8

Accounting for Branches Including

Foreign Branches

Learning Objectives
 After studying this chapter, you will be able to: Understand concept of branches and
their classification from accounting point of view.
 Distinguish between the accounting treatment of dependent branches and independent
branches.
 Learn various methods of charging goods to branches.
 Solve the problems, when goods are sent to branch at wholesale price.
 Prepare the reconciliation statement of branch and head office transactions after finding
the reasons for their disagreement.
 Incorporate branch balances in the head office books.
 Prepare branch accounts even on the basis of incomplete information.
 Differentiate between integral and non-integral foreign branches.
 Learn the techniques of foreign currency translation.

1. Introduction
A branch can be described as any establishment carrying on either the same or
substantially the same activity as that carried on by head office of the company. It must
also be noted that the concept of a branch means existence of a head office for there
can be no branch without a head office - the principal place of business. From the
accounting point of view, branches may be classified as follows:

© The Institute of Chartered Accountants of India

 8.2 Advanced Accounting

Classification of Branches

Inland Branches Foreign Branches

Dependent Branches for which whole accounting records are kept at Head Office
Independent Branches which maintain independent accounting records

Basis of distinction Branch Accounts Departmental Accounts

2.Distinction AccountsBetween BranchAccountsAndDepartmental
1. Maintenance of Branch accounts may be Departmental accounts are
accounts maintained either at maintained at one place only.
branch or at head
office.
2. Allocation of No allocation problem Common expenses are
common expenses arises since the distributed among the
expenses in respect of departments concerned on some
each branch can be equitable basis considered
identified. suitable in the case.
3. Reconciliation Reconciliation of head No such problem arises.
office and branch
accounts is necessary
in case of independent
branches at the end of
the accounting year.
4. Conversion of At the time of No such problem arises in
foreign currency finalization of accounts, departmental accounts.
figures conversion of figures of
foreign branch is
necessary.
 Accounting for Branches including Foreign Branches8.3

3. Dependent Branches
When the business policies and the administration of a branch are wholly controlled by
the head office and its accounts also are maintained by it the branch is described as
Dependant branch. Branch accounts, in such a case, are maintained at the head office
out of reports and returns received from the branch. Some of the significant types of
branches that are operated in this manner are described below:
(a) A branch set up merely for booking orders that are executed by the head office.
Such a branch only transmits orders to the head office;
(b) A branch established at a commercial centre for the sale of goods (wholesale)
supplied by the head office, and under its direction all collections are made by the
H.O.; and
(c) A branch for the retail sale of goods, supplied by the head office.
Accounting in the case of first two types is simple. Only a record of expenses incurred at
the branch has to be maintained.
But however a retail branch is essentially a sale agency that principally sells goods
supplied by the head office for cash and, if so authorised, also on credit to approved
customers. Generally, cash collected is deposited into a local bank to the credit of the
head office and the head office issues cheques thereon for meeting the expenses of the
branch. In addition, the Branch Manager is provided with a ‘float’ for petty expenses
which is replenished from time to time on an imprest basis. If, however, the branch also
sells certain lines of goods, directly purchased by it, the branch retains a part of the sale
proceeds to pay for the goods so purchased.

4. Methods of Charging Goods to Branches

Goods may be invoiced to branches (1) at cost; or (2) at selling price; or (3) in case of
retail branches, at wholesale price.
Selling price method is adopted where the goods would be sold at a fixed price by the
branch. It is suitable for dealers in tea, petrol, vanaspati ghee, etc. In this way, greater
control can be exercised over the working of a branch in as much as that the branch
balance in the head office books would always be composed of the value of unsold
stock at the branch and remittances or goods in transit. The arbitrary price method is
usually adopted if the selling price is not known or when it is not considered desirable to
disclose to the branch manager the profit made by the branch.

5. Accounting for Dependent Branches

Dependent branch does not maintain a complete record of its transactions. The Head office
may maintain accounts of dependent branches in any of the following methods:
8.4 Advanced Accounting

Methods of maintaining accounts of Dependent Branches

Goods invoiced at cost or selling price Goods invoiced at wholesale price

Trading and profit and loss account method (final Accounts method
Stock and Debtors Method Whole sale branches method
Debtors Method

5.1 When goods are invoiced at cost: If goods are invoiced to the branch at cost,
the trading results of branch can be ascertained by following any of the three methods:
(i) Debtors Method, (ii)Stock and Debtors method, (iii) Trading and Profit and Loss
Account (Final Accounts) Method.
For finding out the trading results of branch, it is assumed that the branch is an entity
separate from the head office. On the basis, a Branch Account is stated in the head
office books to which the price of goods or services provided or expenses paid out are
debited and correspondingly, the value of benefits and cash received from the branch
are credited.
Debtors method: This method of accounting is suitable for small sized branches. Under
this method, separate branch account is maintained for each branch to compute profit or
loss made by each branch. The opening balance of stock, debtors (if any), petty cash (if
any), are debited to the Branch Account; the cost of goods sent to branch as well as
expenses of the branch paid by the head office, e.g., salaries, rent, insurance, etc., are
also debited to it. Conversely, amounts remitted by the branch and the cost of goods
returned by the branch are credited. At the end of the year, the value of unsold stock, the
total of customers’ balances outstanding and that of petty cash are brought into the
branch account on the credit side and then the branch account will reveal profit or loss;
Debit ‘balance’ will be the loss suffered by the working of the branch and vice versa. If
the branch is allowed to make small purchases of goods locally as well as to incur
expenses out of its cash receipts, it will be necessary for the branch to supply to the
head office a copy of the Cash Account, showing details of cash collections and
disbursements. To illustrate the various entries which are made in the Branch Account,
the proforma of a Branch Account is shown below:
Proforma Branch Account

To Balance b/d By Bank A/c (Cash

Stock remitted) By Return to
Debtors H.O.
By Balance c/d
 Accounting for Branches including Foreign Branches8.5

Petty Cash Cash

To Goods sent to Debtors
Branch To Bank A/c Petty Cash
Salaries Fixed Assets
Rent Prepaid Expenses
Sundry Expenses By Profit and Loss A/c—
To Profit & Loss A/c—Profit Loss (if debit side is
(if credit side is larger) larger)
Note:
1. Having credited the Branch Account by the actual cash received from debtors, it
would be wrong to debit the Branch Account, in respect of discount or allowances to
debtors.
2. The accuracy of the trading results as disclosed by the Branch Account, so
maintained, if considered necessary, can be proved by preparing a Memorandum
Branch Trading and Profit & Loss Account, in the usual way, from the balances of
various items of income and expenses contained in the Branch Account.
Illustration 1
Fanna Cloth Mills opened a branch at Mumbai on 1st April, 2011. The goods were
invoiced to the branch at selling price which was 125% of the cost to the head office.
The following are the particulars of the transactions relating to branch during the year
ended 31st March, 2012:

