Branch Accounting

Branch is any company or office located at some distance from the head office of the company. This distant office has the full capacity to store inventories, make the sale and perform the recovery processes from the customers. 

The recovery that the branch collects from the customer is deposited into the bank account of the company which is operated from the head office. In order to run the operations and day to day expenses, there is a fund provided to the branch accountant or manager which is called Imprest fund.In order to justify the consumption of this fund, full vouchers and report are provided to the head office and a new request is submitted to replenish the fund.

Purpose of Imprest Fund

The creation of imprest fund ensures better control from the head office as it has full eyes over the expenses being incurred in the branch office. However, if the branch is a larger one, the head office may allow opening of the separate bank account solely for the branch operation. Branch deposits all the recovery into this bank account and withdraw money from Imprest Fund upon receiving the check from the head office. This is quite common in companies where the branch offices are found in other cities or states.

Branch Accoutning Examination Style Question Answer

London head office has a branch at Bristol. The company is involved in using decentralized accounting. The head office charges 20 %  profit while supplying goods to  Bristol Branch. Further information regarding the branch  for 2014 are as follows:

  • goods provided to the branch at a bill price of $  120,000.
  • head office sent cash amounting to $ 15,000 to the branch.
  • Bristol branch has been allowed to do local purchasing and as such, the branch bought goods from the local market on credit amounting to $ 30,000.
  • there are operating expenses at branch amounting to $ 4,200. This is paid by the branch itself.
  • head office also paid some operating expenses of the branch amounting to $ 200.
  • bristol branch sent remittance to head office amounting to $ 45,000.
  • branch sold some merchandise on cash basis amounting to $ 146,000.

Additional information:

accrued operating expenses $ 600.

prepaid operating expenses $ 450.

Opening inventory 25,000 (this includes 40 % purchases made from local market).

Closing inventory 37,500 (received from head office) and 4,000 (purchased from local market).

Requirement

1. record journal entries along with adjusting and closing entries in the books of the Bristol branch.

2. record journal entries in the books of the head office to record Branch net income or loss.

3. Also compute necessary adjustment for over-valuation.

Solution

Allowance for Over Valuation = Bill amount x { % above / (100 + above % ) }

 

Allowance for Over Valuation

March – opening inventory 25,000 x 60% = 15000x20/120

2,500

Add: goods supplied to branch 120,000 x 20/120

20,000

Less: March Closing inventory 37,500 x 20/120

(6,250)

Amount of adjustment

16,250

 

ABC Company

Books of Branch

Date

Particulars

Debit

Credit

 

Merchandise

Head office

(goods received from London head office)

 120,000

 

120,000 

 

Cash

Head office

(cash received from London head office)

15,000 

 

15,000 

 

Purchases

Accounts Payable

(purchase of goods on credit)

 30,000

 

30,000 

 

Operating expenses

Cash

(payment of operating expenses)

 4,200

 

4,200 

 

Operating expenses

Head office

(payment of operating expenses by head office)

 200

 

200 

 

Head office

Cash

(cash remitted to head office)

 45,000

 

45,000 

 

Cash

Sales

(sales made on cash basis)

146,000 

 

146,000 

 

Adjusting & Closing Journal Entries

Date

Particulars

Debit

Credit

 

Operating expenses

Accrued operating expenses

(to record adjustment for accrued operating expenses)

600 

 

600 

 

Prepaid operating expenses

Operating expenses

(to adjust operating expense)

450 

 

450 

 

Income summary

Merchandise inventory opening

Merchandise

Purchases

Operating expenses

(to close all expense accounts)

179,550 

 

25,000

120,000

30,000

 4,550

 

Sales

Merchandise inventory closing

Income summary

(to close all revenue account)

146,000

41,500 

 

 

187,500 

 

Income summary

Head office

(to close income summary account)

7,950 

 

7,950 

 

Heads office Book

Journal Entries

Date

Particulars

Debit

Credit

 

Branch

Branch Profit & Loss

(to record profit earned by the Bristol branch)

7,950 

 

7,950 

 

Allowance for over valuation

Branch Profit & Loss

(to record adjustment for over valuation)

16,250 

 

16,250 

 

Branch Profit & Loss

Retained earnings

(to close the Bristol profit & loss)

24,200 

 

24,200 

 

Branch Accounting - B COM Exam Style Question

Z Plc is engaged in trading of electronic items and is regarded as the top tier company in the industry. Its success largely depends upon the management philosophy of conducting the business via its branch located in South east region of Amsterdam. It runs its business using one of its branch to which it sends goods at 20 % above cost. Decentralized accounting is maintained in the head office and branch. That is why, there is a need to calculate over valuation while doing consolidation accounting. Following is the data available for the head office and branch as on 31st December, 2015.

