Branch Account

Introduction:
Branches are opened to expand business. Head office must know profit or loss of each
branch. Hence, in branch accounts, finally profit or loss o each branch is calculated and
incorporated in the profit and los account of head office.
Dependent Branch:
This type of branch depends fully on its head office. It receives goods from head office
and sells it for cash or on credit at the prices determined by head office. Branch
manager has to act only as per the instructions/guidelines from head office.
Accounting treatment in the books of Head office:
Branch accounts at head office:
Head office has to keep a record of transactions with branch. Head office maintains
branch account to ascertain profit or loss made at the branch. This account is in the

nature of trade and profit and loss account. According transactions between head office
and branch only are recorded in branch a/c.

Entries in the books of head office are:

1) Branch A/c Dr.
To Goods Sent to Branch A/c
(Goods Sent to Branch)
2) Goods Sent to Branch A/c Dr.
To Branch A/c
(Return of goods from Branch)
3) Branch A/c Dr.
To Bank/Cash A/c
(Payment of branch expenses by head office)
4) Bank/ Cash A/c Dr.
To Branch A/c
(Sale proceeds received from branch)
5) Branch Stock A/c Dr.
To Branch A/c
(Goods lying at the branch at the end of the year)
6) Branch A/c Dr.
To Profit and Loss A/c
(Branch profit transferred to profit and loss A/c)
7) Profit and Loss A/c Dr.
To Branch A/c

(Branch loss transferred to profit and loss A/c)

8) Goods Sent to Branch A/c Dr.
To Purchases/Trading A/c
(Transfer of balance in goods sent to branch A/c to purchases/Trading A/c)

Note:
Branch stock account appears in the balance sheet of the head office. In the beginning
of the next year this account is transferred to branch account by passing the following
entry:
Branch A/c Dr.
To Branch Stock A/c
(Cost of branch stock as at the beginning of the year)

If head office has two or more branches branch account is prepared separately
for each branch.
Transactions between branch and its constructions, suppliers, etc, are not
recorded in problems on branch account.
Stock and Debtors System

Under this system head office opens the following accounts for each branch:
1) Branch Stock Account:
This account is always prepared at invoice price. This is prepared to know shortage or
surplus of stock at the branch.
2) Branch Expenses Account:
This account records all expenses incurred at the branch. The debit side of this account
shows depreciation on fixed assets, bad debts, discount allowed to debtors, salary,
commission, rent, carriage, etc. This account is closed by transferring to Branch
Adjustment A/c.
3) Branch Asset Account:
Head office opens separate account for each type of asset of the branch. For examples,
- Branch Cash A/c, Branch Furniture A/c, Branch Debtors A/c, etc.

4) Branch Adjustments Account:

This account is like trading & profit & loss A/c. On the debit side of this A/c

Stock Reserve Profit in the stock at the end is shown at invoice prince and
Profit element in the shortage, if any is shown. On the credit side of this A/c:
Stock Reserve on the opening stock
Profit element in goods sent to branch a/c
Profit element in surplus are shown
The difference in the account is either gross profit or gross loss. This amount is
transferred to below the line of branch adjustment account.
In the second part (which is like P&L A/c) branch expenses A/c and the remaining
amount of shortage or surplus are shown. (Shortage on the debit side and
surplus on the credit side)
Any difference in the A/c is Net Profit or Net Loss.
Journal Entries under Stock and Debtors Systems:
1) When goods send to Branch at invoice price:
Branch Stock A/c Dr.
To Goods Sent to Branch A/c
2) When goods are returned by branch to the head office at Invoice Price:
Goods Sent Branch A/c Dr.
To Branch Stock A/c
3) When goods are sold on credit at branch:
Branch Debtors A/c Dr.
To Branch Stock A/c
4) When goods are sold for Cash at branch:
Cash A/c Dr.
To Branch Stock A/c
5) When cash is collected by branch from branch debtors:
Cash A/c Dr.
To Branch Debtors A/c
6) When goods are returned by branch debtors to the branch:

Branch Stock A/c Dr.

