MCM604_Advanced Financial Accounting

Branch Accounts 243 (ii) To ascertain the real financial position of each branch. (iii) To exercise proper control over each branch. (iv) To assess the progress and performance of each branch. 15.4 Types of Branches Branches are classified into three types from accounting point of view: 1. Dependent Branches Dependent branches are those branches which are not keeping a separate set of books of accounts of their own. All the transactions connected with the branch are recorded only in the books of the Head Office. 2. Independent Branches A Branch is said to be independent when it maintains a separate set of books of accounts and keeps a full system of accounting. 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 prepares its own Trading and Profit and Loss Account. 3. Foreign Branches A foreign branch is nothing but an independent branch located but in a foreign country. It maintains accounts in a foreign currency. The Trial Balance of the foreign branch will have to be incorporated in the books of the head office at the end of the year for purposes of ascertaining the branch trading results and also to prepare the Balance Sheet for the business. 15.5 Dependent Branches Dependent branches are those branches which are not keeping a separate set of books of accounts of their own. All the transactions connected with the branch are recorded only in the books of the Head Office. The branch maintains certain Memorandum records only such as Stock Register or Debtors’ Registers. These records do not constitute Books of Accounts. Dependent branches generally depend upon the Head Office for supply of goods, for meeting the day-to-day expenses and for general control and direction. Collections will be remitted to the Head Office immediately or deposited into a Bank account opened in the name of the Head Office. CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 244 Various Types of Accounts on Dependent Branches The accounts for the dependent branches may be maintained by the Head Office in any one of the following ways: (i) Debtors’ system: where the Head Office opens only one account for each branch called ‘Branch Account’ which is in the nature of a nominal account showing the profit or loss made by each branch. (ii) Final account system: where a separate Trading and Profit and Loss Account prepared for each branch for ascertaining the profit or loss made by it. A ‘Branch Account’ in the nature of a personal account is opened to show the amount due to or due from the branch on any date. (iii) Stock and debtors’ system: where instead of one Branch Account, the Head Office opens (i) Branch Stock Account, (ii) Branch Debtors’ Account, (iii) Branch Expenses Account, (iv) Branch Adjustment Account and (v) Branch Assets Accounts. (iv) Wholesale branch system: where the Head Office supplies goods to the branch at wholesale price and finds out the pure retailing profit made by the branch by comparing the price at which the branch is able to sell its goods and the price at which goods are supplied to the branch. Debtors’ System Under this system the Head Office opens only one account for each branch called a Branch Account which is a nominal account in nature and which serves the purpose of both a running account between the Head Office and the branch as well as a Profit and Loss Account. The profit or loss made by the branch is found out by the Head Office by posting to the debit side of the Branch Account the goods and cash sent to branch, in addition to the various assets on the opening date and posting to the credit side cash received, returns etc. and the assets at the end of the accounting period. The difference shown by the account is either profit or loss made. The following entries will be made in the books of the Head Office: CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 245 (i) For sending the goods to the branch at cost price/invoice price: Branch Account Dr. xxx To Goods Sent to Branch Account xxx (ii) For goods returned by the branch: Goods Sent to Branch Account Dr. xxx To Branch Account xxx (iii) When cash is sent to the branch for meeting its expenses or for petty cash purposes: Branch Account Dr. xxx To Bank/Cash Account xxx (iv) For Cash received from the branch: Bank/Cash Account Dr. xxx To Branch Account xxx (v) Usually, there may be stock unsold with the branch at the end, petty cash balance unspent and debtors uncollected at the end and any other asset like furniture etc. and prepaid expenses. On receiving the details of the above items, they will be incorporated in the books of the head office by the following entry: Branch Stock Account Dr. xxx Branch Petty Cash Account Dr. xxx Branch Debtors Account Dr. xxx Branch Furniture Account Dr. xxx Branch Prepaid Expenses Account Dr. xxx To Branch Account xxx Similarly, liabilities, if any, would be debited to Branch Account. CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 246 (vi) The stock, debtors, petty cash etc., at the end of the previous year becomes opening assets for the current year and will be transferred to the debit of the Branch Account by the following transfer entry: Branch Account Dr. xxx To Branch Stock (opening) xxx To Branch Debtors xxx To Branch Petty Cash xxx Opening liabilities, if any, will be transferred to the credit of the Branch Account. The Branch Account now reveals the profit or loss made by the branch and should be transferred to the General Profit and Loss Account. ‘Goods Sent to Branch Account’ would be closed and transferred to the ‘Trading Account’in the case of manufacturing concerns and to Purchases Account in the case of trading concerns. If the above entries are posted, a Branch Account would look like the one shown below: Books of the Head Office Branch Account Particulars ` Particulars ` To Balance b/d (assets in the beginning) xxx By Balance b/d xxx Cash in hand (liabilities in the beginning) xxx xxx Stock By Remittances received xxx Debtors By Cash Sales Furniture etc. By Cash Collected from Debtors Any other assets By Goods sent to Branch (returns) To