book of each branch. Only those transactions are recorded in head office books which take place between head office and branch. Means those transactions which have taken place between third party and the branch are not recorded in the head office books. So we can say that the transaction between branch and head office are to be accounted for but if branch at her own level has entered into a transaction with the third party such transaction need not to be accounted in the books of head office. So we will start up with the journal entries in the books of the head office to understand how the accounting has been done. For the dependent branch using the branch account method, so the first entry will be for the goods supplied by the head office to the branch. Here we will pass the entry as branch account debit to goods sent to branch it can be at cost or invoice price. Invoice price shall include the profit also so where cost plus loading of the profit percentage is being done and the goods are being furnished with the branch at such price which involves the element of the profit it is known as sending goods to the branch at invoice price. So under that case we need to open the account as branch account debit to goods sent to branch and in the amount column invoice price has to be written. So it depends upon the agreement between the branch and the head office at 5

which price they are to send the goods if it is sent on cost we will write the cost in amount column and if it is furnished in the information that such goods are been sent at invoice price loading

6 which price they are to send the goods if it is sent on cost we will write the cost in amount column and if it is furnished in the information that such goods are been sent at invoice price loading certain specific percentage of profit we need to account for such goods on the invoice price. Next one is for the goods returns by the branch to the head office so reverse entry would be passed here, goods sent to branch would be debited and branch account will be credited. Next is remittance received from the branch such remittance can be amount of cash sales and received from branch debtors 6

7 so whenever cash is received we will debit the bank account. Bank account or cash account can also be there, bank account debits to branch account shall be the entry which we need to pass to account for any remittance which is being received from the branch on account of the cash sales or any amount which we have received from the branch debtors. Now what about the credit sales in case of credits sales by branch There will be no entry in the books of the head office. Next entry is when goods return by the branch debtors to branch. Discount allow to branch debtors and bad debts at branch. Now if we analyzed this transaction these are the transaction between the branch and the third party. 7

So no entry has to be passed in the head office journal. Next one is when goods are return by the branch debtors to the head office. Now here the branch debtors transaction are with the head office.

8 So no entry has to be passed in the head office journal. Next one is when goods are return by the branch debtors to the head office. Now here the branch debtors transaction are with the head office. So head office has come into the picture we need to pass the accounting entry in the books of head office the entry shall be goods sent to branch account debit to branch. Next will be when goods are transferred from one branch to another under the instruction of head office. Unless instruction comes from head office such transaction cannot take place. So let s see the accounting entries of such transfer between the branches. 8

So first entry will be goods to one branch debit to one branch account been goods send by one branch to another and simultaneously another entry will be passed

9 So first entry will be goods to one branch debit to one branch account been goods send by one branch to another and simultaneously another entry will be passed and it will the receiving debit to goods and to another branch. Now other entry is in relation to cheques. Cheques send by head office to branch for branch expenses 9

10 so we need to pass the entry branch account debit to bank account as cheque has been send to meet the expenses. Next one is Petty cash sent to branch for petty expenses here we will pass the entry as branch account debit to bank or cash. Next journal entry is in relation to expenses paid by branch then no such entry or no journal entry is to be passed as expenses paid by branch. 10

11 Then no such entry or no journal entry is to be passed as expenses paid by branch at their end is a different transaction it is not between the head office and the branch. Fixed assets sent out of head office so we will pass the entry branch account debit to fixed assets. A variations is there in fixed assets if such fixed assets are purchase for branches and then sent to the branch We will pass the entry branch account debit to bank or the suppliers rather than the fixed assets. 11

In previous entry we used to fixed assets as fixed assets were sent to the branch here we have purchase the fixed assets and then sent to branch so the accounting entry will change accordingly.

12 In previous entry we used to fixed assets as fixed assets were sent to the branch here we have purchase the fixed assets and then sent to branch so the accounting entry will change accordingly. Next will be when goods sent at cost plus profit to branch here we need to do the cancellation of loading. Loading is to be cancelled so we will pass the entry goods sent to branch debits to branch account and the loading amount shall be there in the amount column. Now for the transfer for the balance of the goods sent to branch account. This is the transfer entry in relation to the balanced which we have left out in the goods sent to branch account so goods sent to branch account debit to trading account. In this way goods sent to branch account can be closed by transferring the balance so left to the trading account. 12

Now we have to incorporate the assets and liabilities of the branches at the end of the period. So for incorporating branch asset at the end of the accounting year we need to pass this entry.