` `
Goods sent to branch at cost to head office 42,12,600
Sales:
Cash 18,76,050
Credit 26,61,450 45,37,500
Cash collected from debtors 23,55,000
Discount allowed to debtors 23,550
Returns from debtors 15,000
Spoiled cloth in bales written off at invoice price 7,500
Cheques sent to branch for:
Rent 1,08,000
Salaries 2,70,000
Other Expenses 52,500 4,30,500
8.6 Advanced Accounting

Prepare Branch Account based on invoice price under Debtors method for ascertaining profit
for the year ended 31st March, 2012.
Solution
Branch Account
` ` ` `
To Goods sent to 52,65,750 By Bank-
Branch Account
To Bank - Sales 18,76,050
Rent Salaries 1,08,000 Collection from 23,55,000 42,31,050
2,70,000 debtors
Other expenses 52,500 4,30,500 10,53,150
By Goods sent to Branch
To Branch Stock Reserve 1,47,150 Account (Loading)
(7,35,750x25/125) (52,65,750x25/125)
To H.O. Profit and Loss By Abnormal Loss
Account -Cost of spoiled cloth 6,000
-Transfer of profit 4,50,450 (7,500x100/125)
By Balance c/d 7,35,750
Branch Stock 2,67,900 10,03,650
62,93,850 Branch Debtors 62,93,850

Working Notes:
1. Memorandum Branch Stock Account
` ` `
To Goods sent to . By Cash - Sales 18,76,050
Brach:
Cost 42,12,600 By Credit Sales 26,61,450
Add: Loading @ By Abnormal
Loss
25% 10,53,150 52,65,750 - Spoiled 7,500
cloth
To Returns from By Balance c/d
Debtors 15,000 (Balancing
figure) 7,35,750
52,80,750 52,80,750
2. Memorandum Branch Debtors Account

` `
To Credit Sales 26,61,450 By Cash collected 23,55,000
By Discount allowed 23,550
 Accounting for Branches including Foreign Branches8.7

By Returns 15,000
By Balance c/d (Balancing figure) 2,67,900
26,61,450 26,61,450
Illustration 2
Buckingham Bros, Bombay have a branch at Nagpur. They send goods at cost to their
branch at Nagpur. However, direct purchases are also made by the branch for which
payments are made at head office. All the daily collections are transferred from the
branch to the head office.
From the following, prepare Nagpur branch account in the books of head office by
Debtors method:
` `
Opening balance (1-1-2012) Bad Debts 1,000
Imprest Cash 2,000
Sundry Debtors 25,000 Discount to Customers 2,000
Stock: Transferred from H.O. 24,000 Remittances to H.O.
Direct Purchases 16,000 (recd. by H.O.) 1,65,000

Cash Sales 45,000 remittances to H.O.

Credit Sales 1,30,000 (not recd. by H.O. so far) 5,000
Direct Purchases 45,000 Branch Exp. directly paid by 30,000
H.O.
Returns from Customers 3,000 Closing Balance (31-12-2012)
Goods sent to branch from H.O. 60,000 Stock: Direct Purchase 10,000
Transfer from H.O. for Petty Transfer from H.O. 15,000
Cash Exp. 4,000 Debtors ?
Imprest Cash ?
Solution
In the Books of Buckingham Bros, Bombay
Nagpur Branch Account
` `
To Opening Branch Assets By Bank – Remittances
received from branch
Stock (24,000+16,000) 40,000 Cash Sales 45,000
Debtors 25,000 Cash from Debtors 1,20,000
Imprest Cash 2,000 Cash from Debtors in transit 5,000 1,70,000
To Goods sent to Branch A/c 60,000 By Stock:
To Creditors (Direct Purchases) 45,000 Transfer from H.O. 15,000
To Bank (Sundry exp.) 30,000 Direct Purchase 10,000
 8.8 Advanced Accounting

To Bank (Petty cash exp.) 4,000 By Sundry Debtors (W.N. 2) 24,000

To Net Profit transferred to By Imprest Cash (W.N. 3) 2,000
To General Profit & Loss A/c 15,000
2,21,000 2,21,000

Working Notes:
(1) Collections from debtors:
`
Total remittances (` 1,65,000 + ` 1,70,000
5,000) Less: Cash sales (45,000)
1,25,000
(2) Calculation of Sundry Debtors closing Balance:
`
Opening Balance 25,000
Add: Credit Sales 1,30,000
1,55,000
Less: Returns, Discount, Bad debts & collections (3,000 + 2,000 +
1,000 + 1,25,000) (1,31,000)
Closing balance 24,000
(3) Calculation of closing balance of Imprest Cash
`
Opening Balance 2,000
Add: Transfer from H.O. 4,000
6,000
Less: Expenses* (4,000)
Closing balance 2,000
*It is assumed that petty cash expenses of the branch for the year were ` 4,000.
Illustration 3
ch has been instructed to send all cash daily to head office. All expenses are paid by head office except petty expenses, which are met b

Particulars Amount Particulars Amount

(` ) (` )
Stock as on 1st April, 2013 (Invoice 40,000 Discount allowed to debtors 300
price)
 Accounting for Branches including Foreign Branches8.9

Sundry Debtors as on 1st April, 25,000 Expenses paid by head office:

2013
Salary 4,000
Cash in hand as on 1st April, 2013 1,000 Staff Welfare 750
Office furniture as on 1st April, 4,000 Telephone Expenses 1,200
2013
Goods invoiced from head office 1,80,000 Other Misc. Expenses paid by 700
(invoice price) branch
Goods return to head office 6,000 Stock as on 31st March, 35,000
2014 (at invoice price)
Goods return by debtors 1,250 Depreciation to be provided 10% p.a.
Cash received from Debtors 65,000 on branch furniture
Cash sales Answer 1,20,000
Credit sales 70,000
In the books of Head Office - LMN
Mumbai Branch Account (At invoice price)

Particulars Amount Particulars Amount

(`) (`)
To Balance b/d: By Stock Reserve 10,000
Stock (opening)
Debtors 40,000 By Remittances
Cash in hand 25,000 Cash Sales 1,20,000
Furniture 1,000 Cash from Debtors 65,000 1,85,000
To Goods sent to branch 4,000 By Goods sent to Branch 45,000
To Goods returned by branch 1,80,000 (loading)
1,500 By Goods returned by 6,000
(loading)
branch (Returns to HO)
To Bank (Expenses paid by
By Balance c/d:
Head Office):
Stock 35,000
Salary 4,000
Debtors 28,450
Staff Welfare 750
Cash (`1,000-`700) 300
Telephone 1,200
5,950 Furniture (`4,000-`400) 3,600
To Stock Reserve (closing)
8,750
To Profit Transferred to
47,150
General Profit & Loss
A/c
3,13,350 3,13,350
8.10 Advanced Accounting

Working Note:
Debtors Account
Particulars Amount (`) Particulars Amount (`)
To Balance b/d 25,000 By Cash A/c 65,000
To Sales A/c (Credit) 70,000 By Sales Return 1,250
By Discount allowed 300
By Balance c/d 28,450
95,000 95,000

Note: It is assumed that goods returned by branch are at invoice price.

