2. WHAT IS BRANCH? The aim of every business is to grow and increase its sales volume so as to earn more and more profits. To achieve this objective the strategy is to make market its products/services over a large territory, which is possible only if the business decide to split its business into certain divisions or parts. These are called branches. For example, Bank of Punjab Ltd. With its registered head office at Chandigarh has opened up its branches in different sectors of Chandigarh as well as in different cities all over India. Likewise, Bata Shoe Co., State Bank of India LIC Housing Finance, Tata Finance Ltd., etc. have many branches all over the country.

3. TYPES OF BRANCHES HOME BRANCHES FOREIGN BRANCHES DEPENDENT BRANCHES INDEPENDENT BRANCHES

4. HOME BRANCHES When a branch is opened in the same country where the head office is registered, it is called a home branch. Home branch are of two types- (a) Dependent branches- The branch that do not maintain a complete record of its transactions are called ‘Dependent branches’. (b) Independent branches- Independent branches are those branches which maintain a complete record of its transactions.

5. IMPORTANT TERMS 1. INTER-BRANCH TRANSACTIONS- When a branch sends goods or cash to another branch, it is called inter- branch transactions. Examples- Delhi branch sends goods to Agra branch etc. Accounting treatment: The best way to deal with inter- branch transactions is to record these transactions by the concerned branches through the head office. This can be illustrated with the help of following example: 1.Agra branch sends goods to Delhi branch for Rs.5000. This is a inter branch transaction and will be recorded by the head office and concerned branches as follows:

6. Head office books Agra branch Delhi branch Delhi branch A/c Dr. 5000 To Agra branch A/c 5000 (Being goods transferred from agra to delhi branch) Head office A/c Dr. 5000 To goods sent to branch A/c 5000 (being goods sent to Delhi branch) Goods from branch A/c Dr. 5000 To head office A/c 5000 (being goods received from Agra branch) GOODS IN TRANSIT: When the goods sent by head office are not received by the branch till the date of closing of books of accounts, those goods are called goods in transit.

7. CASH IN TRANSIT: It is quiet common that the head office and the branch send cash to each other at regular intervals. Suppose, Ludhiana branch sends cash to head office on 30th march. The branch will immediately debit ‘Head office account’ and credit ‘cash account’. But the head office will not pas the entry for receipt of cash till cash is actually received. Now further suppose that the head office receives the cash on 2nd April. The head office will pass entry on 2nd April when the cash is actually received. For a few days, therefore, the two accounts will show different balances.

8. Procedure for reconciliation Compare the balance of ‘branch account’ in the head office books with the balance of ‘head office’ in the books of branch. If the two balances are same, there is no need for reconciliation. But in case of difference, the following steps must be followed. Find out the reason for the difference in balances. Pass the following adjustment entries either in the books of head office or in the books of branch, but not in both sets of books.

9. Reasons for the difference If the adjustment entry is passed in the books of head office If the adjustment entry is passed in the books of branch (a) Goods in transit Goods in transit A/c Dr. To branch A/c Goods in transit A/c Dr. To head office A/c (b) Cash in transit Cash in transit A/c Dr. To branch A/c Cash in transit A/c Dr. To head office A/c

10. THERE ARE THREE METHODS OF KEEPING ACCOUNTS OF DEPENDENT BRANCHES: DEBTORS SYSTEM FINAL ACCOUNT SYSTEM STOCK AND DEBTOR SYSTEM

11. This system is used for branches of small size. Under this method the head office prepares a ‘branch account’ separately for each branch. Branch account is a nominal account which gives us the profit or loss made at branch. The journal entries to be made at the head office under this system are as follows:

12. JOURNAL ENTRIES 1For recording branch assets at the beginning of the year Branch A/c Dr. To Branch Assets A/c 2For recording branch liabilities at the beginning of the year Branch liabilities A/c Dr. To branch A/c 3For goods sent to branchBranch A/c Dr. To goods sent to branch A/c 4For goods returned by branch to H.O. Goods sent to branch A/c Dr. To Branch A/c

13. 5For cash sent to branch for expenses Branch A/c Dr. To cash/bank A/c 6For cash remitted by branch to H.O. Cash/bank A/c Dr. To branch A/c 7For recording branch assets at the end of the year Branch assets A/c Dr. To branch A/c 8For recording branch liabilities at the end of the year. Branch A/c Dr. To branch liabilities

14. 9For closing branch account (a)If profit (i.e. credit side total > debit side total) Branch A/c Dr. To general P & L A/c (b) If loss (i.e. credit side total < debit side total) General P & L A/c Dr. To Branch A/c

15. Let us take an example to understand the format of branch account: The Atlas Cycles Co. has a branch at Rohtak. Goods are invoiced to the branch at cost plus 25%. Branch is instructed to deposit cash every day in the head office account in the bank. All the expenses are paid by cheque by the H.O. except petty cash expenses which are paid by the branch manager. From the following particulars, prepare the branch account in the books of head office:

