BRANCH ACCOUNTING 1

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Advance Financial Accounting (FIN-611)

LESSON # 16

BRANCH ACCOUNTING

(Incorporation of branch)

Question

The following is the Trial Balance of Murree Branch as on 31st December, 2007.

Dr.

Cr.

Dr.

Cr.

(Rs.)

Lahore head office

Debtors

3,700

3,240

Stock 1st Jan. 2007

Creditors

6,000

1,850

Purchases

97,800

Rent

1,960

19,000

Sundry office

1,470

Goods received from H

138,000 expenses

1,780

6,000 Cash at bank

6,000

Sales

Goods supplied to

Furniture

400

Depreciation on

4,500

head office / Sales to H

Furniture

145,850

Salaries

Other Information:

Stock at branch on 31st December 2007 was valued at Rs. 7,700.

Murree Branch Account in the head office books on 31st December, 2007 stood at Rs.

460 (debit balance). On 28th December, 2007 the head office forwarded goods of the

value of Rs. 3,700 to the branch where they were on 3rd January, 2007.

Solution

Murree

Income Statement

For the year ended 31st December, 2007

Sales

138,000

Goods supplied to H O

6,000

144,000

Less CGS

Opening Stock

6,000

Add Purchases

97,800

Goods received from H O 19,000

Less Closing Stock

7,700

115,100

Gross Profit

28,900

Advance Financial Accounting (FIN-611)

Less operating Expenses

Salaries

4,500

Rent

1,960

Sundry Office Expenses

1,470

Depreciation on Furniture

400

8,330

Net Profit

20,570

Murree

Income Statement

For the year ended 31st December, 2007

Sales

138,000

Goods supplied to H O

6,000

144,000

Less CGS

Opening Stock

6,000

Add Purchases

97,800

Goods received from H O 19,000

Less Closing Stock

7,700

115,100

Gross Profit

28,900

Less operating Expenses

Salaries

4,500

Rent

1,960

Sundry Office Expenses

1,470

Depreciation on Furniture

400

Advertisement on Equipment 1,000

Depreciation on Furniture

500

9,830

Net Profit

19,070

Incorporation of Branch Trial Balance in the Head Office Books

It has already been stated that an independent branch prepares its own Trial Balance

and Final Accounts and remits the copies of these statements to the head office.

After receiving Branch Trial Balance, head office proceeds to incorporate it in its own

books. This is absolutely necessary because the branch belongs to the head office, and

if the branch Trial Balance is not incorporated in the head office books, the latter will

not show correct position.

Advance Financial Accounting (FIN-611)

The incorporation of Branch Trial Balance can be divided into two parts:

a. Incorporation of Branch Profit and Loss

b. Incorporation of Branch Assets and Liabilities

Incorporation of Branch Profit and Loss

For the purpose of incorporation of branch profit and loss, the head office may follow

any of the following two methods:

Detailed Incorporation

ii.

Abridged Incorporation

Detailed Incorporation

Under this method, incorporation is done with a view to prepare Branch Trading

and Profit and Loss Account in the books of the head office. Head office opens a

separate Branch Trading and Profit and Loss Account to incorporate all revenue

transactions of the branch. This account is temporary in nature and is prepared to

ascertain the real profit or loss of the branch after making all adjustments.

In this connection, we must remember that head office maintains only the Branch

Account and the statements received from the branch do not form a part of the

double entry system. Therefore, all the Journal Entries should be passed through

the Branch Account maintained in the head office. The required Journal Entries are

as follows:

Journal Entries

1. For items on the debit side of the Branch Trading Account

Branch Trading Account

To Branch Account

[The above entry is passed for the total amount of items like opening stock, purchases, carriage

inwards, wages, processing cost, goods received from head office, sales returns, etc.]

2. For items on the credit side of the Branch Trading Account

Branch Account

To Branch Trading Account

[The above entry is passed for the total amount of items like sales, goods sent to head office,

closing stock, purchases returns, abnormal loss of stock, etc.]

3. For items on the debit side of the Branch Profit and Loss Account

Branch Profit and Loss Account

To Branch Account

[The above entry is passed for the total amount of items like salaries, rent, depreciation, bad

debts, repairs, discount allowed, etc.]

4. For items on the credit side of the Branch Profit and Loss Account

Branch Account

Advance Financial Accounting (FIN-611)

To Branch Profit and Loss Account

[The above entry is passed for the total amount of items like discount received, miscellaneous

income, etc.]

Abridged Incorporation

Under this method, a Memorandum Trading and Profit and Loss Account is

prepared for ascertaining branch profit. Only one entry is passed for incorporating

branch net profit/loss.

Branch Account

To General Profit and Loss Account

[In case of loss the above entry shall be reversed.]

Incorporation of Branch Assets and Liabilities

This part of the incorporation is done with a view to include branch assets and

liabilities in the annual Balance Sheet of the whole business. At the beginning of the

new financial year, assets and liabilities are sent back to the books of the branch by

means of reverse entries.