Stock and Debtors method
If it is desired to exercise a more detailed control over the working of a branch, the
accounts of the branch are maintained under what is described as the Stock and
Debtors Method. According to this method, the following accounts are maintained by the
Head Office:
Account Purpose
1. Branch Stock Account (or Branch Trading Ascertainment of shortage or surplus
Account)
2. Branch Profit and Loss Account Calculation of net profit or loss
3. Branch Debtors Account Ascertainment of closing balance of
debtors
4. Branch Expenses Account Ascertainment of total expenses incurred
5. Goods sent to Branch Account Ascertainment of cost of goods sent to
branch
If the branch is also allowed to purchase goods locally and to incur expenses out of its
cash collections, it would be necessary to maintain (i) a Branch Cash Account, and (ii)
an independent record of branch assets.
The manner in which entries are recorded in the above method is shown below:
Transaction Account debited Account credited
(a) Cost of goods sent to Branch Stock A/c Goods sent to Branch A/c
the Branch
(b) Remittances for expenses Branch Cash A/c (H.O.) Cash A/c
(c) Any assets (e.g. furniture) Br Asset (Furniture) A/c (i) (H.O.) Cash A/c or
provided by H.O. (ii) Creditors A/c
(iii) (H.O.) Furniture
(d) Cost of goods returned by Goods sent to Branch A/c A/c Branch Stock A/c
 Accounting for Branches including Foreign Branches 8.11

the branch
(e) Cash Sales at the Branch Branch Cash A/c Branch Stock A/c
(f) Credit Sales at the Branch Branch Debtors A/c Branch Stock A/c
(g) Return of goods by debtors Branch Stock A/c Branch Debtors
to the Branch A/c
(h) Cash paid by debtors Branch Cash A/c
(i) Discount & allowance to Branch Expenses A/c Branch Debtors
debtors, bad debts A/c Branch Debtors
(j) Remittances to H.O. (H.O.) Cash A/c A/c
(k) Expenses met by H.O. Branch Expenses A/c
Branch Cash A/c
(H.O.) Cash A/c
(l) Closing Stock: Credit the Branch Stock Account with the value of closing stock at
cost. It will be carried down as opening balance (debit) for the next accounting
period. The Balance of the Branch Stock Account, (after adjustment therein the
value of closing stock), if in credit, will represent the gross profit on sales and vice
versa.
Other Steps
(m) Transfer Balance of Branch Stock Account to the Branch Profit and Loss Account.
(n) Transfer Balance of Branch Expenses Account to the debit of Branch Profit & Loss
Account.
(o) The balance in the Branch P&L A/c will be transferred to the (H.O.) Profit & Loss
Account.
The credit balance in the Goods sent to Branch Account is afterwards transferred to the
Head Office Purchase Account or Trading Account (in case of manufacturing concerns), it
being the value of goods transferred to the Branch.
Branch Trading and Profit and Loss Account (Final Accounts Method)
In this method, Trading and Profit and Loss accounts are prepared considering each
branch as a separate entity. The main advantage of this method is that, it is easy to
prepare and understand. It also gives complete information of all transactions which are
ignored in the other methods. It should be noted that Branch Trading and Profit and Loss
account is merely a memorandum account and therefore, the entries made there in do
not have double entry effect.
Illustration 4
From the information given in the illustration 2, prepare Nagpur Branch Trading and
Profit and Loss Account in the books of head office.
8.12 Advanced Accounting

Solution
Buckingham Bros. Bombay
Nagpur Branch-Trading and Profit and Loss Account
for the year ending 31st December, 2012
` ` `
To Opening Stock 40,000 By Sales
To Goods transferred from Cash 45,000
Head Office 60,000 Credit sales 1,30,000
To Purchases 45,000 1,75,000
To Gross Profit c/d 52,000 Less: Returns (3,000) 1,72,000
By Closing Stock 25,000
1,97,000 1,97,000
To Expenses 30,000 By Gross Profit b/d 52,000
To Discounts 2,000
To Bad Debts 1,000
To Petty Cash Expenses 4,000
To Net Profit transferred to
General P&L A/c 15,000
52,000 52,000
The students may note that Gross Profit and Net Profit earned by the branch are
ascertainable in this method and also evaluating the performance of the branch is very
much easier in this method than in the ‘Debtors method’.
Solving Illustration by all three methods: Given below is a simple problem, the
solution whereto has been prepared in all the three methods so as to show the
distinguishing features of these methods.
Illustration 5
The Bombay Traders invoiced goods to its Delhi branch at cost. Head Office paid all the
branch expenses from its bank account, except petty cash expenses which were met by
the Branch. All the cash collected by the branch was banked on the same day to the
credit of the Head Office. The following is a summary of the transactions entered into at
the branch during the year ended December 31, 2012.
` `
Balances as on 1.1.2012:
Stock 7,000 Bad Debts 600
Debtors 12,600 Goods returned by 500
Petty 200 customers Salaries & 6,200
Cash, 26,000 Wages 1,200
Goods sent from H.O. 1,000 Rent & Rates 800
Goods returned to H.O. Sundry Expenses
 Accounting for Branches including Foreign Branches 8.13

Cash Sales 17,500 Cash received from Sundry

Credit 28,400 Debtors 28,500
Sales 200 Balances as on 31.12.2012:
Allowances to 1,400 Stock 6,500
customers Discount to Debtors 9,800
customers Petty Cash 100
Prepare: (a) Branch Account (Debtors Method), (b) Branch Stock Account, Branch
Profit & Loss Account, Branch Debtors and Branch Expenses Account by adopting the
Stock and Debtors Method and (c) Memorandum Branch Trading and Profit & Loss
Account to prove the results as disclosed by the Branch Account.
Solution
(a) Debtors Method
Delhi Branch Account
2012 ` ` 2012 ` `
Jan. 1 To Balance b/d Dec. 31 By Bank
Stock 7,000 Cash Sales 17,500
Debtors 12,600 Cash from
Petty cash 200 19,800 Sundry Debts. 28,500 46,000
Dec. To Goods sent to By Goods sent to
31 Branch A/c 26,000 Branch A/c –
To Bank: Returns
Salaries & to H.O. 1,000
Wages 6,200 By Balance c/d
Rent & Rates 1,200 Stock 6,500
Sundry Exp. 800 8,200 Debtors 9,800
To Balance being Petty Cash 100 16,400
Profit carried to
(H.O.) P & L 9,400
A/c 63,400 63,400
Jan. 1, To 16,400
2013 Balance b/d

(b) Stock and Debtors Method

Branch Stock Account
2012 ` 2012 ` `
Jan. 1 To Stock 7,000 Dec. 31 By Sales:
Dec. 31 To Goods Sent 26,000 Cash 17,500
to Branch Credit 28,400
A/c
8.14 Advanced Accounting