Goods Sent to Branch xxx By Balance c/d (assets at the end) To Bank (expenses paid by head office) xxx Cash in hand To Balance c/d Stock (liabilities at the end, if any) Debtors CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 247 To Profit Furniture etc. Any other Assets By Loss xxx xxx xxx Goods Invoiced to Branch at Selling Price There are two important purposes for which goods sent to branches are invoiced by the head office at selling price. One purpose is not to allow the branch to know what exactly is the profit made at that branch. But the most important purpose is to have a greater control over the stock at the branch. By making out invoices at the selling price and compelling the branch to sell at the price invoiced, stock control is made easy. In the illustrations shown already, it can be noted that the head office sends goods to the branch at cost price only and the branch sends a periodical stock statement showing the value of stock at the end of the particular period. The stock value provided by the branch office is taken for granted and credited to the branch account in the head office books and the profit or loss is ascertained on that basis. There is no possibility of finding out the shortage or surplus of stock at the branch. This weakness can be avoided by preparing a Memorandum Branch Stock Account which would show how much stock should be there at the branch, at the end of the period. This figure can be compared with the stock statement received from the branch office. Difference, if any, will call for investigation. If it is abnormal, necessary action may be taken. If the difference is due to any normal breakage, spoilage or leakage and is within reasonable limits, it can be deducted from the book figure. The Memorandum Stock Account will appear as follows: Date Particulars ` Date Particulars ` Jan. 1 To Balance b/d xxx Dec. 31 By Goods returned to H.O. xxx Dec. 31 To Goods Sent to Branch xxx Dec. 31 By Sales – Cash xxx Dec. 31 To Returns from Customers xxx Dec. 31 By Sales – Credit xxx Dec. 31 To Surplus xxx Dec. 31 By Shortage xxx Dec. 31 By Balance c/d xxx xxx xxx CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 248 A separate Memorandum Stock Account is to be kept for each branch and entries are to be made at selling price only. The system of stock control through a Memorandum Stock Account operates only when the branch is not authorised to vary the selling price fixed by the head office. Accounting Treatment When goods are sent by the head office at selling price, entries will be made at invoice price only. The opening stock, goods sent to branch and the closing stock will appear in the Branch Account at invoice price only. In order to ascertain the true profit, adjustment entries will have to be made to adjust the difference between the invoice and the cost price on the above items, as shown below: 1. To adjust the load in the goods sent: Dr. xxx Goods Sent to Branch Account To Branch Account xxx xxx (With the difference between the invoice price and cost price of goods sent, minus returns during the year) 2. To adjust the difference in closing stock: Branch Account Dr. To Branch Stock Reserve Account xxx (With the difference between invoice price and cost price of closing stock) 3. To adjust the difference in opening stock: Branch Stock Reserve Account Dr. xxx xxx To Branch Account (With the difference between invoice price and cost price of the opening stock) CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 249 15.6 Practical Problems on Dependent Branch Account Illustration - 1 Kolkata Head Office of a company invoices goods to its Durgapur Branch at cost plus 20%. The Shillong Branch also purchases independently from local parties goods for which payments are made by H.O. except a petty cash account maintained by the branch for which periodical transfers are made from H.O. From the following particulars, show the Branch Account maintained in the Head Office books, reflecting the Branch profit for the year ended 31.12.2016. ` Imprest Cash 1.1.2016 2,000 31.12.2016 1,850 Sundry Debtors on 1.1.2016 25,000 Stock on 1.1.2016: Transferred from H.O. at invoice price 24,000 Directly purchased by branch 16,000 Cash Sales 45,000 Total Sales 1,75,000 Direct purchases 45,000 Returns from Customers 3,000 Goods sent to Branch from H.O. at Invoice Branch 60,000 Transfer from H.O. for petty expenses 2,500 Bad Debts 1,000 Discounts to Creditors 2,000 CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 250 Cash received from Debtors 1,25,000 Branch Expenses 30,000 Stock on 31.12.2016: Transfer from H.O. at invoice value 18,000 Directly purchased by Branch 12,000 Solution: In the Books of Head Office Branch Total Debtors Account Particulars Amount Particulars Amount To Balance b/d 25,000 By Cash A/c 1,25,000 To Sales (Credit) (1,75,000 – 45,000) 1,30,000 By Returns from Customers 3,000 1,000 By Bad Debts 2,000 By Discount to Customers By Balance c/d 24,000 (Balancing figure) 1,55,000 1,55,000 Dr. Durgapur Branch Account Cr. Particulars Amount Particulars Amount To Branch Stock A/c By Bank A/c Received from H.O. 24,000 Cash Sales 45,000 Purchased from outside 16,000 40,000 Cash received from Debtors 1,25,000 1,70,000 CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 251 To Branch Debtors A/c 25,000 By Branch Stock A/c To Branch Petty Cash A/c 2,000 Goods received from H.O. 18,000 To Goods Sent to Branch A/c 60,000 Purchased from outside 12,000 30,000 To Bank A/c 45,000 By Branch Debtors A/c 24,000 To Bank A/c By Branch Petty Cash A/c 1,850 Branch expenses 30,000 By Stock Reserve A/c 4,000 Petty Cash expenses 2,500 32,500 (24,000 × 20/120) To Stock Reserve A/c 3,000 By Goods sent to Branch A/c 10,000 (18,000 × 20/120) (60,000 × 20/120) To General P&L A/c 32,350 2,39,850 2,39,850 Illustration - 2 The Kolkata H.O. usually send goods to its Mumbai Branch at cost plus 25%. Further, whatever required, the branch purchases goods independently. From the following details, prepare the Mumbai branch account in the H.O. books. ` Petty Cash balance on 1.1.2016 2,000 Petty Cash