Excelsior Community College

Advanced Financial Accounting

Unit II – Branch Accounting

Branch Accounting is an accounting system in which separate accounts are maintained for each
branch of a corporate entity or organization. The primary objectives of branch accounting are
better accountability and control, since profitability and efficiency can be closely tracked at the
branch level.

Branch accounting may involve added expenses for an organization in terms of accounting and
infrastructure. This is because it may be necessary to appoint branch accountants to ensure
accurate financial reporting and compliance with head office procedures and processes.

Transactions affecting the Books of the branch

1. When Cash or Bank money is given by head office to branch for operating branch activities.

Dr. Cash/ Bank Account

Cr. Head office Account

2. When expenses are paid by branch

Dr. Respective Expense Account

Cr. Cash / Bank Account

3. When expenses are paid by head office

Dr. Respective Expense Account

Cr. Head Office Account

4. When stock transfer from Head office to Branch

Dr. Stock Account (At cost)

Cr. Head office Account

5. When branch transfers cash or bank for any net revenue

Dr. Head office Account

Cr Cash / Bank Account
Maintenance of a separate accounting system for each branch of one legal entity. The home
office opens an account in its general ledger entitled Branch, Branch Control, Investment in
Branch, or some other similar name. Frequently, one account will be used to show the long-term
investment in a branch while another account (such as Branch Current) will be used for more
common accounts. In the home office ledger, this account or group of accounts is charged for
everything sent to the branch or for services rendered to or for the branch, and it is credited for
amounts received from the branch. In a similar manner, the branch ledger maintains an equity
account entitled Home Office, Home Office Control, Home Office Current, or some other similar
name.

This account is credited for all assets received by the branch from the home office. It is also
credited for all debts incurred for merchandise acquired or for services rendered by the home
office for the branch. Such an account would also be credited as a result of expenses incurred by
the home office for the benefit of the branch. It is debited for amounts sent by the branch to the
home office. In operation, the branch account on the home office books will be debited when the
home office account on the branch books is credited, and vice versa. Thus, the balances of such a
pair of accounts should be equal in dollar amount, but the balances should be the opposite sides
of the respective accounts. Two accounts that have such a relationship are often referred to as
Reciprocal.

TYPES OF BRANCHES

From the accounting point of view, branches may be classified into

(1) Dependent Branch
(2) Independent Branch
(3) Foreign Branch

(1) Dependent Branch

The term ‘Dependent Branch’ means a branch which does not maintain its own set of books. All
records have to be maintained by the head office. When the business policies and the
administration of a branch are wholly controlled by the head office, its accounts also are
maintained by it.
In such a case, Branch accounts are written up at the head office out of reports and returns
received from the branch.

ACCOUNTING IN RESPECT OF DEPENDENT BRANCHES

In case of a dependent branch, the head office may keep accounts of the branch acc to any of the
following systems
(1) Debtors System
(2) Stock and Debtors system
(3) Wholesale System
(4) Final Account system

(1) Debtors System (Synthetic Method)

This system is adopted in case of branches of small size. Under this system, a branch account is
opened separately for each branch in the books of head office. This account is nominal account
in nature. The opening balance of stock, debtors (if any), petty cash are debited to the branch
account.

(2) STOCK AND DEBTORS SYSTEM

Profit and loss of a branch can be found out by preparing branch account but there is another
method for the same purpose. This method is known as stock and debtors method. If it is desired
to exercise a more detailed account control over the working of a branch, the accounts of the
branch are maintained under which is described as the stock and debtors method.

(3) WholeSale Branch System

Manufacturers may sell goods to the consumers either through the wholesalers and approved
stockists or through their branches. In order to know whether self-retailing through branch is
more profitable than wholesaling, it is necessary to make distinction between profit due to
wholesale and profit due to retail business of the branch.Wholesale price is always less than
retail price.

(4) Final Accounts System

The head office can also ascertain the profit or loss of a dependent branch by preparing branch
trading and profit and loss a/c at cost. In such cases, the head office may also maintain a branch
account.

BRANCH ACCOUNTING – STOCK AND DEBTOR SYSTEM

Stock and Debtors system is generally used when the goods are sent to the branch at pro-forma
invoice price and the size of the branch is large. Under this system, the branch maintains a few
central accounts to exercise greater control over the branch stock and other related expenses.
These accounts usually are:

1. Branch Stock Account

2. Branch Debtors Account
3. Branch Expenses Account
4. Branch Adjustment Account
5. Goods Sent to Branch Account
6. Branch Stock Reserve Account

Branch Stock Account

This account is on the pattern of a stock account. The account helps the Head Office in
maintaining an effective control over the Branch Stock and tells about shortage and surplus in
the branch stock because of the difference between the pro-forma invoice price and the selling
price. Unlike traditional accounting practice, branch stock a/c is always maintained on the selling
price or pro-forma invoice price. Selling price is used to record the goods sold by the branch to
its customer and goods returned by the branch customers. Rest of the information (even opening
and closing balances) in branch stock a/c is recorded at pro-forma invoice price.

Branch Debtors Account

Branch debtors’ a/c is maintained in the traditional manner to record transactions in between
branch and its credit customers.

Branch Expense Account

The purpose of maintaining this account is nothing but the compile all branch expenses at one
place. This will include all types of expenses i.e. cash based expenses and receivables based
expenses.

Branch Adjustment Account

Branch adjustment a/c replaces the branch income statement (profit & loss a/c). This is the
account in which all expenses and losses are closed along with the margin that is a difference
between cost and the selling price. This difference is split into two; one is termed as “surplus”
that comes from the branch stock a/c representing the difference between selling price and pro-
forma invoice price, the second is termed as “loading” that represents the difference between
pro-forma invoice price and cost. This loading is calculated on opening and closing stock
balances and also on the net of the goods sent branch.