To Branch P & Less: Return (500) 27,900 45,400

L A/c 19,900 By Goods sent 1,000
to Branch
A/c
By - Return
Balance c/d 6,500
52,900 (Stock) 52,900
2013 To Balance b/d 6,500
Jan. 1
Delhi Branch Debtors Account
2012 ` 2012 `
Jan. 1 To Balance b/d 12,600 Dec. 31 By Cash 28,500
Dec. 31 To Sales 28,400 By Returns 500
By Allowances 200
By Discounts 1,400
By Bad debts 600
By Balance c/d 9,800
41,000 41,000
2013 Jan. 1 To Balance b/d 9,800
Delhi Branch Expenses Account
2012 ` 2012 `
Dec. 31 To Salaries & Wages 6,200 Dec. 31 By Branch P & L 10,500
To Rent & Rates A/c
1,200
To Sundry Expenses
800
To Petty
Cash 100
To Expenses
Allowances 200
To to customers
Discounts 1,400
To
Bad Debts 600
10,500 10,500
Delhi Branch Profit & Loss Account
2012 ` 2012 `
Dec. 31 To Branch Exp. A/c 10,500 Dec. 31 By Gross Profit b/d 19,900
To Net Profit to
General P & L 9,400
A/c 19,900 19,900
 Accounting for Branches including Foreign Branches 8.15

(c) Memorandum Branch Trading and Profit and Loss Account

` ` ` `
To Stock 7,000 By Sales:
To Goods sent Cash 17,500
from H.O. 26,000 Credit 28,400
Less: Returns to (1,000) 25,000 Less: Returns (500) 27,900 45,400
H.O.
To Gross profit c/d 19,900 By Closing Stock 6,500
51,900 51,900
To Salaries & Wages 6,200 By Gross Profit 19,900
b/d
To Rent & Rates 1,200
To Sundry Exp. 800
To Petty Cash Exp. 100
To Allowances to 200
Customers
To Discounts 1,400
To Bad Debts 600
To Net Profit 9,400
19,900 19,900
5.2 When goods are invoiced at selling price: It would be obvious that if Branch
Account is debited with the sales price of goods and subsequent to the debit being
raised there is a change in the sale price, the amount of debit either has to be increased
or reduced on a consideration of the quantity of unsold stock that was there at the
branch at the time the change took place. Such an adjustment will be necessary as often
as the change in sale price occurs.
Moreover the amount of anticipatory profit, included in the value of unsold stock with the
branch at the close of the year will have to be eliminated before the accounts of the
branch are incorporated with that of the head office. This will be done by creating a
reserve.
It may also be necessary to adjust the value of closing stock on account of the physical
losses of stock due to either pilferage or wastages which may have occurred during the
year. The last mentioned adjustments are made by debiting the cost of the goods to
Goods Lost Account and the amount of loading (included in the lost goods), to the
Branch Adjustment Account. The three different methods that are usually adopted for
maintaining accounts on this basis are described below:
Stock and Debtors Method
Under this method, when goods are invoiced at selling price, one additional account ie.
‘Branch Adjustment account’ is also prepared in addition to all the accounts which are
maintained on cost basis. (Refer para 5.1)
 .When goods are invoiced at selling price, the following points should be kept in mind
under this method:
8.16 Advanced Accounting

(i) Journal Entries:

` Transaction Accounts debited Accounts credited
(a) Sale price of the Branch Stock A/c (i) Goods sent to
goods sent from (at selling price) Branches
H.O. to the Branch A/c with cost of the
goods sent.
(ii) Branch Adjustment
A/c
(with the loading i.e.,
Difference between
the selling and cost
price).
(b) Return of goods (i) Goods sent to Branch Branch Stock A/c
A/c
By the Branch to H.O. (with the cost of
goods returned).
(ii) Branch Adjustment A/c
(with the loading)
(c) Cash sales at the Cash/Bank A/c Branch Stock A/c
Branch
(d) Credit Sales at the Branch Debtors A/c Branch Stock A/c
Branch
(e) Goods returned to Branch Stock A/c Branch Debtors A/c
Branch by customers (at selling price)
(f) Goods lost in (i) Goods Lost in Transit A/c Branch Stock A/c
Transit or stolen or Goods Stolen A/c
(with cost of the goods)
(ii) Branch Adjustment A/c
(with the loading)
(ii) Closing Stock
The balance in the Branch Stock Account at the close of the year normally should be
equal to the unsold stock at the Branch valued at sale price. But quite often the value of
stock actually held at the branch is either more or less than the balance of the Branch
Stock Account. In that event it will be necessary that the balance in the Branch Stock
Account is increased or reduced by debit or credit to Goods Lost Account (at cost price
of goods) and Branch Adjustment Account (with the loading). The Stock Account at
selling price, thus reveals loss of stock (or surplus) and serves as a check on the branch
in this respect.
 Accounting for Branches including Foreign Branches 8.17

The discrepancy in the amount of balance in the Branch Stock Account and the value of
stock actually in hand, valued at sale price, may be the result of one or more of the
under-mentioned factors:
 An error in applying the percentage of loading.
 Goods having been sold either below or above the established selling price.
 A Commission to adjust returns or allowances.
 Physical loss of stock due to natural causes or pilferage.
 Errors in Stock-taking.
For example, the balance brought down in the Branch Stock Account is ` 100 in excess
of the value of stock actually held by the branch when the goods were invoiced by the
head office to the branch at 20% above cost and the discrepancy is either due to
pilferage or loss by fire, the actual loss to the firm would be ` 80, since 20% of the
invoice price would represent the element of profit. The adjusting entry in such a case
would be:
Dr.` Cr. `
Goods Lost A/c Dr. 80
Branch Adjustment A/c Dr. 20
To Branch Stock A/c 100
If on the other hand, a part of the sale proceeds has been misappropriated, then the
adjusting entry would be:
Dr. Cr.
Loss by theft A/c Dr. XX
Branch Adjustment A/c Dr. XX
To Branch Stock A/c XX
Rebates and allowances allowed to customers are adjusted by debiting the amounts of
such allowances to Branch Adjustment Account and crediting Branch Stock Account.
But, if the gross amount of sale has been debited to Branch debtors Account, this
account would be credited instead of Branch Stock Account, since the last mentioned
account would have already received credit for the full value.
In the Goods Sent to Branch Account, the cost of the goods sent out to a branch for sale
is credited by debiting Branch Stock Account. Conversely, the cost of goods returned by
the branch is debited to this account. As such the balance in the account at the end of
the year will be the cost of goods sent to the branch; therefore, it will be transferred
either to the Trading Account or to Purchases Account of the head office.
The amount of profit anticipated on sale of goods sent to the branch is credited to the
Branch Adjustment Account and conversely, the amount of profit not realized in respect
of goods returned by the branch to head office or that in respect to stock remaining
unsold with the branch at the close of the year is debited. The balance in this account, at
the end of year thus
8.18 Advanced Accounting