16. Stock on 1 st April, 20005000 Stock on 31 st March, 20016000 Sundry debtors on 1 st April, 20002800 Sundry debtors on 31 st March,20013600 Cash sales for the year21600 Credit sales for the year14000 Cash remitted to the H.O.30000 Machinery purchased by the branch2400 Goods invoiced from the H.O.36400 Expenses paid by the branch240 Expenses paid by the H.O.3280 H.O. sent cash to purchase safe for the branch2600

17. BRANCH ACCOUNT Solution: To branch stock5,000By cash remitted30,000 To branch debtors2,800By St. reserve (5000 x 1/5)1,000 To goods sent to branch36,400By goods sent to branch (36400 x 1/5) 7,280 To bank (expenses)3,280By branch stock60,000 To bank (safe)2,600By branch debtors3,600 To stock reserve (6000 x 1/5) 1,200By branch machinery2,400 To general P&L A/c (Profit) 3,760By branch safe2,600 By branch cash2,160 55,040

18. Working notes: (i) calculation of cash received from debtors: To balance b/d2,800By cash (bal. fig.)13,200 To sales (credit)14,000By balance c/d3,600 16,800 DEBTORS ACCOUNT

19. (ii) Calculation of closing cash balance: To sales21600By cash remitted to H.O. 30000 To debtors13200By machinery purchased 2400 By petty expenses 240 By balance c/d2160 34800

20. Under this system the profit or loss made by the branch is ascertained by preparing the ‘branch trading and profit & loss account’. This account is prepared on memorandum basis and do not form the part of the double entry system. After preparing this account, the next step is to incorporate profit or loss made by branch as well as the branch assets and liabilities in the books of head office. This is done by preparing the ‘Branch Account’ in the books of head office. The branch account under the present system will be in the nature of a personal account and must be distinguished from the branch account prepared under the debtors system in which case is a nominal account.

21. This method can be explained by an example which is given below: A Delhi merchant has a branch at madras to which he supplies goods at cost + 25%. The branch keeps its own sales ledger and transmits all cash received to head office every day. All expenses are paid from the H.O. for the year ended 31st December 1999, the transactions of the branch were as follows:

22. Stock on 1-1-199911000Return inwards500 Debtors on 1-1-19991700Cheques sent to branch: Petty cash on 1-1-1999100Rent600 Cash sales2650Wages200 Goods sent to branch20000Other expenses900 Collection on ledger accounts 21000Stock on 31-12-199913000 Goods returned to H.O.400Debtors on 31-12-19992000 Bad debts300Petty cash on 31-12-1999125 Allowances to customers250(including miscellaneous income of Rs. 25 not remitted to H..O.) Prepare the branch trading and profit & loss A/c and branch account for the year ended 31st Dec, 1992.

23. Branch trading and profit and loss account for the year ended 31 st December 1999 To opening stock (cost)8800By sales: (11000-2200) Cash 2650 To goods sent to branch Credit 22350 (20000-4000) 16000 25000 Less: returns to H.O. 320 15680Less: returns inward 500 24500 (400-80)By closing stock10400 To wages200 (13000- 2600) To gross profit c/d10220 Solution:

24. 34900 To bad debts300By gross profit b/d10220 To allowances250By miscellaneous income 25 To rent600 To other expenses900 To net profit8195 10245

25. BRANCH ACCOUNT (Personal) To balance b/d10600By remittances to H.O.23650 (8800+1700+100)(2650+21000) To goods sent to branch less returns (at cost) 15680 To bank (expenses)1700By balance c/d12525 To profit8195(10400+2000+125) 36175

26. Working notes: Calculation of credit sales Branch debtors A/c To balance b/d1700By cash21000 To sales (credit) (bal. fig.) 22350By bad debts300 By return inwards500 By allowances250 By balance c/d2000 24050

27. Under this system, the H.O. maintains the following accounts for keeping records of branch transactions: 1.Branch stock account 2.Branch debtors account 3.Branch expenses account 4.Branch adjustment account (for calculation of gross profit or gross loss) 5.Branch profit & loss account (for calculation of net profit or net loss) 6.Goods sent to branch account The journal entries to be made at the head office under this system are as follows:

28. JOURNAL ENTRIES The journal entries to be made at the head office under this system are as follows: 1For goods sent to branchBranch stock A/c Dr. To goods sent to branch A/c 2For goods returned by branch to H.O. Goods sent to branch A/c Dr. To branch stock A/c 3For sales made by branch(a)If cash sales: Cash/bank A/c Dr. To branch stock A/c (b) If credit sales: Branch debtors A/c Dr. To branch stock A/c

29. 4For goods returned by branch debtorsBranch stock A/c Dr. To branch debtors A/c 5For cash received from debtorsCash/bank A/c Dr. To branch debtors A/c 6For discount allowed to debtorsBranch expenses A/c Dr. To branch debtors A/c 7For bad debtsBranch expenses Dr. To branch debtors A/c 8For goods returned by branch directly to head office Goods sent to branch A/c Dr. Branch adjustment A/c Dr. To branch debtors A/c 9For agreed allowances to customers off selling price already taken into account while invoicing Branch adjustment A/c Dr. to branch Stock A/c