balance on 31.12.2016 2,000 Stock on Hand on 1.1.2016: Goods received from H.O. 6,400 Goods purchased from outside 1,600 Goods sent to Branch 68,000 Cash Sales 13,000 Credit Sales 1,19,000 CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 252 Credit Purchases 15,200 Collections from Debtors 1,12,200 Debtors as on 1.1.2016 8,200 Debtors as on 31.12.2016 11,200 Office Expenses (cash sent by H.O.) 30,000 Stock on Hand on 31.12.2016: Goods received from H.O. 6,000 Goods Purchased from outside 2,000 Amount paid to creditors (out of collections made) 14,800 Creditors as on 1.1.2016 800 Creditors as on 31.12.2016 1,200 Solution: In the Books of Kolkata H.O. Mumbai Branch Account Particulars Amount Particulars Amount To Branch Stock A/c By Branch Creditors A/c 800 Received from Stock 6,400 By Bank Account Purchased from outside 1,600 8,000 Cash Sales 13,000 To Branch Debtors A/c 8,200 Cash from Debtors (1,12,200 – 14,800) 97,400 1,10,400 To Branch Petty Cash A/c 2,000 By Branch Stock A/c To Goods Sent to Branch A/c 68,000 Received from H.O. 6,000 To Bank A/c 30,000 Purchased from outside 2,000 8,000 CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 253 To Branch Creditors A/c 1,200 By Branch Debtors A/c 11,200 To Stock Reserve A/c 1,200 By Branch Petty Cash A/c 2,000 (6,000 × 25/125) To General P&L A/c 28,680 By Stock Reserve A/c 1,280 (6,400 × 25/125) By Goods Sent to Branch A/c 13,600 (68,000 × 25/125) 1,47,280 1,47,280 Illustration - 3 A cloth company of Madurai has its branch at Bangalore. Goods are invoiced to the branch at cost plus 25%. Branch has been instructed to deposit daily all cash received by it in the Head Office, except petty expenses which are met by the branch manager from the petty cash amount sent by the H.O. from time to time. From the following particulars, prepare Kolkata Branch Account in the books of the H.O. at Madurai. ` Stock on 1.4.2016 at invoice price 36,000 Sundry debtors on 1.4.2016 21,000 Cash in hand on 1.4.2016 960 Office furniture on 1.4.2016 3,000 Goods received from H.O. (invoice price) 1,90,000 Goods returned to H.O. (invoice price) 2,500 Cash received from debtors 72,000 Credit sales 1,20,000 CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 254 Discount allowed to debtors 700 1,100 Goods returned by debtors 9,200 Expenses paid by H.O.: For rent ` 2,900 For salary ` 5,600 For Printing and stationery ` 720 Petty expenses paid by the branch manager 670 Depreciation is to be provided on branch furniture at 10% p.a. Solution: In the Books of Cloth Co., Madurai (HO) Kolkata Branch Stock Account (To find out closing stock) Particulars Amount Particulars Amount To Balance b/d 36,000 By Goods returned to H.O. 2,500 To Goods received from H.O. To Goods returned by Debtors 1,90,000 By Credit sales 1,20,000 1,100 By Balance c/d 1,04,600 2,27,100 2,27,100 Kolkata Branch Debtor Account (To find out closing balance) Particulars Amount Particulars Amount To Balance b/d 21,000 By Cash A/c 72,000 To Credit sales 1,20,000 By Sales returns 1,100 By Discount allowed to customer 700 By Balance c/d 67,200 1,41,000 1,41,000 CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 255 Kolkata Branch Account Particulars Amount Particulars Amount To Balance b/d: By Goods Sent to Branch A/c 2,500 Branch Stock A/c 36,000 By Cash/Bank A/c Branch Debtors A/c 21,000 (Cash received from debtors) 72,000 Branch Petty Cash A/c 960 By Stock Reserve (36,000 × 25/125) 7,200 Branch Furniture A/c 3,000 By Goods Sent to Branch To Goods Sent to Branch A/c 1,90,000 (1,90,000 × 25/125) 38,000 To Cash/Bank A/c: By Balanced c/d: Rent 2,900 Branch Stock A/c 32,600 Salaries 5,600 Branch Debtors A/c 67,200 Printing and Stationery 720 9,220 Branch Petty Cash (960 – 670) 290 To Goods Sent to Branch A/c Branch Furniture (3,000 – 10%) 2,700 (2,500 × 25/125) 500 To Stock Reserve A/c By General P & L A/c (Net loss) 44,710 (32,600 × 25/125) 6,520 2,67,200 2,67,200 Illustration - 4 A Head Office in Calcutta charges out goods supplied to its branch at Durgapur at cost plus 25%. From the following information, you are required to prepare in the Head Office books: (i) Durgapur Branch Trading Account, (ii) Durgapur Branch Total Debtors A/c and (iii) Durgapur Branch Account. Goods supplied to branch (at invoice price) ` 86,925 Gross sales during the period ` 84,500 CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 256 Cash sales during the period ` 38,400 Amount received from Debtors ` 42,500 Branch debtors at the beginning ` 15,500 Branch Stock at the beginning ` 18,240 Branch stock at the end ` 26,590 Goods returned to H.O. (invoice value) ` 5,480 General Expenses (Ignore fractions) ` 1,560 Solution: Durgapur Branch Total Debtors Account Particulars Amount Particulars Amount To Balance b/d 15,500 By Cash received 42,500 To Credit Sales 46,100 By Balance c/d 19,100 61,600 61,600 Durgapur Branch Trading A/c Particulars Amount Particulars Amount To Opening Stock (18,240 – 3,648) 14,592 By Sales 84,500 To Goods from H.O. By Closing Stock (26,590 – 5,318) 21,272 (86,925 – 17,385) 69,540 Less: Returns 4,384 65,156 (5,480 – 1,096) To Gross Profit (Credited to 26,024 General P & L A/c) 1,05,772 1,05,772 CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 257 General P & L A/c Particulars Amount Particulars Amount To General Expenses 1,560 By Gross Profit 26,024 To Net Profit 24,464 26,024 26,024 Branch Account Particulars Amount Particulars Amount To Balance b/d 14,592 By Goods Sent to Branch A/c 4,384 Branch Stock (Returns) Branch Debtors 15,500 30,092 By Bank (38,400 + 42,500) 80,900 To Goods Sent to Branch A/c 69,540 By Balance c/d To General P & L A/c (Profit) 26,024 Branch Stock 21,272 Branch Debtors 19,100 40,372 1,25,656 1,25,656 Illustration - 5 Sumana Ltd. had its Head Office in Bengaluru and branch at Mysuru. You are given the following information relating to Mysuru branch for the year ended 30.6.2016. Stock at branch on 1.7.2015 38,400 Petty cash at branch on 1.7.2015 130 Goods sent to branch 55,100 Goods returned by the branch 4,700 Cash sales at branch 85,200 Cash sent to branch for expenses – Salaries ` 15,300, rent ` 3,600 and petty cash ` 3,100. Prepare Mysuru Branch A/c in the books of H.O. CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 258 Solution: In the Books of Sumana Ltd. (HO) Mysuru Branch Account for the year ended 30.6.2016 Particulars Amount Particulars Amount To Stock at Branch 38,400 By Goods sent to Branch 4,700 To Petty cash at Branch 130 By Bank Account To Goods sent to Branch 55,100 Cash Sales 85,200 To Bank Account By General P&L A/c (Loss) 25,730 Salary paid 15,300 22,000 1,15,630 Rent 3,600 1,15,630 Petty cash 3,100 Illustration - 6 Calculate the branch profit (dependent branch) from the following information. Opening balances Branch Furniture 40,000 Branch Stock 6,00,000 Transaction during the year Goods sent to the branch 12,00,000 Cheques sent for branch expenses 50,000 Good returned by the branch 20,000 Remittances by the branch 13,85,000 Closing balances Branch Furniture 35,000 Branch stock 6,50,000 CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 259 Solution: In the Books of Head Office Cr. Dr. Branch Account Particulars Amount Particulars Amount To Opening stock at Branch To Furniture at Branch 6,00,000 By Goods sent to Branch To Goods sent to Branch To Bank A/c (Cheques sent 40,000 (Goods returned by branch to H.O) 20,000 for branch expenses) 12,00,000 By Bank A/c (remittances 13,85,000 50,000 made by branch to H.O) By Stock at Branch 6,50,000 To General P/L A/c (Net Profit) 2,00,000 By Furniture at Branch 35,000 20,90,000 20,90,000 Stock and Debtors’ System When the head office is interested in maintaining a better stock control at the branch, this method is used. Under this system, the head office does not open a Branch Account in its books but keeps separate accounts for recording the various types of transactions at the branch. The following accounts are generally maintained in the head office books: (1) Branch Assets Account (2) Branch Stock Account (3) Branch Debtors Account (4) Branch Expenses Account (5) Branch Adjustment Account (or Profit and Loss A/c) (6) Goods sent to Branch Account. Since a Branch Stock Account is prepared in the head office books, any shortage or surplus of the stock with the branch will be brought to light. This method is useful only when goods are invoiced to the branches at a selling price which the branch is not expected to vary. CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 260 Accounting Treatment The entries will be made in the following manner: Particulars LF Debit Credit 1. When goods are sent to Branch: Branch Stock A/c Dr. xxx To Goods Sent to Branch A/c xxx xxx xxx (Invoice value of the goods sent) xxx xxx xxx xxx If goods are returned by the branch, the above entry xxx xxx will be reversed. xxx xxx 2. When sales are made by the branch: (a) For cash sales: Cash A/c Dr. To Branch Stock A/c (b) For credit sales: Branch Debtors A/c Dr. To Branch Stock A/c 3. When cash is received from debtors: Cash A/c Dr. To Branch Debtors A/c 4. When goods are returned by credit customers: Branch Stock A/c Dr. To Branch Debtors A/c 5. For discount allowed, other allowance and bad debts: Branch Expenses A/c Dr. To Branch Debtors A/c CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 261 6. For branch expenses paid in cash by the head office: xxx xxx Branch Expenses A/c Dr. xxx xxx xxx xxx To Cash A/c xxx xxx xxx 7. For adjusting the load in the goods sent to branch: xxx xxx xxx Goods Sent to Branch A/c Dr. xxx To Branch Adjustment A/c 8. For adjusting the load in the closing stock: Branch Adjustment A/c Dr. To Branch Stock Reserve A/c 9. For shortage of stock at the branch: Branch Adjustment A/c Dr. To Branch Stock A/c 10. For surplus of stock at the branch, if any: Branch Stock A/c Dr. To Branch Adjustment A/c 11. For adjusting the load in the opening stock: Branch Stock Reserve A/c Dr. To Branch Adjustment A/c (This is only a transfer entry. The stock reserve carried forward from the previous period is closed and transferred to the Branch Adjustment A/c. The stock reserve at the end will be carried forward to the next period.) 12. To transfer the branch expenses to Branch Adjustment A/c: Branch Adjustment A/c Dr. To Branch Expenses A/c CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 262 13. The balance in the Branch Adjustment A/c will be profit or loss and will be transferred to General Profit and Loss A/c. The entry will be: Branch Adjustment A/c Dr. xxx To General Profit and Loss A/c xxx If the Branch Adjustment A/c reveals a loss, the above entry will be reserved. 14. For closing the Goods sent to Branch A/c: Goods Sent to Branch A/c Dr. xxx To Purchases A/c / Trading A/c xxx Illustration - 7 Pass journal entries in the books of head office. (a) Goods supplied to Anantapur Branch on 28.12.2015 worth ` 50,000 were received by the Head Office on 5.1.2016. (b) Goods amounting to ` 2,00,000 transferred from Tirupathy branch to Hindupur branch under Head Office instruction. (c) Pavagada branch collected ` 20,000 from a customer of head office. (d) Depreciation of Tumkur branch fixed assets when such accounts are opened in the head office books. (e) Expenses paid ` 5,000 to be charged to Mysore branch for work done on its behalf by HO. Solution: Journal Entries in the Books of Head Office S.No. Particulars LF Debit Credit 1 Goods in Transit A/c Dr. 50,000 To Anantapur Branch A/c 50,000 (Being goods supplied to Anantapur branch) CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 263 2 Hindupur Branch A/c Dr. 2,00,000 To Tirupathy Branch A/c 2,00,000 (Being recording inter branch transfer of goods) 3 Pavagada Branch A/c Dr. 30,000 To Debtors A/c 30,000 (Being cash collected by branch from debtors) 4 Fixed Assets A/c Dr. – To Tumkur Branch A/c – (Being depreciation on fixed assets by head office) 5 Profit and Loss A/c Dr. 5,000 To Mysore Branch A/c 5,000 (Being expenses charged to Mysore branch by head office) Illustration - 8 Udita Ltd. has its head office at Bengaluru and a branch at Hassan. It closes the books of accounts on 31st March every year. Pass adjustment entries in the books of head office for the