will consist of the amount of Gross Profit earned on sale by the branch. On that account,
it will be transferred to the Branch Profit and Loss Account.
(iii) Elimination of unrealised profit in the closing stock: The balance in the Branch
Stock account would be at the sale price; therefore it would be necessary to eliminate
the element of profit included in such closing stock. This is done by creating a reserve
against unrealised profit, by debiting the Branch Adjustment Account and crediting Stock
Reserve Account with an amount equal to the difference in the cost and selling price of
unsold stock. Sometimes instead of opening a separate account in respect of the
reserve, the amount of the difference is credited to Branch Stock Account. In that case,
the credited balance of such a reserve is also carried forward separately, along with the
debit balance in the Branch Stock Account; the difference between the two would be the
value of stock at cost. In either case, the credit balance will be deducted out of the value
of closing stock for the purpose of disclosure in the balance sheet, so that the stock is
shown at cost.
An Alternative method: Where the gross profit of each branch is not required to be
ascertained separately, although the selling price is uniform, the amount of goods sent
to the branch is recorded only in two accounts namely - Branch Stock Account and
Goods Sent to Branch A/c.
In this method, at the end of the year the Branch Stock Account is closed by transfer of
the balance representing the value of closing stock, at sale price, to the Goods Sent to
Branch Account. This has the effect of altogether eliminating from the books the value
of stock at the branch. The balance of Goods sent to Branch Account is afterwards
transferred to the Trading Account representing the net sale price of goods sold at the
branch. In that case, the value of closing stock at the branch at cost will be subsequently
introduced in the Trading Account together with that of closing stock at the head office.
Illustration 6
Harrison of Chennai has a branch at New Delhi to which goods are sent @ 20% above
cost. The branch makes both cash and credit sales. Branch expenses are met partly
from H.O. and partly by the branch. The statement of expenses incurred by the branch
every month is sent to head office for recording.
Following further details are given for the year ended 31st December, 2012:
`
Cost of goods sent to Branch at cost 2,00,000
Goods received by Branch till 31-12-2012 at invoice price 2,20,000
Credit Sales for the year @ invoice price 1,65,000
Cash Sales for the year @ invoice price 59,000
Cash Remitted to head office 2,22,500
Expenses paid by H.O. 12,000
Bad Debts written off 750
 Accounting for Branches including Foreign Branches 8.19

Balances as on 1-1-2012 31-12-2012

` `
Stock 25,000 (Cost) 28,000 (invoice price)
Debtors 32,750 26,000
Cash in Hand 5,000 2,500
Show necessary ledger accounts in the books of the head office and determine the Profit
and Loss of the Branch for the year ended 31st December, 2012.
Solution
Books of Harrison
Branch Stock Account
` `
To Balance b/d 30,000 By Branch Debtors 1,65,000
To Goods Sent to Branch 2,40,000 By Branch Bank 59,000
A/c To Branch Adjustment 2,000 By Balance c/d
A/c Goods in Transit
(Excess of sale (` 2,40,000 –` 20,000
over invoice price) 2,20,000) 28,000
Stock at Branch
2,72,000 2,72,000
Branch Debtors Account
` `
To Balance b/d 32,750 By Bad debts written off 750
To Branch Stock 1,65,000 By Branch Cash-collection (bal.fig.) 1,71,000
By Balance c/d 26,000
1,97,750 1,97,750
Branch Cash Account
` `
To Balance b/d 5,000 By Bank Remit to H.O. 2,22,500
To Branch Stock 59,000 By Branch profit & loss 12,000
To Bank (as per contra) 12,000 A/c (exp. paid by
To Branch Debtors 1,71,000 H.O.) 10,000
By Branch profit & loss A/c
[Bal. fig. (exp. paid by 2,500
Branch)] By Balance c/d
2,47,000 2,47,000
8.20 Advanced Accounting

Branch Adjustment Account

` `
To Stock Reserve (on closing By Stock Reserve opening 5,000
stock (48,000 × 1/6) 8,000
To Gross Profit c/d 39,000 By Goods sent to Branch 40,000
A/c By Branch Stock A/c 2,000
47,000 47,000
Branch Profit and Loss Account
To Branch Expenses By Gross Profit b/d 39,000
(paid by HO: ` 12,000
and paid by Branch ` 22,000
10,000) 750
To Branch Debtors-Bad debts 16,250
To Net Profit
39,000 39,000
Goods Sent to Branch Account
` `
To Branch Adjustment A/c 40,000 By Branch to Stock A/c 2,40,000
To Purchase A/c - Transfer 2,00,000
2,40,000 2,40,000
Debtors Method
Under this method, the principal accounts that will be maintained are:
 The Branch Account;
 The Goods Sent to Branch Account; and
 The Stock Reserve Account.
Entries in these accounts will be made in the following manner:
Transaction Account debited Account credited

(a) Goods sent to Branch at Branch A/c Goods Sent to Branch

selling price A/c
(b) ‘Loading being the Goods Sent to Branch Branch A/c
difference between selling A/c
price and cost of goods
(c) Returns to H.O. at selling price Branch A/c
(d) ‘Loading’ in respect of goods Goods Sent to Branch A/c Goods Sent to Branch
returned to H.O. Branch A/c A/c
(e) ‘Loading’ included in the Branch A/c
Stock Reserve A/c
 Accounting for Branches including Foreign Branches 8.21

opening stock to reduce it

(f) Closing stock at selling price Branch Stock A/c Branch A/c
(g) ‘Loading’ included in closing Branch A/c Stock Reserve A/c
stock to reduce it to cost

It will be observed that entries in the Branch Account in respect of goods sent to a
branch or returned by it, as well as those for the opening and closing stock, will be at
selling price. In consequence, the Branch Account is maintained at selling price.
Hence the Branch Account will not correctly show the trading profit of the Branch unless
these amounts are adjusted to cost. Such an adjustment is effected by making contra
entries in ‘Goods Sent to Branch A/c’ and ‘Stock Reserve Account’. In respect of closing
stock at branch for the purpose of disclosure in the Balance Sheet, the credit balance in
the ‘Stock Reserve Account’ at the end of the year will be deducted from the value of the
closing stock, so as to reduce it to close; it will be carried forward as a separate balance
to the following year, for being transferred to the credit of the Branch Account.
Illustration 7
Take figures from Illustration 5 and prepare branch account following debtors’ method.
Solution
Books of Harrison
New Delhi Branch Account
` `
To Balance b/d By Balance b/d
Stock 30,000 Stock Reserve 5,000
Debtors 32,750 By Goods Sent to Branch 40,000
Cash 5,000 A/c By Bank-Remittance
To Goods Sent to Branch A/c 2,40,000 received from the Branch
To Bank (Exp. paid by H.O.) 12,000 Cash sales 59,000
To Net Profit Transferred to 16,250 Debtors Collection 1,63,500 2,22,500
H.O. Profit and Loss A/c (Net of expense)
To Balance c/d (Stock By Balance c/d
reserve Stock (including Transit)
on closing stock) 8,000 Debtors 48,000
Cash 26,000
2,500
3,44,000 3,44,000
Trading and Profit and Loss Account (Final Accounts) Method
All items of memorandum Branch Trading and Profit and Loss Account are to be
converted into cost price if the goods are invoiced to branch at selling price. Other points
will remain same as already discussed in Para 5.1 for this method if goods are invoiced
at cost.
8.22 Advanced Accounting

