BRANCH ACCOUNTS
Learning objectives
At the end of this chapter, after completing the checkpoint questions and exercises, you should
be able to:
● list the main purposes of branch accounting;
● explain the two main methods of branch accounting;
● prepare branch accounts under each method;
● prepare (i) the branch profit and loss account under each method and (ii) the branch balance
sheet where the branch maintains full accounting records;
● prepare a combined balance sheet, including items in transit, where the branch maintains full
accounting records.
Introduction
The necessity for branch account arises because not every business is a single unit. Greater
volumes of sales, a wider market, cheaper purchases and broader product mix are advantages that
businesses with separate branches scattered over the country or across the political boundaries
have over single unit.
It must be noted that in a business context a branch is a subordinate part of a firm which is not
set up as a limited liability company; such a company would be a subsidiary company.
Purposes and methods of accounting for branches
The purposes of keeping branch accounts are primarily
● to show changes in the branch balance sheet; and
● to report on the branch profit or loss.
Approaches for Recording Branch Transactions
There are two main approaches to recording the branch transactions:
1. maintaining full accounting records at the branch (Autonomous Branch Accounting);
2. recording all the transactions in the head office books (Dependent Branch Account).
APPROACH 1 (AUTONOMOUS BRANCH)
It is used only where the branch is large enough to have its own accounts department. The
advantages of this approach include better control by local management, the information being
immediately available.
This also has an advantage in management development, as it allows for more delegation of
authority. However, with the use of electronic transfer of information, this advantage is now less
important, as compared with approach 2.
APPROACH 2 (DEPENDENT BRANCH )
Under this approach the accounting system is straightforward, involving only appropriate ledger
accounts in the head office books, e.g. branch stock (sales), branch stock adjustment account etc.
This approach is necessary where there is a large number of small branches which cannot afford
to have local accounts departments.
Features of Dependent Branch
1. Purchases are made in bulk and delivered to each department to be sold and the
department in turn will account to the head office for the cash collected.
2. Centralized accounting functions which enables the head office to exercise greater
control over the operations of the branch
3. The staff at the branch do not have access to accounting records which therefore limits
fraud
4. There is no need to employ full time accounting staff at the branch. Concentrating
records keeping function within the head office allows economics of scale in terms of the
number of accounting staff required.
5. Head office ability to implement full control measures over assets especially cash,
debtors, and stock.
Control over Cash
There should be a rule to the effect that all cash takings are banked intact on daily basis. All
wages and other expenses should be paid for, by the head office. If it is necessary to pay for
minor expenses locally, each branch should be authorized to keep petty cash account float, which
is maintain on an imprest system and reimbursed by cheque from head office.
Debtors
The policy for allowing credit facilities should be laid down by the head office. If a large
proportion of sales is on sales ledger at the head office then the debtors have to payment there. If
there is only a small number of credit customers, it may be sufficient to make each branch
responsible for its sales ledger. The head office would then have to maintain a control account.
Control over Stock
Control over stock is effected by fixing the price at which the department may sell the goods
transferred, thereby predetermining the cash that will be collected. Physical checks of the stock
on hand at the end of a given period will complete the control. There three (3) basic methods that
can be used to transfer stocks:
1. Cost Price: Stocks are transferred by the head office to branches at the cost at which they
were bought. The branch is given the discretion to determine the selling price considering
the local market dynamics. This method allows very little control to be exercised by the
head office. It is suitable for businesses trading very perishable goods or where selling
prices are subject to severe fluctuations.
2. Cost Price and a Percentage: Stocks are transferred to the branches at a cost and a
percentage which serves as a target for performance. Failure to allow this targeted gross
profit figure could be an indicator of pilferage or excess wastage.
3. Selling Price: all stock transfers are valued at selling price. It makes it possible to
calculate selling price at any branch at any moment. It makes possible to exercise quicker
control
Reading assignment: What are the main advantages of each of the main approaches (methods)
of branch accounting?
Accounting Entries (Dependent Branch)
There are three (3) special accounts that the head office keeps for each branch:
1. Branch Stock Account
2. Branch Stock Adjustment/Mark Up/Gross Profit/ Profit Loading
3. Goods Sent to Branch
Illustration 1.
An enterprise, a retail business in Accra has a branch in Kumasi. All goods sold by Kumasi
branch are receive from head office at a retail selling price which is cost plus 20% profit mar-up.