following: (a) Goods worth ` 3,00,000 sent by head office on 25th March, 2016 were received by the branch on 5th April, 2016. (b) Depreciation at 15% p.a. is to be provided on Furniture costing ` 3,50,000 installed on 1st August, 2015 at Hassan. The Furniture A/c is maintained at head office. (c) Hassan branch collected ` 18,500 from a local customer and ` 12,500 interest on investments on behalf of the head office. (d) A clerk of the branch rendered services in the head office for a period of 3 months and his salary per month is ` 12,000. CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 264 Solution: Date Particulars LF Debit Credit 1 Hassan Branch A/c Dr. 3,00,000 3,00,000 To Goods Sent to Branch A/c (Being goods sent to Branch) Dr. 35,000 35,000 2 Hassan Branch A/c 31,000 To Branch Furniture A/c Dr. 12,500 (Being depreciation charged) 36,000 18,500 3 Hassan Branch A/c 36,000 To Sundry Debtors A/c To Bengaluru Branch A/c (Being money received) 4 Hassan Branch Expenses A/c Dr. To Bengaluru Branch A/c (Being salary paid for service rendered at H.O.) 15.7 Independent Branch A Branch is said to be independent when it maintains a separate set of books of accounts and keeps a full system of accounting. 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 prepares its own Trading and Profit and Loss Account. A copy of the trial balance so prepared will be forwarded to the head office and the head office will incorporate the same in its books of accounts so that a consolidated Profit & Loss Account and a Balance Sheet can be prepared for the business as a whole. Independent branches generally do not depend upon the head office for supplies of goods and for meeting the expenses and they are not required to remit their collections to the head office CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 265 daily as in the case of dependent branches. However, periodical transfer of goods and remittance of money may take place between the head office and the branch. Features of Independent Branches Independent branches are those branches which act independently within the broad policies framed by the H.O. in conducting their day-to-day activities. The main features of independent branches are: (a) They need not to depend on the head office for their requirements of supplies of goods. They can make purchases themselves. Of course they can also obtain supplies of goods from H.O. as and when they want. (b) They can sell goods only for cash or for cash and credit at any price they consider profitable. (c) They need not to remit the money received by them from cash sales and debtors to the H.O. periodically. They can retain the funds in their own hands and meet their day-to-day expenses out of those funds without relying on the H.O. for their requirements of cash. (d) They keep a complete set of books for recording their transactions, so they can prepare their own trial balance, Trading and Profit and Loss Account and Balance Sheet. 15.8 Practical Problems on Independent Branch Account Accounting Treatment The head office will open in its books a ‘Branch Account’ which is a running account between the head office and the branch and all transactions taking place between the head office and the branch will be recorded therein. Thus, the goods sent to branch, expenses of the branch paid by the head office etc., will be debited to this account. Cash received from the branch, goods returned by the branch etc., will be credited. The balance in this account shows the amount due from or due to the branch by the head office. Corresponding to the ‘Branch Account’ in the head office, the branch opens a ‘Head Office Account’ wherein the same transactions between the branch and head office are recorded and the balance is the amount due to or due from the head office. Since the ‘Branch Account’ in the head office books and the ‘Head Office Account’ in the branch books are only reciprocal accounts, the balances shown by these accounts would generally CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 266 agree, if all the transactions between the head office and branch have been recorded on the same date in both the books. However, because of certain errors or pending adjustments there may be a difference between the balances shown by the books of accounts on any date. The following adjustments may be remembered: 1. Purchase of branch fixed assets It is usual for the head office to open and maintain the fixed asset of the branch in its own book, though the assets are in use with the branch. This is done for the purpose of preparing the consolidated Balance Sheet by the Head Office. In such cases, the following transactions may take place: (i) Purchase of a Machinery for use at the branch, say for ` 10,000 and paid by the Branch. The Branch will make an entry in its books: Date Particulars LF ` ` Branch Machinery A/c Dr. 10,000 To Bank/Cash A/c 10,000 (Being amount paid for machine purchased for branch use) (ii) If the same asset is purchased and paid for by the branch but the accounts for the same is to be opened in the head office books: The entries will be: In the Branch books: Date Particulars LF ` ` Head Office Account Dr. 10,000 To Bank/Cash A/c 10,000 (Being amount paid for machinery purchased, account to be opened in the head office books) CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 267 In the Head Office books: Date Particulars LF ` ` Branch Machinery A/c Dr. 10,000 To Branch A/c 10,000 (Being the Branch Machinery Account opened) 2. Depreciation of branch fixed assets If the branch fixed assets account is opened in the books of the head office as shown above, the depreciation in respect of the asset for the year has to be adjusted in the books of the head office and branch. For example, if the depreciation to be charged at 10% on the Branch Machinery whose book value is ` 10,000, the entries will be: (i) Purchase of a Machinery for use at the branch, say for ` 10,000 and paid by the Branch. In the branch books for charging depreciation: Date Particulars LF ` ` Depreciation A/c Dr. 1,000 To Head Office A/c 1,000 (Being depreciation written off) In the head office books for writing down the value: LF ` ` Date Particulars Branch A/c Dr. 1,000 To Branch Machinery A/c 1,000 (Being depreciation on the branch machinery provided) 3. Goods in Transit When the head office sends goods to the branch, it makes an entry debiting the ‘Branch Account’ and crediting the ‘Goods Sent to Branch Account’ with the value of goods sent. If the CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 268 same goods have been received by the branch before the date of account closing, the branch debits the ‘Goods Received from Head Office Account’ and credits the ‘Head Office Account.’ But it may so happen that a consignment of goods sent by the head office to branch, though entered in the books of the head office might not have reached the branch before the date of account closing. The goods are said to be in transit, and hence no entry would appear in the books of the branch. Hence, the balance shown by the ‘Head Office Account’ in the branch books will not agree with the balance shown by the ‘Branch Account’ in the head office books. The head office will have to make the following entry to adjust the goods in transit. Date Particulars LF ` ` Goods in Transit Account Dr. xxx To Branch Account xxx There will be no entry in the books of the branch. ‘Goods in transit’ is an asset and will be shown in the Balance Sheet. 4. Cash in Transit Just like goods in transit, the cash remitted by the branch might not have reached the head office before the date of account closing. It is known as ‘Cash in Transit’and the following adjustment is made in the branch books: Date Particulars LF ` ` Cash in Transit Account Dr. xxx To Head Office Account xxx (Cash in transit adjusted) The branch credits the Head Office Account because though it has already debited the Head Office Account when the cash was sent, the cash has not yet been received by the head office. There will be no entry in the head office books. The ‘Cash in Transit’ is an asset and appears in the Balance Sheet. However, Cash in Transit may be adjusted in the head office books instead of in the branch books as explained above. In such a case, the entry in the books of the head office will be: CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 269 Date Particulars LF ` ` Cash in Transit Account Dr. xxx To Branch Account xxx (Being cash in transit adjusted) If there is a difference between the Head Office Account and Branch Account it means that either there is goods in transit or cash in transit or both and the necessary adjustments should be made. 5. Head Office Expenses Account The head office might have rendered some service to the branch or the branch might have been benefited by the expenditure incurred by the head office. At the end of the year, the head office may charge the branch with a reasonable amount for the services so rendered or benefit given. The entry in the books of the head office will be: Date Particulars LF ` ` Branch Account Dr. xxx To Profit & Loss Account xxx or To Salaries Account xxx (Being the services/expenses charged to the branch) If the benefit received by the branch is because of the service rendered by the staff of the head office, it is better to credit the Salaries Account in the head office books. If the benefit obtained is of general nature and cannot be specified, the Profit and Loss Account is to be credited. The entry for the same in the branch books will be: ` ` xxx Head Office Expenses Account Dr. xxx To Head Office Account (Being the amount due to Head Office for services received) CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 270 The ‘Head Office Expenses Account’ will be closed and transferred to the Branch Profit and Loss Account. 6. Inter-branch Transactions Frequently goods are transferred from one branch to another under instructions from the head office, to meet the urgent requirements of the branch. Similarly, cash also may be transferred from one branch to another. For example, if the Cochin branch of the Chennai Head Office transfers goods worth ` 4,000 to the Mangalore branch, the entries will be: In the books of the Cochin Branch: Date Particulars LF ` ` Chennai Head Office Account Dr. 4,000 To Goods Sent to Branch Account 4,000 ` (Being goods supplied to Mangalore branch under instruction from Head Office) In the books of Mangalore Branch: Date Particulars LF ` Goods Received from Head Office Account Dr. 4,000 To Head Office Account 4,000 ` (Being goods received from Cochin branch under instruction from Head Office) In the Chennai Head Office books: Date Particulars LF ` Mangalore Branch Account Dr. 4,000 To Cochin Branch Account 4,000 (Being goods transferred from Cochin branch to Mangalore branch) CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 271 It is to be noted that the Head Office debits the branch receiving the benefits and credits the branch giving the benefits. In the books of the concerned branches, only the Head Office Account is either debited or credited since a branch has only the account for the head office in its books and not for the other branches. If each branch has to maintain accounts of all other branches, accounting may become unwieldy and cumbersome. Frequent Inter-branch Transactions When there is frequent inter-branch transactions involving transfer of money, bills, goods, etc., the Head Office may, in order to avoid the unnecessary clerical work involved in it, pass a single entry at the end of each month to adjust the position arising out of such inter-branch transactions during the month. For this purpose a memorandum statement showing the details of such inter- branch transactions during the month may be prepared and the net position ascertained. Illustration - 10 Give the entries to adjust the following in the books of the Mumbai head office and Baroda branch: (a) Goods worth ` 5,000 purchased by Baroda branch but payments made by the Mumbai head office. The Mumbai office debited the amount to its own purchases account. (b) Goods ` 3,000 sent by Mumbai head office to Baroda