Illustration 8
Following is the information of the Jammu branch of Best New Delhi for the year ending
31st March, 2012 from the following:
(1) Goods are invoiced to the branch at cost plus 20%.
(2) The sale price is cost plus 50%.
(3) Other information:
`
Stock as on 01.04.2011(invoice price) 2,20,000
Goods sent during the year(invoice price) 11,00,000
Sales during the year 12,00,000
Expenses incurred at the branch

45,000 Ascertain
(i) the profit earned by the branch during the year.
(ii) branch stock reserve in respect of unrealized profit.
Answer
(i) Calculation of profit earned by the
branch In the books of Jammu
Branch
Trading Account And Profit and Loss Account
Particulars Amount Particulars Amount
` `
To Opening stock 2,20,000 By Sales 12,00,000
To Goods received by Head 11,00,000 By Closing stock (Refer 3,60,000
office W.N.)
To Expenses 45,000
To Net profit 1,95,000
15,60,000 15,60,000

(ii) Stock reserve in respect of unrealised profit

= ` 3,60,000 x (20/120) = ` 60,000
Working Note:
Cost Price 100
Invoice 120
Price Sale 150
Price
 Accounting for Branches including Foreign Branches 8.23

Calculation of closing stock at invoice `

price
Opening stock at invoice price 2,20,000
Goods received during the year at invoice 11,00,000
price
13,20,000
Less : Cost of goods sold at invoice price (9,60,000) [12,00,000 x (120/150)]
Closing stock 3,60,000
Illustration 9
Sell Well who carried on a retail business opened a branch X on January 1st, 2013
where all sales were on credit basis. All goods required by the branch were supplied
from the Head Office and were invoiced to the branch at 10% above cost.
The following were the transactions:
Jan. ’2013 Feb. 2013 March 2013
` ` `
Goods sent to Branch (Purchase Price) 40,000 50,000 60,000
Sales as shown by the branch monthly report 38,000 42,000 55,000
Cash received from Debtors and remitted to 20,000 51,000 35,000
H.O.
Returns to H.O. (Invoice price to Branch) 1,200 600 2,400
The stock of goods held by the branch on March 31, 2013 amounted to ` 53,400 at invoice to
branch.
Record these transactions in the Head Office books, showing balances as on 31st March,
2013 and the branch gross profit for the three months ended on that date.
All workings should form part of your solution.
Solution
Books of Sell Well
Branch Account
` `
To Goods sent to Branch By Cash-collected from 1,06,000
A/c debts
[ 110  1,50,000 ] By Goods sent to 4,200
100 1,65,000 Branch-returns
To Stock Reserve (W.N.2) 4,855 By Goods sent to 14,618
Branch (W.N. 1)
To Profit (bal.) transferred to By Balance c/d
General Profit & Loss A/c 37,363 Stock 53,400
Debtors 29,000 82,400
2,07,218 2,07,218
8.24 Advanced Accounting

Memorandum Branch Debtors Account

` `
To Balance b/d - By Cash/Bank 1,06,000
To Sales 1,35,000 By Balance c/d 29,000
1,35,000 1,35,000
Goods Sent to Branch Account
` `

To Branch A/c (Returns) 4,200 By Branch A/c 1,65,000

To Branch A/c (Loading) 14,618
To Purchases A/c 1,46,182
1,65,000 1,65,000
Working Notes:
1. Loading on Goods sent to Branch = 1/11 of (` 1,65,000 – ` 4,200) = `
14,618 2. Stock Reserve = 1/11 of 53,400 = ` 4,855
Illustration 10
Hindustan Industries Mumbai has a branch in Cochin to which office goods are invoiced
at cost plus 25%. The branch sells both for cash and on credit. Branch Expenses are
paid direct from head office, and the Branch has to remit all cash received into the Head
Office Bank Account.
From the following details, relating to calendar year 2012, prepare the accounts in the
Head Office Ledger and ascertain the Branch Profit. Branch does not maintain any
books of account, but sends weekly returns to the Head Office:
`
Goods received from Head Office at invoice price 6,00,000
Returns to Head Office at invoice price 12,000
Stock at Cochin as on 1st Jan., 2012 60,000
Sales in the year - Cash 2,00,000
Credit 3,60,000
Sundry Debtors at Cochin as on 1st Jan. 2012 72,000
Cash received from Debtors 3,20,000
Discount allowed to Debtors 6,000
Bad debts in the year 4,000
Sales returns at Cochin Branch 8,000
 Accounting for Branches including Foreign Branches 8.25

Rent, Rates, Taxes at Branch 18,000

Salaries, Wages, Bonus at Branch 60,000
Office Expenses 6,000
Stock at Branch on 31st Dec. 2012 at invoice price 1,20,000
Solution
Books of Hindustan Industries, Mumbai
Cochin Branch Stock Account
` `
To Balance b/d 60,000 By Bank A/c (Cash sales) 2,00,000
To Goods sent to Branch A/c 6,00,000 By Branch Debtors (Cr. sales) 3,60,000
To Branch Debtors A/c By Goods sent to Branch
(sales return) 8,000 (Ret. to H.O.) 12,000
To Branch P & L A/c (surplus) 24,000 By Balance c/d (closing 1,20,000
stock)
6,92,000 6,92,000

Cochin Branch Stock Adjustment Account

` `
To Goods sent to Branch A/c 2,400 By Balance b/d 12,000
(1/5 of ` 12,000) (on (1/5 of ` 60,000)
returns) 1,05,600 By Goods sent to 1,20,000
To Branch P & L A/c Branch A/c (1/5 of `
(Profit on sale at invoice 24,000 6,00,000)
price) To Balance c/d (1/5 of `
1,20,000)
1,32,000 1,32,000
Goods Sent to Branch Account
` `
To Cochin Branch By Cochin Branch Stock A/c 6,00,000
Stock Adjustment A/c 1,20,000 By Cochin Branch Stock Adj. 2,400
To Cochin Branch Stock A/c 12,000 A/c
(Ret.)
To Purchases A/c 4,70,400
6,02,400 6,02,400
Branch Debtors Account
` `
To Balance b/d 72,000 By Bank 3,20,000
To Branch Stock A/c 3,60,000 By Branch P & L A/c
8.26 Advanced Accounting

By Discount 6,000
By Bad Debts 4,000 10,000
By Branch Stock (Sales 8,000
Returns.)
By Balance c/d 94,000
4,32,000 4,32,000