For the purpose of incorporation, the following entries are passed:

Journal Entries

1. For Branch Assets

Branch Assets Accounts

Dr. [Individually]

To Branch Account

2. For Branch Liabilities

Branch Account

Dr. [Individually]

To Branch Liabilities Account

Question

Babar Co. Ltd. of Islamabad had a branch in Sahiwal which maintained its accounts

independently. Accounts relating to fixed assets in the Sahiwal branch were, however,

kept in the books of accounts of the head office. On 31st December, 2006 the Sahiwal

branch extracted the following Trial Balance from its own books of accounts and

forwarded the same to the head office.

Particulars

Dr. (Rs)

Cr. (Rs)

Stock in Trade (01.01.2006)

20,000

Purchases

50,000

Carriage and Freight Inward

2,500

Goods Received from head office

15,000

Transit insurance on goods received

1,000

Advance Financial Accounting (FIN-611)

Salaries

10,000

Rents rates and taxes

3,800

General office expenses

9,000

Sundry debtors

7,200

Cash in hand and at bank

2,500

Sales

75,900

Sundry creditors

5,000

Miscellaneous receipts

500

Purchases returns

800

Sales returns

500

Bills receivable

1,500

Discount allowed

200

Head office account

41,000

Total

1,23,200

The closing stock (as at 31.12.2006) at Sahiwal branch was Rs. 16,000. Depreciation was

to be allowed @ 15% p.a. on Branch Plant and Machinery of Rs. 25,000 and @ 20% p.a.

on Branch Furniture and Fittings of Rs. 6,000. Outstanding rent in respect of the year

2006 amounted to Rs. 500. Sahiwal Branch account, in the head office books, showed a

debit balance of Rs. 46,000 and it was revealed that the difference in the balances

shown by Head Office Account and Sahiwal Branch Account was on the account of

cash-in-transit.

You are to show Journal Entries required to incorporate the above Trial Balance and

other particulars in the books of the head office and also the Sahiwal Branch Account.

In the books of Babar Co. Ltd. (H.O.)

Journal

Dr.

Cr.

Date

Particulars

L.F.

Rs.

89,000

2006

Sahiwal Branch Trading A/c

Dec,

To Sahiwal Branch A/c (Note 1)

89,000

[Being the incorporation of opening stock, purchases,

carriage and freight inward, goods received from head office,

transit insurance, sales returns etc]

92,700

Sahiwal Branch A/c

To Sahiwal Branch Trading A/c (Note 2)

92,700

[Being the incorporation of closing stock, sales and purchase

returns]

Sahiwal Branch Trading A/c

3,700

To Sahiwal Branch Profit & Loss A/c

3,700

[Being the gross profit transferred to Branch Profit & Loss

Account]

Sahiwal Branch Profit & Loss A/c

28,450

To Sahiwal Branch A/c (Note 3)

28,450

[Being the incorporation of branch expenses]

Sahiwal Branch A/c

500

Advance Financial Accounting (FIN-611)

To Sahiwal Branch Profit & Loss A/c

500

[Being the incorporation of branch miscellaneous income]

General Profit and Loss A/c

24,250

Dr.

24,250

To Sahiwal Branch Profit & Loss A/c

[Being the incorporation of branch net loss]

5,000

Cash in Transit

To Sahiwal Branch A/c

5,000

[Being cash remitted by Sahiwal Branch not yet received by

the H.O.]

4,950

Sahiwal Branch A/c

To Branch Plant & Machinery A/c

3,750

1,200

To Branch Furniture & Fittings A/c

[Being the depreciation charges on branch assets]

Sahiwal Branch Closing Stock A/c

16,000

Sahiwal Branch Debtors A/c

Dr.

7,200

Sahiwal Branch Bills Receivable A/c

1,500

Sahiwal Branch Cash in hand A/c

2,500

To Sahiwal Branch A/c

27,200

[Being the incorporation of branch assets]

Sahiwal Branch A/c

5,500

To Sahiwal Branch Creditors A/c

5,000

To Outstanding Rent A/c

500

[Being the incorporation of branch liabilities]

In the books of the Babar Co. Ltd. (H.O.)

Sahiwal Branch Account

Date

Particulars

Rs.

Date

Particulars

Rs.

46,000

89,000

31.12.06

To Balance b/d

31.12.06

By Sahiwal Branch Trading A/c

To Sahiwal Branch Trading A/c

(Note 1)

92,700

(Note 2)

By Sahiwal Branch Profit & Loss

28,450

To Sahiwal Branch Trading A/c

A/c

500

To Branch Plant & Machinery A/c

By Cash in Transit A/c

3,750

5,000

To Branch Furniture & Fittings A/c

By Sahiwal Branch Assets A/c

1,200

27,200

To Sahiwal Branch Creditors A/c

5,000

To Outstanding Rent A/c

500

1,49,650

Working Notes:

1. Opening stock Rs. 20,000 + Purchases Rs. 50,000 + Carriage and Freight Rs.

2,500 + Goods from head office Rs. 15,000 + Transit insurance Rs. 1,000 + Sales

Return Rs. 500 = Rs. 89,000.

2. Sales Rs. 75,900 + Closing Stock Rs. 16,000 + Purchase Returns Rs. 800 = Rs.

92,700.

3. Salaries Rs. 10,000 + Rent rates (including outstanding) Rs. 4,300 + General

office expenses Rs. 9,000 + Discount allowed Rs. 200 + Depreciation on Plant

and Machinery Rs. 3,750 + Depreciation on Furniture and Fittings Rs. 1,200 =

Rs. 28,450.

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