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Advance Financial Accounting (FIN-611)

LESSON #12

BRANCH ACCOUNTING

Pro-forma Invoice Price

Head office may send goods to branch either at "cost" or at "pro-forma invoice price".

In previous section of this chapter we have discussed accounting treatment for a

dependent branch to which the goods are sent to branch at cost price. In the

forthcoming section we will discuss the accounting treatment for the dependent

branch to which goods are sent at pro-forma invoice price. The treatment is slightly

different but before discussing the accounting treatment we must know what pro-

forma invoice price is and why head office prefers to send goods at pro-forma invoice

price.

Pro-forma invoice price is higher than the cost price. Adding a reasonable profit in the

cost makes the price equal to the pro-forma invoice price. Here we must know what is

selling price? Selling price is the price at which goods are sold to the customers. So the

selling price will be higher than the pro-forma invoice price in normal circumstances.

Difference between cost and pro-forma invoice price is known as loading and the

difference between cost and the selling price is the profit in real terms.

Head office usually sends goods to its branches at the pro-forma invoice price to keep

its profit margin secret from the branch managers. Had the cost been known to the

branch manager he would have been in a position to determine the exact profits

enjoyed by the head office, which may induce the branch manager to confront the

business as a competitor. Moreover by sending goods to the branches at pro-forma

invoice price, the head office can dictate pricing policy to its branches, as well as save

work at the branch because prices have already been decided. Sending goods at pro-

forma invoice price is generally done where goods are of standard type, pre-packed

and unlikely to fluctuate in price.

Here it is worth mentioning that "pro-forma invoice" is name of the document which

is sent to branches along with the goods sent; in this document description and

quantity of the goods sent is written along with the price. Therefore the price

appearing on the pro-forma invoice is named as pro-forma invoice price.

The document which is sent to the customers to evident the sales of goods to them is

known as "invoice"; this document discloses the quantity, description and selling

price of the goods sold, along with the settlement terms. Technically speaking "selling

price" may also be termed as "invoice price", but "invoice price" and "pro-forma

invoice price" are different. It is a common error that often people do not care while

using the terminology and confuse "invoice price" with the "pro-forma invoice price".

The method of preparing Branch a/c while goods are sent at pro-forma invoice price is

the same with the exception that the accounting entries relating to the goods sent to

and goods returned from the branch are recorded at pro-forma invoice price and a

reverse adjustment is required with the amount of loading (difference between cost

and pro-forma invoice price).

Remember; the accounting entries for opening and closing stocks are recorded at cost

price. Do not record stocks at pro-forma invoice price.

Rationale; an accountant is supposed to record accounting entries evidenced by a

source document. Goods sent to branch are evidenced through "pro-forma invoice"

therefore price mentioned on the document cannot me ignored while recording this

Advance Financial Accounting (FIN-611)

transaction. Whereas, valuation of opening and closing stocks is not reported through

pro-forma invoice therefore to make it simple stocks are accounted for at cost.

Accounting Entries in the Books of Head Office

11. For opening balances of assets at the branch

Branch a/c

Branch assets a/c (individual accounts)

12. For opening balances of liabilities at the branch

Branch liabilities a/c (individual accounts)

Branch a/c

13. For goods sent to the branch (at pro-forma invoice price)

Branch a/c

Goods sent to branch a/c

14. For return of goods by the branch (at pro-forma invoice price)

Goods sent to branch a/c

Branch a/c

15. For reversal of loading on (net) goods set to branch (with the amount of loading)

Goods sent to branch a/c

Branch a/c

16. For remittance of cash or cheque to the branch

Branch a/c

Cash/Bank a/c

17. For cash or cheque received from the branch

Cash/Bank a/c

Branch a/c

18. For closing balances of assets at the branch

Branch asset a/c (individual accounts)

Branch a/c

19. For closing balances of liabilities at the branch

Branch a/c

Branch liabilities a/c (individual accounts)

20. For closing goods sent to branch account.

Goods sent to branch a/c

Purchases a/c

Advance Financial Accounting (FIN-611)

21. For closing branch account into the profit and loss account

Incase of profit

Branch a/c

Profit & loss a/c

Incase of loss

Profit & loss a/c

Branch a/c

22. For abnormal loss (should always be accounted for at cost)

Abnormal loss a/c

(at cost)

Branch a/c

Insurance claim a/c (claim admitted)

Profit & loss a/c

(balance if not admitted by the insurance company)

Abnormal loss a/c (cost of the abnormal loss)

Note: No accounting entry is required for normal losses.

Solved Problem # 1

Excellent Garments of Multan has a branch at Lahore. Goods are supplied to the

branch at cost. The expenses of the branch are paid from Multan and the branch keeps

a sales journal and the debtors' ledger only. From the following information supplied

by the branch, prepare a Branch Account in the books of the head office. Goods are

sent to branch at pro-forma invoice price which is cost plus 20%. (All figures in

rupees)

Opening Stock (at Pro-forma invoice) 28,800 Closing Debtors

9,150

Closing Stock (at Pro-forma invoice)

21,600 Opening Debtors

Goods received from HO (at Pro-forma invoice)

40,320

Bad Debt

140

Credit Sales

41,000

Expenses paid by Head office

10,400

Cash Sales

17,500

Cash received from Debtors

37,900

Pilferage of goods by the employees (Normal Loss) 2,000

Solution: (Debtors System)

In the books of Head Office (Multan)

Lahore Branch Account

Particulars

Rs.

Particulars

Rs.

Opening Stock

24,000

Cash Received from Branch

17,500

Opening Debtors

6,200

Cash Received from Debtors

37,900

Cash sent to Branch

10,400

Goods sent to Branch

6,720

Goods sent to Branch a/c 40,320

(loading)

18,000

General Profit & Loss a/c 8,360

Closing Stock

9,160

(Profit)

Closing Debtors

89,280

Advance Financial Accounting (FIN-611)

Working:

Debtors Account

Particulars

Rs.

Particulars

Rs.

Op. Debtors (Balancing 6,200

Cash Received from Debtors

37,900

fig)

41,000

Bad Debts

140

Sales (credit)

Cl. Debtors c/f

9,160

47,200

Opening stock at cost

28,800 x 100/120 = 24,000 (pro-forma invoice x % of cost by % of pro-forma invoice)

Closing stock at cost

21,600 x 100/120 = 18,000 (pro-forma invoice x % of cost by % of pro-forma invoice)

Loading on goods sent to branch (net)

Rupees

Goods sent to branch (at pro-forma invoice)

40,320

Less Goods returned by branch (at pro-forma invoice)

Net goods sent

(at pro-forma invoice)

40,320

40,320 x 20/120 = 6,720 (pro-forma invoice x % of loading by % of pro-forma invoice)

Income Statement System

The head office may also prepare an Income Statement to find out the profits of

branch. Such Income Statement is merely a memorandum; the only reason for

preparing the statement is to have full information of all transactions which are

ignored in Debtor System (already discussed in the previous section). While preparing

the Income Statement of the branch we shall be using all those skills which we have

learned in the single entry system of accounting during conversion of single entry into

double entry.

We know very well that in Income Statement incomes and expenses are measured on

the basis of accrual concept and the profits are measured according to the matching

concept. So the cost of goods sold will be determined keeping in view that the goods

sent to branch are equivalent to purchases of the branch and should be included at

cost. Obviously the opening and closing stocks can not be measured at a value that is

above its cost.

Above problem can be solved through Income Statement System as well. Following is

the solution.

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