Branch Expenses Account

` `
To Bank A/c (Rent, Rates & 18,000 By Branch Profit & Loss A/c 84,000
(Transfer)
Taxes)
To Bank A/c (Salaries & Wages) 60,000
To Bank A/c (office exp.) 6,000
84,000 84,000
Branch Profit & Loss Account for the year ending 31st Dec. 2012
` `
To Branch Expenses A/c 84,000 By Branch Stock Adj. 1,05,600
Discount 6,000 A/c By Branch stock A/c
Bad debts 4,000 10,000 (Sale over invoice price) 24,000
To Net Profit transferred to
Profit & Loss A/c 35,600
1,29,600 1,29,600
Illustration 11
Arnold of Delhi, trades in Ghee and Oil. It has a branch at Lucknow. He dispatches 25
tins of Oil @ ` 1,000 per tin and 15 tins of Ghee @ ` 1,500 per tin on 1st of every month.
The branch incurs some expenditure which is met out of its collections; this is in addition
to expenditure directly paid by Head Office.
Following are the other details:
Delhi Lucknow
` `
Purchases Ghee 14,75,000 -
Oil 29,32,000 -
Direct expenses 3,83,275 -
Expenses paid by H.O. - 14,250
Sales Ghee 18,46,350 3,42,750
Oil 27,41,250 3,15,730
Collection during the year (including Cash Sales) - 6,47,330
 Accounting for Branches including Foreign Branches 8.27

Remittance by Branch to Head Office - 6,13,250

(Delhi)
Balance as on: 1-1-2012 31-12-2012
Stock : Ghee 1,50,000 3,12,500
Oil 3,50,000 4,17,250
Debtors 7,32,750 -
Cash on Hand 70,520 55,250
Furniture & Fittings 21,500 19,350
Plant/Machinery 3,07,250 7,73,500

(Lucknow)
Balance as on: 1-1-2012 31-12-2012
Stock : Ghee 17,000 13,250
Oil 27,000 44,750
Debtors 75,750 -
Cash on Hand 7,540 12,350
Furniture & Fittings 6,250 5,625
Plant/Machinery -
Addition to Plant/Machinery on 1-1-2012 ` 6,02,750.
Rate of Depreciation: Furniture / Fittings @ 10% and Plant / Machinery @ 15% (already
adjusted in the above figures).
The Branch Manager is entitled to 10% commission after charging such commission
whereas, the General Manager is entitled to 10% commission on overall company profits
after charging such commission. General Manager is also entitled to a salary of ` 2,000
p.m. General expenses incurred by H.O. ` 24,000.
Prepare Branch Account in the head office books and also prepare the Arnold’s Trading
and Profit and Loss A/c (excluding branch transactions).
Solution
In the books of Arnold
Lucknow Branch Account
` `
To Balance b/d By Bank (Remittance to H.O.) 6,13,250
Opening stock: By Balance c/d
Ghee 17,000 Closing stock:
Oil 27,000 Ghee 13,250
Debtors 75,750 Oil 44,750
Cash on hand 7,540 Debtors (W.N. 1) 86,900
Furniture & fittings 6,250 Cash on hand (W.N. 2) 12,350
8.28 Advanced Accounting

To Goods sent to Branch A/c Furniture & fittings 5,625

Ghee 2,70,000
Oil 3,00,000
To Bank (Expenses paid by 14,250
H.O.)
To Branch Manager commission
(` 58,335 × 1/11) 5,303
To Net Profit transferred
to General P & L 53,032
A/c
7,76,125 7,76,125
Arnold
Trading and Profit and Loss account for the year ended 31st December, 2012
(Excluding branch transactions)
` `
To Opening Stock: By Sales:
Ghee 1,50,000 Ghee 18,46,350
Oil 3,50,000 Oil 27,41,250
To Purchases: By Closing Stock:
Ghee 14,75,000 Ghee 3,12,500
Less: Goods sent Oil 4,17,250
to Branch (2,70,000) 12,05,000
Oil 29,32,000
Less: Goods sent
to Branch (3,00,000) 26,32,000
To Direct Expenses 3,83,275
To Gross Profit 5,97,075
53,17,350 53,17,350
24,000 5,97,075
To Manager’s Salary By Gross Profit
To General Expenses 24,000 By Branch Profit transferred 53,032
To Depreciation
Furniture @ 10% 2,150
Plant & Machinery
@ 15% 1,36,500 1,38,650
To General Manager’s
Commission @ 10%
42,132
(i.e., 4,63,457 × 1/11)
4,21,325
To Net profit
6,50,107 6,50,107
 Accounting for Branches including Foreign Branches 8.29

Working Notes:
(1) Debtors Account
` `
To Balance b/d 75,750 By Cash Collections 6,47,330
To Sales made during By Balance c/d 86,900
the year:
Ghee 3,42,750
Oil 3,15,730
7,34,230 7,34,230
(2) Branch Cash Account
` `
To Balance b/d 7,540 By Remittance 6,13,250
To Collections 6,47,330 By Exp. (Balance fig.) 29,270
By Balance c/d 12,350
6,54,870 6,54,870
5.3 Goods invoiced at wholesale price to retail branches: Under this method,
the Head Office (particularly, the manufacturing concern) supplies goods to its retail
branches at wholesale price which is cost plus wholesale profit. The profit attributable to
such branches is the difference between the sale proceeds of goods at the shops and
the wholesale price of the goods sold. For the purpose, it is assumed that the
manufacturer would always be able to sell the goods on wholesale terms and thereby
realizes profit equal to the difference between the wholesale price and the cost. Many
concerns, therefore, invoice goods to such shops at wholesale price and determine
profit or loss on sale of goods on this basis. Accordingly, Branch Stock Account or the
Trading Account is debited with:
(a) the value of opening stock at the Branch; and
(b) price of goods sent during the year at wholesale
price. It is credited by:
(a) sales effected at the shop; and
(b) closing stock of goods valued at wholesale price.
The value of goods lost due to accident, theft etc. also is credited to the Branch Stock
Account or Trading Account calculated at the wholesale price. At this stage, the Branch
Stock or Trading Account will reveal the amount of gross profit (or loss). It is transferred
to the Branch Profit and Loss Account. On further being debited with the expenses
incurred at the shop and the wholesale price of goods lost, the Branch Profit and Loss
Account will disclose the net profit (or loss) at the shop.
8.30 Advanced Accounting

Since the closing stock at the branch has to be valued at wholesale price, it would be
necessary to create a stock reserve equal to the difference between its wholesale price
and its cost (to the head office) by debiting the amount in the Head Office Profit and
Loss Account. This Stock Reserve is carried down to the next year and then transferred
to the credit of the (Head Office) Profit and Loss Account.
Illustration 12
M/s Rahul operates a number of retail outlets to which goods are invoiced at wholesale
price which is cost plus 25%. These outlets sell the goods at the retail price which is
wholesale price plus 20%.
Following is the information regarding one of the outlets for the year ended 31.3.2012:
`
Stock at the outlet 1.4.11 30,000
Goods invoiced to the outlet during the year 3,24,000
Gross profit made by the outlet 60,000
Goods lost by fire ?
Expenses of the outlet for the year 20,000
Stock at the outlet 31.3.12 36,000
You are required to prepare the following accounts in the books of Rahul Limited for the year
ended 31.3.12 :
(a) Outlet Stock Account.
(b) Outlet Profit & Loss Account.
(c) Stock Reserve
Account. Answer
Outlet Stock Account
` `
To Balance b/d 30,000 By Sales (Working Note 1) 3,60,000
To Goods sent to outlet 3,24,000 By Goods lost by fire 18,000
To Gross Profit c/d 60,000 By Balance c/d 36,000
4,14,000 4,14,000
Outlet Profit & Loss Account
` `
To Expenses 20,000 By Gross Profit b/d 60,000
To Goods lost by fire (W.N. 2) 18,000
 Accounting for Branches including Foreign Branches 8.31