branch have not yet reached the branch. (c) An amount of ` 5,000 sent by the Baroda branch to the head office has not yet been received. (d) The Baroda branch paid ` 2,500 as salary to a visiting head office official. This was debited to the Salaries account by the branch. (e) Expenses ` 3,000 to be charged to the Baroda branch for services rendered to it by the head office. (f) Baroda branch purchased a Plant and Machinery for ` 20,000 and paid the amount; the account is to be opened in the head office books. (g) Depreciation of ` 1,000 in respect of the above machinery has not yet been provided. (h) The Baroda branch paid ` 700 dividend to a local shareholder on behalf of the head office. CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 272 Solution: In the Books of Mumbai H.O. S. No. Particulars LF Debit Credit 5,000 (a) Baroda Branch A/c Dr. 5,000 3,000 To Purchases A/c 2,500 (Being wrong debit to Purchases A/c for goods purchased 3,000 20,000 by branch rectified) 1,000 (b) Goods in Transit A/c Dr. 3,000 700 To Baroda Branch A/c (Being goods in transit adjusted) (c) No entry (d) Salaries A/c Dr. 2,500 To Baroda Branch A/c (Being salaries paid by the Baroda Branch) (e) Baroda Branch A/c Dr. 3,000 To P & L A/c (Being expenses charged to branch) (f) Branch Plant & Machinery A/c Dr. 20,000 To Baroda Branch A/c (Being Branch Machinery Account opened) (g) Baroda Branch Account Dr. 1,000 To Branch Plant and Machinery A/c (Being depreciation on branch machinery) (h) Dividends A/c Dr. 700 To Baroda Branch A/c (Being dividend paid by the branch on our behalf) CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 273 In the Books of Baroda Branch S. No. Particulars LF Debit Credit (a) Purchases A/c Dr. 5,000 To Head Office A/c 5,000 (Being purchases paid by H.O.) (b) No entry Dr. 5,000 5,000 (c) Cash in Transit A/c To Head Office A/c (Being cash in transit adjusted) (d) Head Office A/c Dr. 2,500 To Salaries A/c 2,500 (Being wrong debit to Salaries A/c for salary paid to the head office officially rectified) (e) Head Office Expenses A/c Dr. 3,000 To Head Office A/c 3,000 (Being the amount due to H.O. for services received) (f) Head Office A/c Dr. 20,000 20,000 To Bank A/c (Being Plant and Machinery purchased and account to be opened in the H.O. books) (g) Depreciation A/c Dr. 1,000 To Head Office A/c 1,000 (Being depreciation written off) (h) Head Office A/c Dr. 700 700 To Bank A/c (Being the dividend to the local shareholder paid on behalf of the H.O.) CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 274 Incorporation of Branch Trial Balance in the Head Office Books An independent branch prepares its own trial balance and sends a copy of the same to the head office to be incorporated in the books of the head office so that a profit and loss account for the branch and a consolidated balance sheet can be prepared for the business as a whole. There are two ways in which it can be done. Method I: Under this method, all the figures found in the branch trial balance are incorporated in the books of the head office by means of a set of incorporating entries, as shown below: S. No. Particulars LF Debit Credit xxx xxx 1 To Incorporate all items on the debit side to the branch trading account: Branch Trading Account Dr. To Branch Account (Being opening stock, goods from H.O. and direct expenses incorporated) 2 To incorporate all items on the credit side of the branch trading account: Branch Account Dr. xxx xxx To Branch Trading Account (Being sales and closing stock incorporated) The Gross Profit/Loss can now be ascertained. 3 To transfer the Gross Profit to Profit and Loss Account: If it is Gross Profit: Branch Trading Account Dr. xxx To Branch P & L A/c xxx (Being Gross Profit transferred) CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 275 If it is a Gross Loss: Dr. xxx Branch P & L Account xxx To Branch Trading Account xxx (Being Gross Loss transferred) xxx 4 To incorporate all the items on the debit side of the xxx branch Profit and Loss Account: xxx Branch P & L Account Dr. xxx xxx To Branch Account (Being the expenses and losses incorporated) xxx xxx 5 To incorporate the items on the credit side of the Profit and Loss A/c Branch Account Dr. To Branch P & L Account (Being incomes and gains incorporated) 6 Branch Profit and Loss Account would now show the net profit or loss. To transfer the profit or loss: Branch Account Dr. To General P & L Account (Being Net Profit transferred) The entry will be reversed if there is a loss. The above six entries will complete the Branch Trading and P & L Account. 7 To incorporate the branch assets: Individual Asset Account Dr. To Branch Account (Being the assets incorporated) CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 276 8 To incorporate branch liabilities: Dr. xxx Branch Account xxx To Individual Liability Account (Being the liabilities incorporated) The last two entries enable the head office to prepare a balance sheet for the branch by the head office. The effect of all the above incorporating entries is to close the Branch Account in the books of the head office, since all items have been transferred to the head office books. If the head office has to prepare the Trading and Profit and Loss Account only, it does not pass the last two entries, with the effect that the branch account will show a balance equal to net assets, i.e., total assets minus liabilities at the branch on that date. In the subsequent accounting period, the last two entries will be reversed so that the branch assets and liabilities can be closed in the head office books and transferred to the branch books. Method II: Under this method, the branch trading and profit and loss account is prepared as a memorandum account and entry is passed only for incorporating the net profit or loss at the branch, instead of incorporating all the items of the trial balance. The entry to incorporate the net profit or loss will be: If it is net profit: Branch Account Dr. xxx To General P & L Account xxx (Net profit incorporated) If it is net loss: General P & L Account Dr. xxx To Branch Account xxx (Net loss incorporated) CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 277 In addition to the above entry, entries for incorporating the branch assets and liabilities will be made, as shown already. Just like entries are made in the books of the head office for incorporating the branch figures, branch will make closing entries to close its books and transfer the balances to the head office. 