As a business flourishes, it becomes necessary to open up branches in various other towns and cities in order to market its services/products

which results in the increase of its profits.

A branch is generally defined as a section of an enterprise that is geographically separated from the rest of the business.
The activities of the branch are controlled by a head office and usually it carries on the same functions as of enterprises. For example Service Shoes Co. Ltd has branches in different countries.

Branch is not a separate legal entity; it is simply a segment of business. In order to exercise great control over the branches it is necessary to ascertain profit or loss made by such branches separately.

The head office and branch keep proper book of accounts.

Ascertain profit of each branch separately Ascertain the financial position of each branch Asses the progress and performance of each branches. Fulfill the audit requirement under companies ordinance 1984. Ascertain the quantity of stock held by each branch at the end of that accounting period

Types of Branches

Home Branches

Foreign Branches

Dependent Branches

Independent Branches

Types of Dependent Branches

Services Branches

Retail selling Branches

Booking order on behalf of the head office

Executing orders from Head Office

Goods transferred From Head office at cost

Wholesale price

Goods transferred From head office at loaded (invoice) price

The Accounting arrangement of a branch depends upon its size, the type of activities, the method of operation and degree of control to be exercised by head office. The Main methods of accounting for branch transaction are:
1. Debtors System 2. Stock and Debtor system 3. Final account system

Debtor system
This system of accounting is suitable for the small size branches. Under this a branch account is opened for each branch in the head office ledger. Head office may send goods to branch at either at cost price or selling price.

1. Cost price method 2. Selling price method (Invoice price)

1. Cost price method:

Under this method at the beginning of the year branch account is debited with the opening balance of assets such as stock (at cost), debtors, petty cash, furniture, prepaid expenses, accrued income, lying with the branch. Similarly, it is credited with the opening balances of liabilities of the branch such as creditors, outstanding salaries, rent.

Journal entry: 1. Branch Account Branch Assets Account (Individual) Branch Liabilities Account (Individual) Branch Account Dr.

2.

Dr.

In the books of Head office Branch Account

Date Jan. 1 Particulars Branch b/d Stock Debtors Petty Cash Furniture Prepaid expenses Rs Date Jan.1 Particulars Balance b/d Creditors Outstanding Salaries

Rs

1. Cost price method:

Branch Accounting is then debited with the amount of goods sent to the branch (at cost) and other amount remitted to meet various expenses such as, salaries rent and taxes etc. Branch account is credited with the return of goods (at cost) by the branch and receipts from debtors and cash sales. At the year end, branch account is debited with the closing values of liabilities and credited with the closing values of assets. The Difference between the two sides represents profit or loss for the branch for a particular period.

1. Cost price method:

Journal entries
For goods sent to branch: Branch Account Goods sent to Branch Account Dr.

In the books of Head office Branch Account

Date Jan. 1 Particulars Branch b/d Stock Debtors Petty Cash Furniture Prepaid expenses Goods sent to branch A/c Rs Date Jan.1 Particulars Balance b/d Creditors Outstanding Salaries

Rs

Dec. 31

1. Cost price method:

Journal entries
For goods sent to branch: Branch Account Goods sent to Branch Account Branch Account Cash/bank Account Dr.

For remittance of Cash/cheque to branch for expenses e.g Salaries, rent, petty expenses

Dr.

In the books of Head office Branch Account

Date Jan. 1 Particulars Branch b/d Stock Debtors Petty Cash Furniture Prepaid expenses Goods sent to branch A/c Bank A/c Rent, Rates & Taxes Petty Cash remittance Rs Date Jan.1 Particulars Balance b/d Creditors Outstanding Salaries

Rs

Dec. 31

1. Cost price method:

Journal entries
For goods sent to branch: Branch Account Goods sent to Branch Account Dr.

For remittance of Cash/cheque to branch for expenses e.g Salaries, rent, petty expenses Branch Account Dr. Cash/bank Account
For cash/cheque received from branch (Cash sales plus collection from debts) Cash/Bank Account Dr. Branch Account

In the books of Head office Branch Account

Date Jan. 1 Particulars Branch b/d Stock Debtors Petty Cash Furniture Prepaid expenses Goods sent to branch A/c Bank A/c Rent, Rates & Taxes Petty Cash remittance Rs Date Jan.1 Particulars Balance b/d Creditors Outstanding Salaries

Rs

Dec. 31

Dec.31

Bank A/c Cash sales Collection from debts

1. Cost price method:

Journal entries
For goods sent to branch: Branch Account Goods sent to Branch Account Dr.

For remittance of Cash/cheque to branch for expenses e.g Salaries, rent, petty expenses Branch Account Dr. Cash/bank Account
For cash/cheque received from branch (Cash sales plus collection from debts) Cash/Bank Account Dr. Branch Account For closing balance of assets at the branch: Branch Asset A/c Branch Account Dr.

