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BRANCH ACCOUNTING

BRANCH ACCOUNTING. WHAT IS BRANCH?.

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BRANCH ACCOUNTING

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  1. BRANCH ACCOUNTING

  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- • Dependentbranches- 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: • 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. Agra branch Head office books 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. 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. Procedure for reconciliation

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

  10. DEBTORS SYSTEM 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:

  11. JOURNAL ENTRIES

  12. 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:

  13. Solution: BRANCH ACCOUNT

  14. Working notes:(i) calculation of cash received from debtors: DEBTORS ACCOUNT

  15. (ii) Calculation of closing cash balance:

  16. FINAL ACCOUNT SYSTEM 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.

  17. 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:

  18. Prepare the branch trading and profit & loss A/c and branch account for the year ended 31st Dec, 1992.

  19. Solution: Branch trading and profit and loss accountfor the year ended 31st December 1999

  20. BRANCH ACCOUNT (Personal)

  21. Working notes: Calculation of credit sales

  22. STOCK AND DEBTORS SYSTEM • Under this system, the H.O. maintains the following accounts for keeping records of branch transactions: • Branch stock account • Branch debtors account • Branch expenses account • Branch adjustment account (for calculation of gross profit or gross loss) • Branch profit & loss account (for calculation of net profit or net loss) • Goods sent to branch account • The journal entries to be made at the head office under this system are as follows:

  23. JOURNAL ENTRIES The journal entries to be made at the head office under this system are as follows:

  24. 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:

  25. BRANCH STOCK ACCOUNT

  26. Branch Debtors A/c Branch expenses A/c

  27. Branch adjustment A/c Branch P & L A/c

  28. INDEPENDENT BRANCHES • 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: • Journal (e) petty cash book • Cash book (f) purchase book • Ledger (g) sales book • Stock register

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

  30. 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 • For incorporating debit side items of P & L A/c • branch P & l A/c Dr. • To Branch A/c

  31. 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

  32. 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)

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