13 Now we have to incorporate the assets and liabilities of the branches at the end of the period. So for incorporating branch asset at the end of the accounting year we need to pass this entry. Branch stock account debit, branch debtors debit, branch petty cash debit, branch fixed assets debit to branch account. Any other sorts of assets are there they also have to be debited and to branch has to be credited. This is the journal entry and other such assets are to be accounted for if they are given in the form of additional information. Now for the incorporation of the branch liabilities at the end of accounting year Branch account debit to branch liability shall be the entry to incorporate the liabilities of branches in the head office books. 13

14 If there is a stock reserve we have to pass the entry branch account debit to branch stock reserve. Next entry is relations to profit earned or loss incurred so in case of the profit earn branch account debit to profit & loss shall be use or if loss incur profit & loss account debit to branch account. 14

15 In the case of loss it is the reverse entry as we have pass in the case of profit earn. Branch account is to be debited and P&L is to be credited when profit is earned and its reversal is done in the case of loss. So these are the journal entries which we have to keep in mind for preparing the accounts in the head office books in relation to the branches. 5. DERIVING BRANCH RESULTS UNDER BRANCH ACCOUNTS We will prepare the format of branch accounts and we will analyze how the branch results i.e. profit or loss can be ascertained. So here this is a branch account. BRANCH ACCOUNT 15

16 We will start to the branch stock it can at invoice of cost; to branch debtors; to branch petty cash these are the assets of branches, to branch furniture we need to account for them into goods sent to branch account it can be at invoice or cost whatever is the amount we have to fill it accordingly. Then to creditors that is a direct purchases at head office we need to account for it can be to creditors or bank, to cash or to furniture as has been furnished by the head office to the branch on to stock raise out i.e. in relation to the loading amount. Where the goods are being sent to branch invoices. On the credit side by goods sent to branch is the return entry because at the time of sending we have pass the entry branch account debit to goods send to branch account invoice. If there is something returned out from these goods so send, so a reverse entry has to be passed on the credit side and it is by goods sent to branch account debit to branch account. If branch account is credited so on the credit side we have written the amount of the goods so return, then by bank, cash and debtors it s the collection of remittance which we have received we will account for such collection or remittance on the credit side of the branch account as we have pass the entry cash account debit to branch account then to by branch stock, it shall be the closing stock by branch debtors, we will be the closing debtors of the branch, by branch petty cash account, by branch furniture, by goods sent to branch, by stock reserve and finally the total of the debit and credit has to be done and if the credit exceeds the debit we will ascertain the profit and if the debit exceeds credit side we will ascertain that we have incur the loss. So this is the basic format we have to be abide by for finding out the results of the operations carried out by the branch. This branch account we have preparing in the books of head office because dependent branches do not maintain their own set of books. Very important aspect we have to keep in mind when we do the accounting dependent branch using branch account method the first one is no entry is made by the head office in branch account method for the following. 16

17 1. Credit sales at branch 2. Shortage in stock 3. Surplus in stock 4. Goods return by branch debtors to the branch 5. Discount allowed 6. Bad debts at branch 7. Petty Expenses Incurred by the Branch. 8. Profit or Loss on Sale of Fixed Assets by Branch. 9. Depreciation on Branch Fixed Assets Charged by The Branch So for these set of entries we need not to pass any accounting entry in the books of head office. These transactions are being carried out at the branch level and between the branch and the third party so we need not to pass any entry in the books of head office when we do the accounting of a dependent branch. Some additional accounts we need to prepare to find out the requisite information are 1. Memorandum branch debtors a/c 2. Memorandum branch stock a/c 3. Memorandum branch petty cash 4. Memorandum branch fixed asset a/c A memorandum accounts are been prepared so that we can assess the information which is been missing, so we have to prepare the branch account we have to take the help of the opening balances of the assets and closing balances of the assets we have to transfer the branch liabilities so to trace out the relevant figure we have to prepare the branch debtors stock petty cash and fixed assets account so that we can find out either the opening balance or the closing balance or whatever information is being missing, with help of this accounts prepared we can trace out required information. 17

18 Now let us understand one very important concept and that is known as calculation of closing stock. Sometimes we have been furnished the information that goods are being sent to the branch by adding certain loading point i.e. we have added the percentage the profit on cost. We assume that we have loaded 20% profit on cost when we have send the goods to the branch. So I have taken certain imaginary figures to find out the closing stock when we are not being given the amount of closing stock and we have to ascertain. We were given the information in relation to the opening stock at branch and it was Rs.30,000 then we have sent goods to the branch at Rs.90,000 so we were having Rs.1,20,000 as the gross figure. Now goods have been sold so when have sold the goods we know that invoice price was cost plus 20%, so 1,20,000 is the invoice price it would have been Rs.1,20,000 into 100 divide by 120 so this figure had been 1,00,000. If cost of goods sold it to be subtracted from the opening stock plus goods so sent to the branch we can ascertain the closing. In our example 1,20,000 minus 1,00,000 will give us the figure of closing stock as 20,000 so whenever we are being provided by the figure of 18

19 invoice and the percentage of loading we can trace out the cost of goods sold and can subtracted from the opening stock plus goods so send to the branch and can find out a closing stock. So this was one of the very important calculations which we have to use while solving the question where information relation to closing stock is not being given there are certain hidden information taking the help of such information we can find out what the closing stock shall be. 6. SUMMARY With this we are ending up our lecture of today in today s lecture we have learnt in detail the significance of branch accounting and the classification of the branches on the basis of location and on the basis of the accounting procedure. We have also learn in detail how the dependent branch has to be accounted for in the books of head office taking the help of various method amount such method taking the branch account and find out the results of the operations of the dependent branch we have discussed in length the journal entries which are required to be passed in the books of head office to ascertain profits or loss end of the accounting year for which we are preparing a books of accounts. We have also learnt very important concept of finding out closing stock with the help of the relevant information being furnished to us. With this we are ending up lecture of today. Thank you. 19

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