In the books of Head office Branch Account

Date Jan. 1 Particulars Branch b/d Stock Debtors Petty Cash Furniture Prepaid expenses Goods sent to branch A/c Bank A/c Rent, Rates & Taxes Petty Cash remittance Rs Date Jan.1 Particulars Balance b/d Creditors Outstanding Salaries

Rs

Dec. 31

Dec.31

Bank A/c Cash sales Collection from debts Balance c/d Stock Debtors Petty Cash Furniture Prepaid expenses

1. Cost price method:

Journal entries
For Closing balances of liabilities at the branch: Branch Account Dr. Liabilities account (Individual) For transferring profit and loss; if profit Branch Account To General Profit and loss A/c For transferring profit and loss; if loss General profit and loss Account To Branch Account Dr.

Dr.

It should be noted that the closing balances of branch asset and liabilities are shown in balance sheet

In the books of Head office Branch Account

Date Jan. 1 Particulars Branch b/d Stock Debtors Petty Cash Furniture Prepaid expenses Goods sent to branch A/c Bank A/c Rent, Rates & Taxes Petty Cash remittance Balance c/d Creditors Outstanding Expenses Rs Date Jan.1 Particulars Balance b/d Creditors Outstanding Salaries

Rs

Dec. 31

Dec.31

Bank A/c Cash sales Collection from debts Balance c/d Stock Debtors Petty Cash Furniture Prepaid expenses General Profit and loss A/c (Loss)

General Profit and loss A/c (Profit)

1. Cost price method:

Journal entries
For Abnormal loss: Abnormal loss account Branch Account Dr. (Total)

General profit and loss Account Dr. (Loss) Insurance claim Account Dr. (Claim) Abnormal loss Account

Illustration A ltd had a branch office at Sialkot. The following were the transactions took place between Head office and its branch office for the year ending 31 December 2009. Branch opening Stock 1.1.2009 Goods sent to Branch Goods sent to branch for expenses: Salaries, Rent, Telephone, Petty Cash 3000 67000 4950

Cash sent to Head office

Branch stock on 31.12.2009 Branch cash balance

79000
8000 100

In the books of Head office Sialkot branch Account For the year ended 31 Dec. 2009 Particulars Opening Stock Goods sent to branch Cash for salaries Cash for rent Cash for telephone Cash for petty cash Rs 3,000 67,000 Particulars Rs Cash (from branch) 79,000 Closing balances stock 8,000 Closing balance cash 100

4,950

General profit and Loss (Net profit) 12150 87,100 87,100

2. Invoice Price Method

It is the method of sending goods to its branches at sale price. Methods of selling goods at invoice price is excellent from the point of view of stock control. Goods may be invoiced at selling price to keep the margin of profit a secret from the branch manager.

2. Invoice Price Method Journal Entries

For loading on opening stock Stock reserve Account Branch Account For goods sent to branch Branch Account Goods sent to branch account For return of goods Goods sent to branch account Branch Account

Dr.

Dr.

Dr.

For loading (Net) on goods sent to branch Goods sent to branch Dr. Branch Account

2. Invoice Price Method Journal Entries

For loading on Closing Stock Branch Account Stock Reserve Account

Dr.

For transferring profit and loss; if profit Branch Account Dr. General profit and loss account For transferring profit and loss ; if loss General profit and loss Dr. Branch Account

Rest of the entries are same as of cost price method.

2. Invoice Price Method Journal Entries

For Abnormal loss a) Abnormal loss Branch Account b) Branch Account Abnormal loss c) Bank Account General profit and loss account Abnormal loss Account

Dr.(Invoice price) Dr. (Loading on abnormal loss)

Dr. (Insurance claim received) Dr. (Loss)

2. Invoice Price Method Illustration

The Naveed Stores ltd, Multan has a branch at hyderabad. Goods are invoiced to the branch at a selling price, being cost plus 25%. The branch keeps its own sales ledger and deposits all cash received daily to the credit of the head office account opened at the MCB, Hyderabad. All expenses are paid by cheque from multan.