All sales are on cash basis and the proceeds banked daily for the credit of the head office.
The following are transactions relating to Kumasi branch for the month of January 2017
GHC
Stock at 1/1/2017 24000
Transfer to Branch 240000
Returns to Head Office by Branch 2400
Branch Sales 252000
Prepare the necessary ledger accounts to record the above transactions.
With the above illustration it is assumed that the branch sold all the goods at the stipulated
selling price and that there was neither deficiency nor excess profit.
Excess Profit/ Deficiency
Where the closing stock is valued and entered in the branch stock account any credit balance
represents excess profit and any debit balance represents deficiency.
Treatment of Excess Profit
The excess profit arising on the branch stock account is transferred to the credit of profit and
loss account (together with the gross profit ascertained in the branch stock adjustment
account).
Treatment of Deficiency
Any deficiency in the branch stock account may be due to such factors as goods lost or stolen,
or it may be cash lost or stolen. The treatment of the deficiency will depend on whether it is
normal or abnormal.
Normal Deficiency – deficiency expected by management and therefore uncontrollable. Credit
to Branch Stock Account and Debit to Branch Stock Adjustment Account.
Abnormal Deficiency – unexpected losses which could have been controlled or avoided.
Treatment depends on whether it was with goods are cash.
If it was with cash the implication is that profit was made on the goods before stolen. The
treatment is to credit Branch Stock Account and debit Defalcation Account.
The amount to transfer from Defalcation Account to Profit and Loss Account depends on
whether the goods were insured or not.
If they were insured, the business will be indemnified by the insurer (Insurance Company). At
the receipt of indemnity in a form of cash, debit Cash Account and credit Defalcation Account.
Consequently, the balance on the Defalcation Account is transferred to the Profit and Loss
Account.
If the deficiency is traceable to goods stolen, then the profit anticipated on the goods were never
realized. In that case credit Branch Stock Account with the amount of the deficiency (stolen
goods), debit Branch Stock Adjustment Account with the profit element, and debit Defalcation
Account with the cost of the goods stolen. Again, the amount to be transferred depends on
whether the goods were insured or not.
Illustration 2.
The following information relates to ABC Ltd. which operates a number of branches. Goods
supplied to the branches are charged out at cost plus 33⅓%. Each branch maintains debtors
ledger. The following information relates to the branch at Tema for the year ended 31st December
2017.
GHC
Credit Sales 24,550
Cash from Debtors 23,908
Cash remitted to Head Office 47,012
Goods sent to Branch 49,240
Cash Discount allowed to Debtors 621
Expenses Branch paid by Head Office 2,905
Stock at 31st December 2016 1,400
Stock at 31st December 2017 1,900
Goods returned by Branch 400
Reduction in selling price authorised by area
manager 72
Debtors at 1/1/2017 3,402
Bad debt written off 47
A consignment of goods sent to Head Office on 31st December 2017 amounting to GHC500
million was not received until 5th January 2018, and therefore was not included in the stock.
You are required to record the transactions in the ledger and prepare a Trading, Profit or Loss
Account for the year ended 31st December 2006.
Reading Assignment: Research about the Double Column Method of recording
Branch accounting where the branch maintains full accounting records (Autonomous
Branch)
The branch accountant will open a full set of double entry records for the operations of the
branch. In addition to the usual sales, stock, cost of goods sold and other asset, liability and
expenses accounts, there will also be a head office current account.
The resources needed for the operation of the branch are supplied by the owner(s) of the firm
indirectly through head office. In practice the head office current account in the branch books
and the branch current account in the head office books are treated as debtors/creditors, so that if
the branch is a debtor in head office books the head office will be a creditor in the branch books
and vice versa.
As we shall see later, in some respects the head office current account has the characteristics of a
sole trader’s capital account, being credited with profits and debited with losses. Let’s now
illustrate the operation of this method through a worked example.
Illustration 3.
A firm, Abetico, which has its head office in Abetifi, opened a branch on 1 October 2017.
