BRANCH ACCOUNTING FOR IPCC STUDENT

BRANCH ACCOUNTING FOR IPCC STUDENT
CA MANISH PANDEY

Branch A trading company may try to expand its business by opening BRANCHES as another establishment of the company in different locations

Account kept by Branch

Account Kept by Branch Head office and Branch will open a full set of books to record their won transactions instead of branch books are kept by the Head office

In Head Office books: In Branch books:
Branch Current Account is opened to record transactions between the Head Office and the Branch In Branch books: Head Office Current Account is opened to record transactions between them

HO’s Book: Branch Current $ $ Bal b/f X Goods in Transit X Remittance from branch X Branch net profit X Cash in Transit X Bal c/f X X X Branch’s Book: HO Current $ $ Remittance to HO X Bal b/f X Bal c/f X Net profit X X X

Goods in Transit (GIT) Goods were sent by the Head Office before the end of the financial period, but received by the branch after the end of the financial period GIT =Goods Sent to Branch – Goods received from HO

Remittances/Cash in Transit (CIT)
The remittance or cash was remitted by the branch before the end of the financial period, but was received by the Head office after the end of the financial period CIT= Remittance to Head Office – Remittance from Branch

Preparation of the Final Accounts
Separate trading and profit and loss accounts and balance sheets would be prepared for the head office and the branch(es)

Head office (HO) books Branch books No entry Transactions
1 Opening Stock Dr HO Trading Cr Stock (opening stock)[at cost] Dr Branch Trading Cr Stock (Opening stock)[at Cost or Cost+profit] 2 Goods purchased directly from HO suppliers[at cost] Dr Purchase(Trading) Cr Creditors No entry 3 Goods purchased directly from Branch suppliers [at cost] NO entry Dr Purchase(trading)

Head office (HO) books Branch books Transactions
4 Goods sent from HO to Branch [cost+profit] Dr Branch Current Cr Goods sent to Branch Dr Good received from HO Cr HO Current 5 Goods returned from Branch to HO Dr Goods sent to branch Cr Branch Current Dr HO Current Cr Good received from HO 6 Cash sales/Credit sales Dr HO Cash/Debtors Cr HO Sales Dr Branch cash/ debtors Cr Branch sales

Head office (HO) books Branch books Transactions 7 Closing stock
Dr Stock(Closing) Cr HO Trading Dr Stock (Closing) Cr Branch Trading good purchased directly from Branch suppliers [at cost] & goods received from HO [cost+profit] 8 Gross profit on trading Dr HO Trading Cr HO profit and loss Dr Branch Trading Cr Branch profit and loss 9 HO expenses paid by HO Dr Expenses (P&L) Cr Cash/Bank No entry

10 Branch expenses paid by Head Office Dr Branch Current Cr Cash/Bank Dr Expenses (P&L) Cr HO Current 11 Branch expenses paid by Branch No entry 12 Administrative charges for services rendered by HO to Branch Cr HO P&L (Income) Dr Branch P&L

13 Provision for Unrealized Profit (Branch & Goods in Transit)[cost+profit] Increase in provision Dr HO P&L Cr Prov. For Unrealized profit Decrease in provision Reverse No entry 14 Goods in Transit(GIT) Dr Goods in Transit Cr Branch Current NO entry 15 Cash in Transit (CIT) Dr Cash in Transit

16 Profit made by the branch Dr Branch Current Cr Retained profit Dr Branch P&L Cr HO Current 17 Profit made by HO Dr P&L No entry 18 Cash remittances from the branch Dr Bank Cr Branch Current Or Cr remittance from branch Dr Remittance from branch Dr HO Current Cr Bank Dr Remittance to HO Cr Remittances to HO

Inter-company transactions
It would not be transferred to the total column of the trading and profit and loss account and the balance sheet For example, goods sent to the branch, goods from the head office, service overheads charged by the head office to the branch, head office current account, branch current account provision for unrealized profit