15.9 Summary Dependent branches are those branches which are not keeping a separate set of books of accounts of their own. All the transactions connected with the branch are recorded only in the books of the Head Office. A Branch is said to be independent when it maintains a separate set of books of accounts and keeps a full system of accounting. 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 prepares its own Trading and Profit and Loss Account. Dependent branches are those branches which are not keeping a separate set of books of accounts of their own. All the transactions connected with the branch are recorded only in the books of the Head Office. A Branch is said to be independent when it maintains a separate set of books of accounts and keeps a full system of accounting. 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 prepares its own Trading and Profit and Loss Account. A foreign branch is nothing but an independent branch located but in a foreign country. It maintains accounts in a foreign currency. Branch Account which is a nominal account in nature and which serves the purpose of both a running account between the Head Office and the branch as well as a Profit and Loss Account. CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 278 15.10 Key Words/Abbreviations z Branch Account: Goods supplied to them by the H.O. may be either at the cost price or at invoice price. z Dependent Branch: All the transactions connected with the branch are recorded only in the books of the Head Office. z Independent Branch: A Branch is said to be independent when it maintains a separate set of books of accounts 15.11 Learning Activity 1. How many types of branches are there? Mention the four systems under which a Head Office may maintain the accounts of its branch. _________________________________________________________________ _________________________________________________________________ 2. How are the branches classified for the purpose of accounting? What is meant by loaded price in branch accounting? _________________________________________________________________ _________________________________________________________________ 3. Goods of the value of ` 56 crore are transferred by Hubli Branch to Sagar Branch under Head Office instructions. Journalise in the books of Sagar branch. _________________________________________________________________ _________________________________________________________________ CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 279 15.12 Unit End Questions (MCQs and Descriptive) A. Descriptive Type Questions 1. What is branch? State the features of dependent branches. 2. What is the purpose of preparing the branch accounts? Mention the features of independent branches. 3. What are dependent branches? State the features of dependent branches. 4. What are Independent branches? Mention the features of Independent Branches. 5. Pass journal entry in the books of H.O. A payment of ` 39,100 was made by Sagar branch to a local supplier of goods of H.O. under the instructions of H.O. Ans: Creditors A/c Dr. 6. Kolar H.O. sends goods to its K.G.F. branch at a profit of 20% on cost, of the H.O. sends goods for ` 1,00,000. Calculate the cost price. Ans: Cost: 83,333. 7. The Bombay Head Office sends goods to its Poona branch at a profit of 20% on cost. If Bombay H.O. sends goods for `1,20,000, calculate the cost price. Ans: Cost price: 1,00,000. 8. Calculate the branch profit (dependent branch) from the following information: Opening balances: Branch Furniture 40,000 Branch Stock 6,00,000 Transaction during the year: Goods sent to the branch 12,00,000 CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 280 Cheques sent for branch expenses 50,000 Goods returned by the branch 20,000 13,85,000 Remittances by the branch Closing balances: 35,000 6,50,000 Branch Furniture Branch stock B. Multiple Choice/Objective Type Questions 1. Under Debtors System, the Branch Account is _______. [a] Real Account [b] Nominal Account [c] Personal Account [d] None of these 2. Stock Reserve in relation on Opening Stock appears under the Debtors System _______. [a] On the debit side of the Branch Account [b] On the credit side of the Branch Account [c] On the credit side of Head Office Account [d] None of the above 3. Stock reserve in relation to Closing Stock appears under the Debtors System _______. [a] On the debit side of the Branch Account [b] On the credit side of the Branch Account [c] On the debit side of Head Office [d] None of these CU IDOL SELF LEARNING MATERIAL (SLM)

Branch Accounts 281 Answers 1. [b], 2. [b], 3, [a] 15.13 References 1. Arulanandam and Raman, Advanced Accountancy, Himalaya Publication House Pvt. Ltd., Edition 2018. 2. Dr. Vishwanathan Reddy and Jayaram Kanzal, Corporate Accounting, Himalaya Publication House Pvt. Ltd., Edition 2019 3. Dr. S.N. Maheswari, Financial Accounting, Vikas Publication, Edition 2017. 4. S.P. Jain and K.L. Narang, Financial Accounting, Kalyani Publication, Edition 2018. 5. Reddy, K.R. (2000), “Accounting Standards and Gaps in Practices in India”, Management Accountant, ICWAI, April. 6. http://www.mca.gov.in/MinistryV2/accountingstandards1.html 7. https://www.icaew.com/technical/by-country/north-america/us/accounting-in-us/us-gaap 8. https://www.ifrs.org/issued-standards/list-of-standards/ 9. http://www.accountingnotes.net/final-accounts/final-accounts-of-the-companies-with- solutions-accounting 10. http://www.accountingnotes.net/amalgamation/external-reconstruction-and-amalgamation 11. http://www.yourarticlelibrary.com/accounting/problems-accounting/amalgamation-and- external-reconstruction ˆˆˆ CU IDOL SELF LEARNING MATERIAL (SLM)