During the first month of trading the following transactions took place:
i. Head office opened a branch bank account in Pepease by transferring GHC200,000 from
its Abetifi bank account.
ii. Head office obtained premises for the branch in Pepease, paying rent in advance for six
months of GHC6,000.
iii. Abetifi transferred goods for resale from its own stock to Pepease, invoicing Pepease
branch at cost GHC80,000.
iv. Pepease branch bought furniture and fittings for GHC24,000, paying by means of a
cheque drawn on its own bank account.
v. Pepease purchased goods for resale on credit from Dansco for GHC10,000.
vi. Pepease returned unsuitable goods for resale, cost GHC5,000, to Abetifih.
vii. Pepease made cash sales amounting to GHC50,000, of goods transferred from Abetifi
(cost GHC40,000). The proceeds were immediately banked in the Pepease account.
viii. At head office’s request, Pepease paid GHC25,000 to head office, by cheque.
ix. Pepease paid salaries for the month amounting to GHC2,500.
You are required to how the above records will appear in the books of:
a. Head Office
b. Branch Office
After making adjustments in respect of the prepaid rent and the accrued expenses listed below, draw up
the branch profit and loss account for the month and the balance sheet as at 31 October 2017. (Abetico
deals with depreciation only at year end.)
Expenses accrued as at 31.10.X3 were:
Heating and lighting GHC200
Telephone GHC100
Preparation of Final Account
Approach
Prepare the necessary cost structure
Adjust the branch current account in the head office books for in-transit items
Prepare the head office, the branch, and the combined trading account
Prepare the head office, the branch, and the combined profit and loss account
Ensure to put through all the necessary adjustments to the branch current account
Prepare the head office balance sheet
Proforma Trading, Profit and Loss Account
Head Branc combine
Office h d
GHC GHC GHC
Sales xxx xxx xxx
Tranfer to Branch xxx
xxx xxx xxx
Less Cost of Sales:
Opening Stock xxx xxx xxx
Purchases xxx xxx xxx
Transfers from Head Office xxx
xxx xxx xxx
Closing stock (xxx) (xxx) (xxx)
xxx xxx xxx
Gross Profit xxx xxx xxx
Other Income xxx xxx xxx
xxx xxx xxx
Less Expense:
Increase/Decrease for Unrealised Profit xxx
Admin Expense xxx xxx xxx
Selling and Distribution Expenses xxx xxx xxx
Finance Charges xxx xxx xxx
xxx xxx xxx
Net Profit/(Loss) xxx xxx xxx
Proforma Balance Sheet
Head Branc combine
Office h d
GHC GHC GHC
Fixed Assets xxx xxx xxx
xxx xxx xxx
Branch Current Account xxx
Provision for Unrealised Profit (xxx)
xxx
Current Assets:
Stocks and Goods in Transit xxx xxx xxx
Debtors xxx xxx xxx
Cash and Cash in Transit xxx xxx xxx
xxx xxx xxx
Current Liabilities (xxx) (xxx) (xxx)
Net Current Assets xxx xxx xxx
Net Assets xxx xxx xxx
Financed By:
Capital Employed xxx xxx
Profit for the Year xxx xxx
Head Office Current Account xxx
xxx xxx xxx
Illustration 4.
Mrs. Veronica Addo operates a soft drink distribution business under the business name Come
Alive Enterprise. The head office is in Accra and it is managed by her while the Kumasi branch
is managed by her sister, Mary. The Kumasi branch operates with a high degree of autonomy
except from the fact that all the stocks are transferred from the Accra depot at 10% profit margin.
The trial balance as at 31st December 2017, were as follows:
Accra Kumasi
DR. CR. DR. CR.
¢'000 ¢'000 ¢'000 ¢'000
Fixed Assets (NBV) 76000 30800
Stocks at 1st Jan 2017 56000 34000
Trade Creditors 30000
Expense Creditors 2468 1080
38804
Sales 0 238800
Administration Expenses 46000 30000
Distribution Cost 62000 10000
Bank 21228 11536
Debtors 34896 7808
Kumasi/Accra Current Account 253064 249864
Purchases 391800
Goods received from Accra 139880
14308
Goods Transferred to Kumasi 0
22476
Remittance from Kumasi 0
Remittance to Accra 225720
Provision for unrealised profit (1/1/2017) 3400
14924
Capital (1/1/2017) 0
94098
940988 8 489744 489744
Additional information:
i) At 31st December 2017,
Stock at head office at cost ¢50800000
Stock at branch at transfer price ¢19200000
Stocks in transit at transfer price ¢3200000
Cash in transit ¢960000
ii) Fixed Assets are to be depreciated at 20% on reducing balance
iii) Mary is entitled to a bonus of 5% of net profit after deduction of the bonus
You are required to prepare Trading, Profit or Loss account in columnar form for the year ended
31st December 2017, and Balance Sheet as at that date.