To Branch Debtors A/c

7) When goods are returned by branch debtors directly to head office:

Goods Sent to Branch A/c Dr.
To Branch Debtors A/c
8) When Goods are sent by one branch to another branch:
I) Goods Sent to Branch A/c Dr.
To Branch Stock A/c
II) Branch Stock A/c Dr.
To Goods Sent at Branch A/c
9) When bad debt and discount are entered:
Branch Expenses A/c Dr.
To Branch Debtors A/c
10) When branch expenses are paid:
Branch Expenses A/c Dr.
To Bank A/c
11) When there is abnormal shortage i.e. pilferage or loss of stock:
Branch Adjustment A/c Dr.
Branch Profit and Loss A/c Dr.
To Branch Stock A/c
Adjustments:
12) When load in opening stock is adjusted:
Stock Reserve A/c Dr.
To Branch Adjustment A/c
13) When load in closing stock is adjusted:
Branch Adjustment A/c Dr.
To Stock Reserve A/c

14) When load in net goods sent to branch is adjusted:

Goods Sent to Branch A/c Dr.
To Branch Adjustment A/c
15) When branch expenses are transferred:
Branch Adjustment A/c Dr.
To Branch Expenses A/c
16) When the balance on Goods Sent to Branch A/c is transferred:
Goods Sent to Branch A/c Dr.
To Purchases A/c
17) When Net Profit is transferred to Profit and Loss A/c:
Branch Adjustment A/c Dr.
To Profit and Loss A/c
18) Reserve entry is passed for loss at branch.
Foreign Branches
This is also independent branch. But it is located in foreign country and as such
there arises the question of conversion of foreign currency into the currency of
the nation in which the head office is established or situated. The branch send its
trail balance in foreign currency and as such the head office required to convert it
into the currency of its own nation before the items in the trail balance are
incorporated into the head office books and final accounts are prepared. Foreign
branch keeps its accounts in foreign currency and such trail balance is also
prepared in foreign currency. Suppose an Indian company opens its branch in
America, the branch will maintain its accounts in American Dollars. As such, the
branch prepared and sends its trial balance to the head office in dollars. The
head office is, therefore, required to convert the trail balance from the dollars to
rupees before it is incorporated.
Rules for Converting Trial Balance of the Branch:
1. In the cases of Moderate Fluctuations:

The rules for recording transactions with the branches in head office books may
be stated as under:
i.

Fixed Assets:
The question of conversion of the value of fixed assets arises only when
the accounts of the branch fixed assets are maintained in the Head Office
Books. In this case any one of the following exchange rates may be
adopted:
a) The rate prevailing at the time of contract of purchase; or
b) The rate prevailing on the date of delivery or
c) The rate prevailing on the date of payment. The depreciation to be
charged must also be converted at the same rate, and not at any other
rate.

ii.

Fixed Liabilities:
These should be converted at the rate of exchanges ruling on the day
when such liabilities were incurred or their payment was effected.

iii.

Floating Assets/ Liabilities:

These should be converted at the rate prevailing on the last day of the
year.

iv.

Goods Sent to Branch:

They will be recorded in the head office at cost. The branch will convert
the invoice at the rate ruling on the date of receipt of goods.

v.

Revenue Items:
These items should be converted at the average rate of exchange ruling
during the period under question. However, if fluctuations are violent these
should be converted each month at the average rate prevailing during the
month.

vi.

Remittance:
It is converted at actual amount received by the head office or the branch
as the case may be.

vii.

Opening and Closing Stock:

Opening stock should be converted at the rate prevailing at the beginning
of the period where as the closing stock should be converted at the rate
prevailing on the last day of the period.

2. Stable Exchange Rate:

A fixed rate of exchange may be adopted for conversion of all branch items with
the exception of:

Remittance:
It is to be converted at the same amount of which branch account appears in
head office books (i.e. actual amount)
3. Heavily Fluctuating Exchange Rates:
In such a case ordinary rules of conversion cannot be applied. It becomes,
therefore, necessary to us a standard rate except in case of remittance of cash.
Remittance of cash will be recorded at the amounts involved and the question of
difference in exchange may not arise.
Some Important Points:
a. If current assets have been acquired and held abroad by the head office and are
covered by a forward exchange contract, the assets should be converted at the
rate mentioned in the contract.
b. Average rate means = Operating rate + Closing rate
2
c. The year in which local currency is devalued, even revenue items, should be
converted at the rate prevailing at the end of the year.