 

Head Office

Branch

Cash

800,000

500,000

Furniture & fixture (bought on Oct1, 2015)

160,000

-

Property, plant & equipment

-

40,000

Land

200,000

-

Inventory - Opening

500,000

240,000

Sales

1,440,000

700,000

Purchases

600,000

240,000

Freight in

144,000

-

Goods delivered to branch

267,500

-

Goods received from head office

-

?

Rent expenses

32,000

34,000

Other operating expenses

240,000

-

 

Additional information:

Inventory/ stock o n December 31, 2015 at Head office $ 150,000 and at branch 54,000 (includes 18,000 from local market)

Accrued rent for head office $ 4,000.

Prepaid rent in respect of branch $ 10,000.

Depreciation is to be charged @ 15 % per annum on fixed assets.

Requirements:

Prepare consolidated income statement/ profit & loss of Head office and Branch for the year ended Dec 31, 2012.

Record adjusting entry for Allowance for overvaluation in the head office book.

Solution

Over valuation in opening inventory

240,000 x 20 /120 = 40,000

Bill price 

267,500 x 120/100 = 321,000

Closing stock 

54,000 – 18000 = 36,000 x 20/120 = 6,000

 

Head Office Book

Allowance for overvaluation Schedule

 

Selling Price

Cost

Allowance for overvaluation

Opening inventory

240,000

200,000

40,000

Shipment

321,000

267,500

53,500

Closing inventory

36,000

(30,000)

(6,000)

Adjustment

   

87,500

 

Opening stock = 500,000 + 200,000 = 700,000

Closing inventory = 150,000 + 18,000 + 30,000 = 198,000

Z Plc

Consolidated Profit & Loss

For the Period Ended December 31, 2015

Sales revenue

 

2,140,000

Less: Cost of goods sold

   

Opening inventory

700,000

 

Add: purchases

840,000

 

Add: freight in charges

144,000

 

Goods available for sale

1,684,000

 

Less: closing inventory

(198,000)

 

Cost of goods sold

 

(1,486,000)

Gross profit

 

654,000

Less: operating expenses

   

Rent expense

(32,000+4,000=36,000)

34,000 – 10,000 = 24,000

   

Depreciation expense

160,000 x 15% = 24,000 x 3/12 = 6,000

40,000 x 15% = 6,000

6,000

6,000

 

Other operating expense

240,000

 

Total operating expense

 

(312,000)

Net profit

 

342,000

 

Head Office Book

Adjusting Entries

Date

Particulars

Debit

Credit

 

Allowance for over valuation

Branch Profit & Loss

(to record adjustment for overvaluation)

87,500

87,500

 

Question Answer

William Co. is a reputable name in selling computer items. It has opened a branch in another city Mumbai to expand its business operations. During the year, it shipped merchandise to the branch billed at 120,000. Further additional shipments of 48,000 were done to the branch to meet the customer’s demand. During the year, branch returned the merchandise amounting to $ 1500 due to defective items. At the year end, physical count shows the ending inventory at branch at $ 37,000, the detail of this ending inventory are as follows:

Inventory received from outside parties

4,000

Inventory received from head office at billed price

33,000

Total

37,000

Branch Loss

7,200

Head office always charges 25 % above cost while billing to branch. All the sales and sales returns are recorded at billed price in the books of head office.

Required

You are required to pass on necessary journal entries in the books of head office to record the operations of the branch. Also make necessary computations of allowance for overvaluation.

Solution

Allowance for Overvaluation

Allowance for overvaluation = bill price x {above % / (100 + above %) }

Shipment = 120,000 x 25 /125 = 24,000

Additional shipment = 48,000 x 25 /125 = 9,600

Sales return = 1500 x 25 / 125 = 300

Ending inventory = 33,000 x 25/ 125 = 6,600

Schedule for Allowance for Overvaluation

 

Bill price

Cost price

Allowance for overvaluation

Shipment

120,000

96,000

24,000

Additional shipment

48,000

38,400

9,600

Sales return

(1500)

(1200)

(300)

Less: ending inventory

(33,000)

(26,400)

(6,600)

Amount to be adjusted

133,500

26,700

6,675

 

William Co.