Example -1

Colour Toys Ltd. has its head office in Central and a branch in
Shatin and separate final accounts are prepared for HO and Branch. Trial Balance as at 31 December as at 31 Dec 1997 HO Branch $ $ $ $ Cash and Bank Debtors HO Current Branch Current Fixed assets Stock,1Jan Creditors Prov. For dep Remittances to HO Remittances from Branch Capital

Service Charged Received 5000 Administrative Expenses 245000 36000
HO Branch $ $ $ $ Retained Profits Purchases and Sales Good sent to branch Good from HO Selling Expenses Service Charged Received Administrative Expenses Additional information: Goods purchased by the HO are sent to the branch at cost Stock at 31 Dec 1997: HO $80000; Branch $10600 Depreciation is to be provided at 10% on cost per annum Administrative expenses include an annual charge of $5000 for services rendered by the head office Required: Prepare final accounts of HO and Branch for the year ended 31Dec 1997

Trading and profit and loss a/c for the year ended 31 Dec 1997
HO Branch Total $ $ $ $ $ $000 Sales Good Sent to Branch Less COGS Opening Stock Purchases Goods from HO Less Closing stock(WK1) Gross profit Add: Service charges received Less: Depreciation Selling expense Admin. Exp.(WK2) Net profit

WK1: The total closing stock should be included Goods in transit as GIT are still unsold goods at year end but those goods are transported on the way => = 138.6 Wk2: The total administrative expenses should deduct the inter- Company service charges of $5000 => =276

HO’s Book: Branch Current $ $ Bal b/f Goods in Transit ( ) Branch net profit Remittance from branch Cash in Transit ( ) Bal c/f Branch’s Book: HO Current $ $ Remittance to HO Bal b/f Bal c/f Net profit

Less Current Liabilities Creditors 96 10 106
Balance Sheet as at 31 Dec 1997 HO Branch Total $ $ $ $ $ $000 Fixed Assets Less provision for Dep Current Assets Stock Goods in Transit Branch Current Debtors Cash and Bank Cash in Transit Less Current Liabilities Creditors Working Capital Capital Retained profit Head Office Current

Goods Sent to Branch at Mark-up

Goods Sent to Branch at a Mark Up
The head office supplies goods to its branch with an invoice price at cost plus profit Goods Sent to Branch a/c and Goods Received from HO a/c are valued at invoice price. If there is unsold stock at the end of the accounting period, the unrealized profit-in-stock must be eliminated from the consolidated final accounts A Provision for Unrealized Profit a/c will be opened to measure unearned profit included in the closing stock of the branch and reflect in the HO’s book

Provision for Unrealized Profit
=Stock at mark up* Mark up 100%+Mark up Stock mark up= Closing stock at branch sent from HO + Goods in transit Closing stock of branch include goods directly purchased from suppliers will not be concerned in the calculation of the provision of unrealized profit

Account entries Increase in Provision Dr P/L
Cr Provision for unrealized profit Decrease in Provision Dr Provision for unrealized profit Cr P/L The increase or decrease in the provision should be entered in the profit and loss a/c The balance should be appear in the balance sheet under Current Liabilities The total stock= stock in HO+stock in branch+stock in transit - provision for unrealized profit

Example - 2

Goods sent form the head office are charged to the branch
At cost plus 10% the closing stock was valued as follows: Date HO Branch Goods in transit 31 Dec (1st year of business) 31 Dec 31 Dec 31 Dec Required Prepare Provision for unrealized profit account for

Provision for unrealized profit
$ $ Dec 31 Bal c/d ( *10/110 Dec P/L Jan Bal b/d Dec 31 Bal c/d ( )*10/110 Dec P/L Dec P/L Jan Bal b/d Dec 31 Bal c/d ( )*10/110 Dec 31 Bal c/d ( )*10/110 Jan Bal b/d

