METHODS OF BRANCH ACCOUNTING

METHODS OF BRANCH ACCOUNTING

Branch Accounting means recording of business transactions of a branch for the purpose of calculating its profit or loss for an accounting period.

OBJECTIVES OF BRANCH ACCOUNTING

TO ASCERTAIN PROFIT OR LOSS AT BRANCH: Every business house wants to measure the performance of its branches separately. Hence, separate records for each branch are necessary. Efficiency or otherwise of a branch can also be measured with the help of its accounting records.

TO ASCERTAIN TRUE FINANCIAL POSITION OF BUSINESS: Branch Accounting helps the business to ascertain its true financial position. Accounting records of the assets and liabilities will helps in preparing in the balance sheet which is a mirror of the financial position.

COMPLIANCE WITH STATUTORY REQUIREMENT: Branch accounts are necessary to meet large requirements with the company law, Income tax laws and other such acts.

TO INCREASE EFFICIENCY OF THE BRANCH: Branch accounts are the indicators of the efficiency of the branch. They will indicate the loopholes or drawbacks which can be rectified in time. In this way, branch accounts will be helpful in increasing the efficiency of the branch.

TO EXERCISE CONTROL OVER BRANCH: Head Office exercises control only through information supplied by branches to head office. The main source of information is the accounts maintained from branch transactions.

METHODS OF BRANCH ACCOUNTING

Dependent branch is a branch which does not maintain its own set of books. All records have to be maintained by the head office. The Head Office will record transactions of Branch by any of the following methods:

methods of branch accounting

DEBTORS SYSTEM

Under this system, head office maintains separate branch account for each branch. It will be prepared to find out profit or loss of the branch. The branch account is nominal account. The journal entries passed under this method are as follows:

WHEN GOODS ARE SENT TO THE BRANCH
Branch A/c     Dr.
     To Goods sent to branch A/c
EXPENSES OF BRANCH PAID BY THE HEAD OFFICE
Branch A/c    Dr.
To Cash/ bank A/c
CASH SENT TO BRANCH FOR PURCHASE OF FIXED ASSETS
Branch A/c    Dr.
     To Bank A/c
CASH BEING SENT FOR PETTY EXPENSES
Branch A/c    Dr.
     To Cash/ bank A/c 
FOR GOODS RETURNED BY BRANCH TO HEAD OFFICE
Goods sent to branch A/c    Dr.
     To Branch A/c
FOR CASH SALE BY BRANCH
Cash/ Bank A/c    Dr.
       To Branch A/c
FOR CLOSING BALANCE OF FIXED ASSETS
Branch Fixed Asset A/c    Dr.
     To Branch A/c
FOR PROFIT EARNED BY BRANCH
Branch A/c      Dr.
    To general Profit and Loss A/c
FOR LOSS EARNED BY BRANCH
General profit and loss A/c   Dr.
      To Branch A/c

FORMAT OF BRANCH ACCOUNT

PARTICULARS AMOUNT PARTICULARS AMOUNT
To Branch stock A/c   By cash/ bank account (for cash sales)  
To branch debtors A/c   By cash/ bank a/c (for cash from debtors)  
To branch petty cash account (opening balance)   By goods sent to branch account (returned to head office)  
To goods sent to branch account (at cost price)   By branch stock account  
To expenses outstanding account   By branch debtors account  
To general profit and loss account (net profit)   By branch petty cash account (closing balance)  
    By prepaid expenses account  

STOCK AND DEBTORS SYSTEM

This method is also adopted to find out the profit or loss made by the branch. This method is generally adopted when the goods are dispatched to the branch at the selling price which the branch is not authorized to vary. Under this method, the following accounts are opened:

BRANCH ASSETS ACCOUNT: Individual assets accounts are opened for each kind of asset. Example: branch cash account, branch debtors’ account, branch furniture account etc.

BRANCH EXPENSES ACCOUNT: This account is debited with all the expenses of the branch like rent, salaries, advertisement etc. this account is closed by transferring to the branch adjustment account.

BRANCH STOCK ACCOUNT: This account is prepared to find out the surplus or shortage of stock at the branch. This account is featured as:

  • This account is prepared at invoice price.
  • Opening stock is posted at the debit side of this account.
  • Goods sent to branch is also recorded at the debit side of this account.
  • Goods returned to head office and closing stock is shown at the credit side of this account.
  • The excess of debit over credit is shortage.
  • The excess of credit over debit is surplus.

BRANCH ADJUSTMENT ACCOUNT: This account has two parts. The first part is prepared like Trading Account. It is debited with

  • stock reserve account (profit element in  closing stock)
  • profit element in shortage.

This account is credited with

  • stock reserve account (profit element in  opening stock)
  • profit element in surplus.
  • Profit element in goods sent to branch.

The excess of debit over credit is gross loss and excess of credit over debit is gross profit.

In the second part, the branch expenses account and the cost of shortage or surplus is shown- the shortage on the debit side and the surplus on the credit side. The balance of this account indicates either profit or loss.

JOURNAL ENTRIES

WHEN GOODS SENT TO BRANCH
Branch Stock A/c    Dr.
    To Goods sent to branch A/c
WHEN SALES ARE MADE AT THE BRANCH
On cash basis
Cash A/c   Dr.
     To Branch stock A/c
On credit basis
Branch Debtors A/c    Dr.
     To Branch Stock A/c
WHEN CASH IS RECEIVED FROM DEBTORS
Cash A/c    Dr.
     To Branch debtors A/c
FOR BRANCH EXPENSES PAID IN CASH
Branch Expenses A/c   Dr.
     To Cash A/c
FOR TRANSFER OF EXPENSES TO BRANCH ADJUSTMENT ACCOUNT
Branch Adjustment A/c   Dr.
     To Branch Stock A/c
FOR ADJUSTMENT IN INFLATED PRICE OF OPENING STOCK
Stock Reserve A/c   Dr.
     To Branch Adjustment A/c
FOR ADJUSTMENT IN INFLATED PRICE OF CLOSING STOCK
Branch Adjustment A/c    Dr.
      To Stock Reserve A/c
FOR TRANSFER OF PROFIT TO GENERAL PROFIT AND LOSS ACCOUNT
Branch Adjustment A/c    Dr.
      To General profit and loss account
FOR TRANSFER OF LOSS TO GENERAL PROFIT AND LOSS ACCOUNT
General Profit and Loss A/c    Dr.
      To Branch Adjustment A/c

FINAL ACCOUNTS SYSTEM

Under this system, Trading and profit and loss account is prepared to calculate the gross profit or gross loss and net profit or net loss. The opening stock and goods sent to branch is debited in the trading account. The closing stock, sales, goods returned by branch is credited to the trading account.

WHOLESALE PRICE SYSTEM

Under this system, the goods are invoiced at the wholesale price to a retail branch. Opening stock and closing stock of branch will be shown at the wholesale price and unrealized profits in closing stock will be debited as stock reserve to profit and loss account of head office. Similarly, the stock reserve of opening stock will be credited to profit and loss account of head office. 

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