Stock on 1.1.01 Stock on 31.12.01 Sundry debtors 1.1.01 Sundry debtors 31.12.01 Goods invoiced from H.O

30,0000 36,000 16,800 21,600 2,18,400

Cash sales for the year Credit sales Cash received from the debtors Wages paid

1,29,600 84,000 79,200 8,960

Rent, rates and taxes

Sundry Expenses

9,600
1920

Books of Naveed Stores Ltd. Hyderabad Branch A/c For the year ended 31 Dec. 2001 Date Particulars Rs 30,000 16800 2,18,400 9,600 Date Particulars Rs 129600 19200 36000 21600 01.01.0 Balances 1 Stock Debtors Goods sent to branches Cash----Expenses Rent, rates and taxes Sundry expenses Wages Stock reserve (36000*1/5) General profit & loss 31.12.0 Cashsales 1 Cash--- debtors Balances: Stock Debtors Goods sent to branches (218400*1/5) Stock reserve (30,000*1/5)

1,920 8,960
7200 23200

43680
6000

3,16,080

3,16,080

2. Stock and Debtor System

Stock and debtor system is generally used when the goods are sent to the branches at an invoice price and the size of the branch is large.

These accounts usually are

i. ii. iii. iv. v. vi. vii. viii. Branch Stock Account; Branch Debtor Account Goods sent to branch account Branch adjustment account Branch cash account Branch Expense Account Branch Profit and loss Account Branch Fixed Asset Account

A. Branch Stock Account;

a) b) c) Branch Stock Account is a practical means of controlling stock at branch. It is maintained at invoice price Actual Stock with the branch is shown as the balance in this account.
Date Jan. 1 Particulars Branch b/d In transit At branch Rs Date Jan.1 Particulars Balance b/d Creditors Outstanding Salaries

Rs

Dec. 31

Goods sent to branch A/c Bank A/c Rent, Rates & Taxes Petty Cash remittance

Dec.31

Bank A/c Cash sales Collection from debts Balance c/d at branch In transit

B. Branch Debtors Account

When branch is allowed to sell goods on credit. It is used to exercise control over branch debtors. It is prepared like sundry debtors account.
Date Jan. 1 Particulars Branch b/d Rs Date Jan.1 Particulars Balance b/d

Rs

Dec.31

Branch Stock A/c (Credit sales)

Dec.31

___ ___ Jan. 1 Balance b/d

Bank A/c Collection Branch expense A/c Discount allowed Bad debts Branch Stock A/c (Returned) Balance c/d

__ __

C. Goods sent to Branch Account

Goods sent to branch account is credited with the invoice price of goods sent to the branch by the head office and transferred from other branches and debited with the invoice price of the goods returned/transferred by the branch.
Date Jan. 1 Particulars Branch b/d Rs Date Jan.1 Particulars

Rs

Dec.31

Branch Stock A/c (Returns) Branch Account A/c (Transfer) Branch adjustment account (Loading) Purchases/ trading A/c*

Dec.31

Branch Stock A/c Branch Stock A/c (Transfer)

D. Branch Cash Account

Branch Cash Account is prepared with a view to exercise control over the branch cash. The account is generally opened where the branch is allowed to hold cash received from debtors and use it for branch expenses and remit the balance to head office after certain interval.
Date Jan. 1 Particulars Branch b/d Rs Date Jan.1 Particulars Balance b/d Creditors Outstanding Salaries

Rs

Dec. 31

Goods sent to branch A/c Bank A/c (Remittance) Bank A/c (Transfer from other branch)

Dec.31

Bank A/c(Remittance to H.o) Branch expense a/c Bank A/c (Transfer to other branch) Balance c/d

E. Branch Expense Account

Branch expense records all branch expenses in cash. In addition, this account is debited with the item like bad debts, discount allowed, depreciation on branch fixed assets, etc. The balance of this account is transferred to branch profit and loss account and thereby closed.
Date Jan. 1 Particulars Branch b/d Rs Date Jan.1 Particulars Balance b/d Creditors Outstanding Salaries

Rs

Dec. 31

Branch Cash A/c (Returns) Branch Assets A/c(Depreciation) Branch Debtors A/c Bad debts Discount allowed

Dec.31

Branch Profit and loss A/c

F. Branch (Stock) Adjustment Account

It is prepared to ascertain gross profit of the branch. This account summarizes the profit loading on all transactions. This account is credited with the stock reserve on opening stock and loading on net good sent to branch. It is credited with the loading on surplus in stock.
Date Jan. 1 Particulars Branch b/d Rs Date Jan.1 Particulars Balance b/d Creditors Outstanding Salaries Stock reserve A/c* (Loading on opening stock) Goods sent to branch A/c (Loading on net goods sent) Surplus in stock A/c (Loading on surplus) Gross Loss c/d

Rs

Dec. 31

Shortage in stock A/c (Loading) Loss by fire A/c (Loading) Loss in transit (Loading) Loss by theft(loading) Pilferage A/c (Loading) Stock reserve* (Loading on closing stock) Gross profit c/d

Dec.31

G. Branch Fixed assets Account

The head office may maintain separate asset accounts for each fixed assets. This account is debited with the opening value of asset and purchase of an asset, if any. This account is credited with the depreciation provided on the asset.