Stock Loss Normal stock loss Abnormal stock loss
Related to the ordinary activities of the business e.g. Obsolete stock, damaged stock No entry needed Caused by an exceptional events e.g. fire loss, burglary loss Accounting recorded needed

Accounting entries – abnormal Loss
Events HO’s book Branch’s book Total column Stock loss in the HO Dr P/L Cr Trading (cost) No entry Cr Trading (Cost) Stock loss in transit Dr Goods sent to Branch Cr Branch Current (Mark up) Stock loss in Branch NO entry

Example-3

Colour Toys Ltd. has its head office in Central and a branch in
Shatin and separate final accounts are prepared for HO and Branch. All goods sold by branch are supplied by the HO at cost plus 10% Trial Balance as at 31 December as at 31 Dec 1997 HO Branch $ $ $ $ Share Capital Profit and loss account HO Current Branch Current Fixed assets Stock,1Jan Debtors/Creditors Prov. For dep Remittances to HO Remittances from Branch

Provision for unrealized profit 1400
HO Branch $ $ $ $ Bank and cash Purchases and Sales Good sent to branch Good from HO Provision for unrealized profit Administrative Expenses Additional information: Stock as at 31 Dec 1997 excluding goods in transit was valued at followings: Head office, at cost $32600 Branch, at cost to branch - received from HO $16500 - own purchases $8000 The branch stock at 31 Dec 1996 consisted wholly of goods received from the head office

On 20 Nov 1997 some goods received by the branch from the
head office were destroyed by fire. No entry has been made for this loss. The cost of these goods to the branch was $11000 Depreciation is to be provided on fixed asset at 2% per annum on cost Required Prepare final accounts for HO and Branch separately as at 31 Dec 1997

Trading and profit and loss a/c for the year ended 31 Dec 1997
HO Branch Total $ $ $ $ $ $000 Sales Good Sent to Branch Less COGS Opening Stock (WK1) Purchases Goods from HO Less:Fire loss (WK2) 16.5+8 Less Closing stock(WK3) Gross profit Less: Depreciation Fire loss Administrative Prov for Unrealized profit (1.5+5)-1.4

WK1: HO and Branch value stock on different bases in this case. HO’s Stock is valued at cost; while Branch’s stock is valued at mark-up. Total opening stock should be recorded at cost price HO+Branch(at mark up) – Opening prov. for unrealized profit = = 62.5 WK2: Fire loss in total column should be recorded at cost price rather than mark-up price Invoice price = Cost + Profit Cost = Invoice Price – Profit = 1.1 – 1.1*10/110 = 10

WK3: Total closing stock should be included HO’s stock, Branch’s Stock and Goods in transit HO’s stock and Branch (own purchases)’s stock are valued at cost;while Branch (received from HO)’s stock and Goods in transit are valued at mark-up. Those goods should be adjusted at cost price Total closing stock should be included: ( *10/110)+( *10/110) = 60.6

WK4: Provision for unrealized profit Bal b/f P/L Bal c/f ( )*10/110

Less Current Liabilities Creditors 35 37.2 72.2
Balance Sheet as at 31 Dec 1997 HO Branch Total $ $ $ $ $ $000 Fixed Assets Less provision for Dep Current Assets Stock Goods in Transit Branch Current(WK1) Debtors Cash and Bank Cash in Transit Less Current Liabilities Creditors Prov for unrealized profit Working Capital Capital Retained profit Head Office Current WK2)

WK1: HO’s book: Branch Current Bal b/f Branch net profit Goods in transit Remittance from branch22000 Cash in transit ( ) Bal c/f Wk2: Branch’s book: HO Current Remittance to HO Bal b/f Branch net profit Bal c/f

Account kept by Head Office

Account kept by HO The branch do not keep their won records, the HO will keep all accounting records for the branch transactions