30. 10For loss or shortage of stock ( i) if normal loss Branch adjustment A/c Dr. To branch stock A/c (ii) If abnormal loss Branch adjustment A/c Dr. Branch profit & loss A/c Dr. To branch stock A/c 11For insurance claim recoverable Insurance claim recoverable A/c Dr. To branch P & L A/c 12For surplus in stockBranch stock A/c Dr. To branch adjustment A/c To branch P & L A/c 13For goods sent by one branch to another branch Goods sent to branch A/c Dr. Branch adjustment A/c Dr. To branch stock A/c

31. 14For goods received by one branch to another branch Branch stock A/c Dr. To goods sent to branch A/c to branch adjustment A/c 15For apparent profit over the invoice price Branch stock A/c Dr. To branch adjustment A/c 16For branch expenses paid in cash Branch expenses A/c Dr. To cash A/c 17For closing ‘branch expenses A/c’ Branch adjustment A/c Dr. Branch P & L A/c Dr. To branch expenses A/c 18For closing ‘goods sent to branch A/c’ Goods sent to branch A/c Dr. To purchases or trading A/c

32. 19For loading(a)For loading of opening stock: Stock reserve A/c Dr. To branch Adjustment A/c (b) For loading of goods sent to branch Goods sent to branch A/c Dr. T o branch adjustment A/c (c) For loading of closing stock Branch adjustment A/c Dr. To stock reserve A/c 20For closing ‘branch adjustment A/c’ Branch adjustment A/c Dr. To branch P & L A/c 21For ‘branch P & L A/c’Brasnch P & L A/c Dr. To General P & L A/c

33. This method can be explained by taking an example: Indian Soap Mills Ltd. Has two branches at Agra and Goa. Goods are invoiced to branches at cost + 50%. Branches remit all cash received to H.O. and all expenses are met by H.O. from the following particulars, prepare the necessary accounts, on the Stock & Debtors System, to show the profit earned at the branches:

34. AGRAGOA Stock on 1st April, 1990 (invoice price)930015600 Debtors on 1st April, 199068008700 Goods sent to branch (cost price)3400036000 Sales at branches: Cash sales2501035000 Credit sales3100030100 Cash collected from debtors3040029800 Goods returned by debtors12001500 Goods returned by branch to H.O.1500 Goods transferred from Goa to Agra2100 Surplus of stock300 Shortage of stock450 Discount allowed to customers200350 Expenses at branches54006700

35. BRANCH STOCK ACCOUNT ParticularsAgraGoaParticularsAgraGoa To bal b/d930015600By cash2501035000 To goods sent to branch5100054000By branch debtors3100030100 To braqnch debtors12001500By goods sent to branch1500- To goods sent to branch A/c By goods sent to branch (goods received from Goa) 2100-(goods sent to Agra)-2100 To branch adjustmentBy branch adjustment (loading of surplus)-100(loading of shortage)150- To branch P & L A/cBy branch P & L A/c (cost of surplus)-200(cost of shortage)300- By balance c/d56404200 63600714006360071400

36. Branch Debtors A/c To balance b/d68008700By cash3040029800 To branch stock A/c3100030100By branch stock (returns) 12001500 By branch exp. (discount) 200350 By balance c/d60007150 37800388003780038800 Branch expenses A/c To branch debtors200350By branch P & L A/c 56007050 To cash54006700 5600705056007050

37. Branch adjustment A/c To stock reserve18801400By stock reserve31005200 To branch stockBy goods sent to branch A/c 1720017300 (loading of shortage)150-By branch stock A/c To branch P& L1827021200(loading of surplus)-100 20300226002030022600 Branch P & L A/c To branch expenses A/c56007050To branch adj. A/c To branch stock A/c(gross profit)1827021200 (cost of shortage)300-By Br. stock A/c To net profit1237014350(cost of surplus)-200 18270214001827021400

38. A branch is said to be independent when it keeps a full system of accounting and maintains its own books of accounts. 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 prepare its own trading and profit & loss account and balance sheet. Books of accounts: an independent branch generally maintains the following books of accounts: (a)Journal (e) petty cash book (b)Cash book (f) purchase book (c)Ledger (g) sales book (d)Stock register

39. Procedure for incorporating branch accounts in the books of H.O. Under this method the following journal entries are passed: 1.For incorporation debit side items of trading account Branch trading A/c Dr. To Branch A/c 2.For incorporating credit side items of trading account Branch A/c Dr. To branch trading A/c

40. 3. For closing branch trading account (a) If gross profit Branch trading A/c Dr. To branch P & L A/c (b) If gross loss Branch P & L A/c Dr. To branch trading A/c 4.For incorporating debit side items of P & L A/c branch P & l A/c Dr. To Branch A/c

41. 5. For incorporating credit side items of P & L A/c Branch A/c Dr. To branch P & L A/c 6. For closing branch P & L A/c (a) If net profit Branch P & L A/c Dr. To general P & L A/c (b) If net loss General P & L A/c Dr. To branch P & L A/c

42. 7. For incorporating branch assets Branch assets A/c Dr. (individually) To Branch A/c 8. For incorporating branch liabilities Branch A/c Dr. To branch liabilities A/c (individually)