Goods Sent to Branch Account

This is a supporting account, which is maintained to show second effects of the goods sent to
branch and the goods returned from branch at pro-forma invoice price. Although the goods sent
to and returned form the branch should be adjusted in the purchases a/c of the head office, but as
we know that the branch stock a/c is not maintained at cost price, therefore, second effect of
goods sent to and returned from branch is not recorded directly into the purchases a/c instead this
second effect is recorded into the goods sent to branch a/c which after adjustment of the loading
is finally closed into the purchases a/c.

Branch Stock Reserve Account

This is contra to branch stock account. In this account opening and closing balance of loading on
branch stock is maintained.

ACCOUNTING ENTRIES IN THE BOOKS OF HEAD OFFICE

Sr no. JOURNAL ENTRIES Debit Credit

For Goods Sent to Branch (at Invoice)
(1) Branch Stock Account (Dr) xxx
Goods Sent To Branch Account (Cr) xxx
For Goods Sold At Branch On Credit
(2) Branch Debtors Account (Dr) Selling Price) (At xxx xxx
Branch Stock Account (Cr)
For Goods Sold At Branch For Cash
(3) Branch Cash Account (Dr) Selling Price) (At xxx xxx
Branch Stock Account (Cr)
For Cash Received From Branch Debtors
(4) Branch Cash Account (Dr) xxx
Branch Debtors Account (Cr) xxx
For Goods Returned by Branch
(5) Branch Stock Account (Dr) xxx
Branch Debtors Account (Cr) xxx
For Goods Returned by Branch To Head Office
(6) Goods Sent To Branch Account (Dr) (At Invoice) xxx xxx
Branch Stock Account (Cr)
For Cash Sent By Head Office to Branch For
(7) Expenses Branch Expenses Account (Dr) xxx xxx
Cash Account (Cr)
For Bad Debts/ discount Allowed To Branch
(8) Debtors Branch Debtors Account (Dr) xxx xxx
Branch Debtors Account (Cr)
For Shortage/ Shrinkage in Branch Stock Branch
(9)
Adjustment Account (Dr) xxx
61
Branch Stock Account (Cr) xxx
For Surplus In Branch Stock Branch Stock Account (Dr)
(10) xxx
Branch Adjustment Account (Cr) xxx
For Closing Branch Expenses Account Into Branch
(11) Adjustment Account Branch Adjustment Account (Dr) xxx xxx
Branch Expenses Account (Cr)
For Transfer of Opening Stock Reserve (Loading) Into
The Branch Adjustment Account Branch Stock Reserve
(12) xxx
Account (Dr) (with loading of opening Branch Adjustment
Account (Cr) xxx
For Creating Stock Reserve on Closing Balance of Stock
(13) (Loading on Closing Stock) Branch Adjustment Account xxx
(Dr) Branch Stock Reserve (Cr) xxx
(14) For Loading on Net Amount of Goods Sent to Branch xxx xxx
 Goods Sent to Branch Account (Dr) Branch Adjustment
Account (Cr)
For Closing Goods Sent To Branch Account Into
(15) Purchase Account Goods Sent To Branch Account (Dr) xxx
Purchases Account (Cr) xxx
For Closing the Branch Adjustment Account Into Profit
(16) & Loss Account Branch Adjustment Account (Dr) (with thexxx
amount of profit on branch) Profit & Loss Account (Cr) xxx

LEDGER ACCOUNTS IN THE MAIN LEDGER OF HEAD OFFICE

BRANCH STOCK ACCOUNT

Particulars Debit Particulars Credit
Balance Brought Forward (At ****** Branch Debtors (Credit Sales) (Selling Jef (2)
Invoice) Price)
Goods Sent to Branch (At Invoice) Jef (1) Branch Cash (Cash Sales)(Selling Jef(3)
Price)
Branch Debtors (Sales Return) Jef (5) Goods Sent to Branch (Return) Jef(6)
Branch Adjustment (Surplus) Jef (10) Branch Adjustment (Shortage) Jef(9)
Balance Carried Forward (At Invoice) ******
GOODS SENT TO BRANCH ACCOUNT
Particulars Debit Particulars Credit
Branch Stock (Credit Sales) Jef(6) Branch Stock (Goods Sent) (At Jef(1)
Invoice)
Branch Adjustment (Loading) Jef(14)
Purchases (Balancing Figure) Jef(15)
BRANCH EXPENESE ACCOUNT
Particulars Debit Particulars Credit
Cash (Expense) Jef(7) Branch Adjust (Closing) Jef(11)
Branch Debtors (Discount Allowed + Jef(8)
Bad Debts)
BRANCH DEBTORS ACCOUNT
Particulars Debit Particulars Credit
Opening Balance Brought Forward ****** Cash Received Jef(4)
Branch Stock (Credit Sales) Jef(2) Branch Stock (Sales Return) Jef(5)
Branch Expense (Bad Debts + Jef(8)
Discount Allowed)
Balance Brought Forward ******
STOCK RESERVE ACCOUNT
Particulars Debit Particulars Credit
Branch Adjustment (Transfer of Jef(12) Opening Stock Reserve Brought ******
Opening Balance) Forward
Closing Stock Reserve Balance c/f ****** Branch Adjustment (Closing Loading)Jef(13)
BRANCH ADJUSTMENT ACCOUNT
Particulars Debit Particulars Credit
Branch Stock (Shortage) Jef (9) Branch Stock (Surplus) Jef(10)
Branch Expense (Closed) Jef (11) Branch Stock Reserve (Opening Jef(12)
Balance)
Branch Stock Reserve (Closing) Jef (13) Goods Sent to Branch (Loading) Jef(14)
Profit & Loss Account (Balancing Jef (16)
Figure)