Goods are invoiced to the Branch at cost plus profit
Cost Profit = Invoiced price Goods Sent to Branch a/c Branch Stock Adjustment a/c Branch Stock a/c The gross profit will be calculated in Branch Stock Adjustment account

Goods returned by Branch to HO
Transactions Accounting entries Opening stock balance Branch stock a/c-opening “debit” balance recorded as “cost plus profit” Branch Stock Adjustment a/c- Opening “Credit” balance recorded as “Profit” portion only Goods sent to branch Dr Branch Stock [cost+profit] Cr Goods sent to Branch [cost] Cr Branch stock adjustment [profit] Goods returned by Branch to HO Dr Goods sent to Branch [cost] Dr Branch stock adjustment [profit] Cr Branch Stock [cost+profit]

Credit Sales at the Branch Cash Sales at the Branch
Transactions Accounting entries Credit Sales at the Branch Dr Branch Debtors (selling price) Cr Branch Stock Cash Sales at the Branch Dr Branch Cash (selling price) Goods returned by customer to Branch Dr Branch Stock (selling price) Cr Branch Debtors Bad debts, Discount Allowed to customer Dr Branch Profit and loss Branch expenses Cr Cash/Bank Branch income Dr Cash/Bank Cr Branch Profit and loss

Treatment of closing stock
Transactions Accounting entries Treatment of closing stock Branch Stock a/c- actual stock+ GIT recorded as “cost plus profit” will be entered on the credit side as closing debit balance Branch stock adjustment a/c- actual stock + GIT recorded as “Profit” portion will be entered on debit side as closing credit balance Net amount of Goods sent to Branch deducted from HO Purchases a/c and transfer to trading a/c Dr Goods sent to Branch [cost] Cr Head Office Purchases/Trading Branch transferred Stock adjustment to branch P/L Dr Branch Stock Adjustment Cr Branch Profit and loss Treatment of Branch net profit Dr Branch Profit and loss Cr Head Office profit and loss

Example-4

Sino Ltd. Sends goods at the selling price to the branch
Sino Ltd. Sends goods at the selling price to the branch. The selling price is cost plus 10 per cent. The branch accounts are maintained by the head office. Transactions between the head office and the branch for the year ended 31 December 1997 were as follows: $ Opening stock at branch at selling price ,000 Goods sent to branch at cost ,000 Goods returned to the head office at cost ,000 Credit sales by branch ,000 Cash sales by branch ,000 Goods returned to branch at selling price ,000 Closing stock at branch at selling price ,500 Closing goods in transit at selling price ,500

Branch Stock(SP) $ $ Bal b/f Return to HO (50000*1.1) Gd sent to branch (750000*1.1) Branch debtors Branch cash Branch debtors-return Bal c/f ( ) Branch Adjustment(Profit) $ $ Return to HO (55000*10/110) Bal b/f (110000*10/110) Branch stock (75000*0.1) Branch P/L Bal c/f(209000*10/110) Goods Sent to Branch(cost) $ $ Branch stock Branch stock HO Purchase

Transactions Accounting entries Stock Loss in Branch
-Normal Loss event related to ordinary activities of the business e.g. pilferage, stock wastage, unaccounted stock -Abnormal Loss caused by exceptional event e.g. fire, burglary etc -Goods lost in transit Dr Branch Stock Adjustment [cost+profit] Cr Branch Stock Dr Branch Profit & Loss [cost] Dr Branch Stock Adjustment [profit] Cr Branch Stock [cost+profit] Dr Branch adjustment [profit] Dr Profit & Loss [cost]

Stock transfer from branch A to branch B
Transactions Accounting entries Stock transfer from branch A to branch B Dr Goods sent branch A [cost] Dr Branch A Adjustment [profit] Cr Branch A Stock [cost+profit] Dr Branch B Stock [cost+profit] Cr Good sent to branch B [cost] Cr Branch B stock [cost+profit] Branch Stock Valuation -reduction in selling price Dr Branch Adjustment Cr Branch Stock [with the total reduction off the selling price] Addition mark up -Goods are sent to the branch at mark up lower than selling price -Goods are sold to customers with an additional mark up Dr Branch Stock [cost+profit] Cr Branch adjustment [profit] Cr Goods sent to branch [cost] Dr Branch Stock