Journal Entries (Head Office Book)

Date

Particulars

Debit

Credit

 

Branch

Inventory

Allowance for over valuation

(to record shipment of merchandise at billed price)

120,000

96,000

24,000

 

Branch

Inventory

(to record additional shipment to the branch)

48,000

38,400

9,600

 

Inventory

Allowance for over valuation

Branch

(to record return of merchandise from branch)

1200

300

1500

 

Branch profit & loss

Branch

7,200

7,200

 

Allowance for over valuation

Branch profit & loss

(to record adjustment for over valuation)

26,700

26,700

 

Branch profit & loss (26,700 – 7,200)

Retained earnings

(to close the retained earning account)

19,500

19,500

 

M COM, ACCA, CA, CPA, CMA Level Question

This type of question is often examined in above professional level examinations. That is why, we have decided to share with you below question, so that you could prepare and perform very well in the examination results.

Zubi (Pvt) Ltd. is a well known assembler and seller of motor cycles in eastern part of India. Following is the extract from its accounting records as on Dec 31, 2015.

Cash

300,000

Accounts payable

80,000

Accounts receivable

160,000

VAT Payable

20,000

Inventory

500,000

Share capital

800,000

Furniture & fixture

140,000

Accumulated profit

200,000

 

1,100,000

 

1,100,000

 

In order to grow the business, a new branch was opened in Jaipur on 1st January, 2016 and to start the operation in the Jaipur, head office sent cash of $ 100,000 & inventory costing 160,000. Head office sent the inventory to the branch at 20 % above cost price. Following are the further information regarding the transactions happened in the month of January, 2016 for head office and Jaipur branch:

 

Head Office

Jaipur Branch

Purchases on credits (inc. 16 % VAT)

1,160,000

60,000

Sales on credit (inc. 16% VAT)

1,856,000

92,800

Received from customers

800,000

40,000

Paid to creditors

400,000

30,000

Operating expenses paid

190,000

20,000

Furniture purchased for Jaipur

50,000

 

Cash remittances sent to head office

 

40,000

Sales tax paid

20,000

 

 

On 31st Jan, 2016 the ending inventory were valued at 360,000 and 90,000 at head office & Jaipur branch respectively. The ending inventory of Jaipur branch w as valued at billed price. Zubi charges depreciation at 10 % yearly on non-current assets.

Requirement

You are required to pass on journal entries for the month of Jan 2018 in the books of head office.

Zubi (Pvt) Ltd.

General Journal

Date

Particular

Debit

Credit

1

Jaipur branch

Inventory

Allowance for over valuation

Cash

(to record cash and inventory sent to the Jaipur branch)

292,000 

 

160,000

32,000

100,000 

2

Purchases

Accounts payable

(to record credit purchase including VAT)

1,160,000 

 

1,160,000 

3

Accounts receivable

VAT

Sales

(to record credit sales and VAT)

1,856,000 

 

256,000

1,600,000 

4

Cash

Accounts receivable

(to record recovery from customers)

800,000 

 

800,000 

5

Accounts payable

Cash

(to record payment to suppliers)

400,000 

 

400,000 

6

Operating expenses

Cash

(to record payment against operating expenses)

190,000 

 

190,000 

7

Jaipur Branch

Cash

(purchase furniture for the Jaipur branch on cash)

 50,000

 

50,000 

8

Cash

Jaipur Branch

(remittances received from Jaipur branch)

 40,000

 

40,000 

9

VAT

Cash

(to record payment of VAT to Government)

 20,000

 

20,000 

10

Allowance for over valuation

Branch profit & loss

(to adjust the amount of over valuation)

 2,000

 

2,000 

 

Expense & Revenue Summary 

Inventory Opening

Purchases

Operating expenses

(to close all expense accounts)

 1,850,000

 

500,000

 1,160,000

190,000

 

Inventory

Sales

Inventory closing

Expense & Revenue Summary

(to close all revenue accounts)

 160,000

1,600,000

360,000

 

 

 

2,120,000 

 

Expense & Revenue Summary

Accumulated Profits

(to close expense & revenue summary account)

 270,000

 

270,000 

 

Branch profit & loss

Jaipur Branch

(to record Jaipur branch loss)

 17,000

 

17,000 

 

Accumulated profits

Branch profit & loss

(to record branch loss)

 15,000

 

15,000 

 

Computation

Billing price = cost price x { (100 + above %) / 100 } = (160,000 x 120/100) = 192,000

Allowance for over valuation = bill price – cost = 192,000 – 160,000 = 32,000

Allowance for over valuation = bill x { (above %) / 100 } = (180,000 x 20/120) = 30,000

Head Office Book

Schedule – Allowance for Over Valuation

 

Bill Price

Cost price

Allowance for over valuation

Shipment

192,000

160,000

32,000

Less: Closing inventory

(180,000)

 

(30,000)

Amount of adjustment

 

(30,000)

2,000