Cash Misappropriation -loss from the theft of the cash takings
Transactions Accounting entries Cash Misappropriation -loss from the theft of the cash takings Dr Cash Misappropriated Cr Cash Dr Branch profit and loss Cr Cash Misappropriated

Example-5

Joyce Ltd. Has a head office in Central and two branches, one in Shatin and the other in Tsuen Wan. Branch accounts are maintained by the head office. Goods are invoiced to Shatin at cost plus 20 per cent. This is the selling price. Joyce Ltd. Sent goods at cost plus 25 per cent to Tsuen Wan. The selling price in this branch was cost plus 30 per cent. The head office books showed the following balances related to transactions between the head office and its two branches for the year ended 31 December 1997: Shatin Tsuen Wan $ $ Opening stock at cost , ,000 Credit sales by branches , ,840

Shatin Tsuen Wan $ $ Goods sent to branches at cost , ,000 Goods returned by branches at cost , Stock lost in first at cost , Reduction in selling price , Cash received from debtors , ,320 Discount allowed , ,000 Bad debts written off Returns by debtors , Branch transfer at selling price from Shatin To Tsuen Wan

Shatin Tsuen Wan $ $ Closing stock at selling price , ,000 Goods in transit from head office to Shatin At selling price ,800 Expenses , ,500 Any stock unaccounted for may be regarded as pilferage and normal wastage.

Shatin Branch Branch Stock(SP) $ $ Bal b/f (100000*1.2) 120000
$ $ Bal b/f (100000*1.2) Branch debtors Gd sent to branch (806000*1.2) Return to HO (80000*1.2) Fire loss (64000*1.2) Branch adj.-reduction in selling price Branch Adjustment (Profit) $ $ Return to HO(80000*0.2) 16000 Bal b/f (100000*0.2) Fire loss (64000*0.2) Branch stock (806000*0.2) Branch adj.-reduction in selling price Goods Sent to Branch(cost) $ $ Gd return to HO Branch stock Branch Debtors(SP) $ $ Branch stock Branch profit and loss account for the year ended 31 Dec 1997 $ $ Fire loss

Shatin Branch Branch Stock $ $ Bal b/f (100000*1.2) 120000
$ $ Bal b/f (100000*1.2) Branch debtors Gd sent to branch (806000*1.2) Return to HO (80000*1.2) Fire loss (64000*1.2) Branch adj.-reduction in selling price Branch debtors-return Branch Debtors $ $ Branch cash Branch stock Discount allowed Bad debts Branch stock-return Branch profit and loss account for the year ended 31 Dec 1997 $ $ Fire loss Discount allowed Bad debts

$ $ Bal b/f (100000*1.2) Branch debtors Gd sent to branch (806000*1.2) Return to HO (80000*1.2) Fire loss (64000*1.2) Branch adj.-reduction in selling price Branch debtors-return Branch transfer Branch Adjustment $ $ Return to HO(80000*0.2) 16000 Bal b/f (100000*0.2) Fire loss (64000*0.2) Branch stock (806000*0.2) Branch adj.-reduction in selling price Branch transfer (960*20/120) Goods Sent to Branch $ $ Gd return to HO Branch stock Branch transfer (960*100/120)

$ $ Bal b/f (100000*1.2) Branch debtors Gd sent to branch (806000*1.2) Return to HO (80000*1.2) Fire loss (64000*1.2) Branch adj.-reduction in selling price Branch debtors-return Branch transfer Pilferage & wastage(Bal fig) Bal c/f ( ) Branch Adjustment $ $ Return to HO(80000*0.2) 16000 Bal b/f (100000*0.2) Fire loss (64000*0.2) Branch stock (806000*0.2) Branch adj.-reduction in selling price Branch transfer (960*20/120) Pilferage & wastage Branch P/L(Bal fig) Bal c/f(96480*20/120)

Goods Sent to Branch $ $ Gd return to HO Branch stock Branch transfer (960*100/120) HO Purchase(bal.fig.) Branch Debtors $ $ Branch cash Branch stock Discount allowed Bad debts Branch stock-return Bal c/f Branch profit and loss account for the year ended 31 Dec 1997 $ $ Fire loss Branch Adj.- gross profit Discount allowed Bad debts Expense Net profit

Tsuen Wan Branch

Tsuen Wan Branch Branch Stock $ $ Bal b/f (56000*1.3) 72800
$ $ Bal b/f (56000*1.3) Branch debtors Gd sent to branch (400000*1.25) Branch adj (400000*0.05) Branch Adjustment $ $ Bal b/f (56000*0.3) Branch stock (400000*0.25) Branch stock (400000*0.05) Goods Sent to Branch $ $ Branch stock Branch Debtors $ $ Branch cash Branch stock

Branch Debtors $ $ Branch cash Branch stock Discount allowed Bad debts Branch profit and loss account for the year ended 31 Dec 1997 $ $ Discount allowed Bad debts

$ $ Bal b/f (56000*1.3) Branch debtors Gd sent to branch (400000*1.25) Branch adj (400000*0.05) Gd sent to branch (800*1.25) Branch adj.(800*0.05) Branch Adjustment $ $ Bal b/f (56000*0.3) Branch stock (400000*025) Branch stock (400000*0.05) Branch stock-branch transfer (800*0.25) Branch stock (800*0.05) Goods Sent to Branch $ $ Branch stock Branch stock-branch transfer

$ $ Bal b/f (56000*1.3) Branch debtors Gd sent to branch (400000*1.25) Bal c/f Branch adj (400000*0.05) Gd sent to branch (800*1.25) Branch adj.(800*0.05) Branch Adjustment $ $ Branch P/L(Bal fig) Bal b/f (56000*0.3) Bal c/f(117000*30/130) Branch stock (400000*025) Branch stock (400000*0.05) Branch stock-branch transfer (800*0.25) Branch stock (800*0.05)

Goods Sent to Branch $ $ Branch stock HO Purchase(bal.fig.) Branch stock-branch transfer Branch Debtors $ $ Branch cash Branch stock Discount allowed Bad debts Bal c/f Branch profit and loss account for the year ended 31 Dec 1997 $ $ Branch Adj.- gross profit Discount allowed Bad debts Expense Net profit

Preparation of the Final Accounts for the Head Office
After calculating the branch profits or losses, the overall profit and loss for the head office can be computed

Account entries Transactions Accounting Entries Balance transferred from goods sent to branch account to the head office purchases account Dr Goods sent to branch Cr HO purchases/trading Branch net profit transferred to head office profit and loss account Dr Branch Profit and loss Cr HO P/L

Example-6

The following trial balalnce was extracted from the books of
Joyce Ltd Trial Balance as at 31 December as at 31 Dec 1997 $ $ Share Capital Profit and loss account Fixed assets Stock at Head Office,1Jan Debtors/Creditors Prov. for dep Purchases Sales Administrative expenses Selling expenses Bank and cash

$ $ Branch stock 1 Jan 1997-Shatin - Tsuen Wan Branch adjustment- Shatin - Tsuen Wan Additional information: On 31 Dec 1997, stock in the HO was valued at $180000 The branches paid local expenses and remitted all the remianing cash received from debtors to the HO. NO entry had been made about the remittances from the branches. 3. Depreciation is to be charged on the fixed asset at 10% per annum on cost. Prepare final account for Joyce Ltd for the year ended 31 Dec1997

BRANCH ACCOUNTING FOR IPCC STUDENT

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