To Profit transferred 22,000

60,000 60,000
Stock Reserve Account
` `
To HO P & L A/c – Transfer 6,000 By Balance b/d 6,000
To Balance c/d (Stock Res. required) 7,200 By HO P&L A/c (W.N. 7,200
3)
13,200 13,200
Working Notes :
`
(1) Wholesale Price 100+25 = 125
Retail Price 125 + 20% = 150
Gross Profit at the outlet
Wholesale Price – Retail Price (150 – 125) 25
150
Retail sales value = 60,000 ×
= ` 3,60,000
25
(2) Goods lost by fire
Opening Stock + Goods Sent + Gross Profit – Sales – Closing
Stock 30,000 + 3,24,000 + 60,000 – 3,60,000 – 36,000 = `
18,000
(3) Stock Reserve
25
Opening Stock = 30,000 × = ` 6,000
125
25
Closing Stock = 36,000 × = ` 7,200
125
6. Accounting for Independent Branches
When the size of the business is big, it is desirable that the branch maintains complete
records of its transactions. These branches are called independent branches and each
independent branch maintains comprehensive account books for recording their transactions;
therefore a separate trial balance of each branch can be prepared. The head office
maintains one ledger account for each such branch, wherein all transactions between
the head office and the branches are recorded.
Salient features of accounting system of an independent branch are as follows:
1. Branch maintains its entire books of account under double entry system.
8.32 Advanced Accounting

2. Branch opens in its books a Head Office account to record all transactions that take
place between Head Office and branch. The Head Office maintains a Branch
account to record these transactions.
3. Branch prepares its Trial Balance, Trading and profit and loss Account at the end of
the accounting period and sends copies of these statements to Head Office for
incorporation.
4. After receiving the final statements from branch, Head Office reconciles between the
two
– Branch account in Head Office books and Head Office account in Branch books.
5. Head office passes necessary journal entries to incorporate branch trial balance in
its books.
The Head Office Account in branch books and Branch Account in head office books is
maintained respectively.
Transactions Head office books Branch books
(i) Dispatch of goods to Branch A/c Dr. Goods received. from H.O. A/c Dr.
branch by H.O. To Good sent to To Head Office A/c
Branch A/c
(ii) When goods are Goods sent to Branch A/c Dr. Head Office A/c Dr.
returned by the Branch To Branch A/c To Goods recd. from H.O.
to H.O. A/c
(iii) Branch Expenses No Entry Expenses A/c Dr.
are paid by the Branch To Cash A/c
(iv) Branch Expenses Branch A/c Dr. Expenses A/c Dr.
paid by H.O. To Bank To Head Office A/c
(v) Outside purchases No Entry Purchases A/c Dr.
made by the Branch To Bank (or) Crs. A/c
(vi) Sales effected by No Entry Cash or Debtors A/c Dr.
the Branch To Sales
(vii) Collection from Cash or Bank A/c Dr. Head office A/c Dr.
Debtors of the Branch To Branch A/c To Sundry Drs. A/c
recd. by H.O.
(viii) Payment by H.O. for Branch A/c Dr. Purchase (or) Sundry Creditors A/c
purchase made by To Bank Dr.
Branch To Head Office
(ix) Purchase of Asset No Entry Sundry Assets Dr.
by Branch To Bank (or) Liability
(x) Asset purchased by Branch Asset A/c Dr. Head office Dr.
the Branch but Asset A/c To Branch A/c To Bank (or) Liability
retained at H.O. books
(xi) Depreciation on (x) Branch A/c Dr. Depreciation A/c Dr.
 Accounting for Branches including Foreign Branches 8.33

above To Branch Asset To Head Office A/c

(xii) Remittance of funds Branch A/c Dr. Bank A/c Dr.
by H.O. to Branch To Bank To Head Office
(xiii) Remittance of funds by Reverse entry of(xii) Reverse entry of (xii) above
Branch to H.O. above
(xiv) Transfer of goods (Recipient) Branch A/c Dr. Supplying Branch H.O. A/c Dr.
from one Branch to To Supplying Branch To Goods Received
another branch A/c from H.O. A/c
Recipient Branch
Goods Received from H.O. A/c Dr.
To Head Office A/c

Students may find a few further practical situations and it is hoped that they can pass
entries on the basis of accounting principles explained above.
The final result of these adjustments will be that so far as the Head Office is concerned,
the branch will be looked upon either as a debtor or creditor, as a debtor if the amount of
its assets is in excess of its liabilities and as a creditor if the position is reverse.
A debit balance in the Branch Account should always be equal to the net assets at the
branch. The important thing to remember, when independent sets of accounts are
maintained, is that the branch and head office books are connected with each other only
through the medium of the Branch and the Head Office Account which are converse of
each other.; also when accounts of the branch and head office are consolidated both the
Branch and Head Office Accounts will be eliminated.

7. Adjustment and Reconciliation of Branch and Head Office

Accounts
If the branch and the head office accounts, converse of each other, do not tally, these
must be reconciled before the preparation of the final accounts of the concern as a
whole.
For example if Head Office has sent goods worth ` 50,000 but the branch has received
till the closing date goods only ` 40,000, then the branch should treat ` 10,000 as
goods in transit and should pass the following entry :
Dr. Cr.
Goods in transit A/c Dr. 10,000
To Head Office A/c 10,000
However, there will be no entry in Head office books being the point where the event has
been recorded in full, hence no further entries in Head office books.
7.1 Reasons for Disagreement: Following are the possible reasons for the
disagreement between Branch A/c in Head office books and Head office A/c in Branch books
on the closing date:
8.34 Advanced Accounting

 Goods dispatched by the Head office not received by the branch. These goods
may be in transit or loss in transit.
 Goods returned by the branch to Head Office may have been received by the H.O.
Again, these goods may be in transit or lost in transit.
 Amount remitted by Head office to branch or vice versa remaining in transit on the closing
date.
 Receipt of income or payment or expenses relating to the Branch transacted by
the head office or vice versa, hence not recorded at the respective ends wherein
they are normally to be recorded.
The technique of reconciliation has been illustrated through the example given below :
Head office Branch
Dr. Cr. Dr. Cr.
Goods sent to Branch 1,50,000 -
Goods recd. from H.O. - 1,40,000
A/c Branch A/c 1,12,000
Head office A/c - - - 78,500

On analysis of Branch A/c in Head office books and Head office A/c in branch books, you
find:
 ` 15,000 remitted by the branch has not been received, hence not recorded in the
head office books.
 Direct collection of ` 10,500 from a customer of the branch by Head office not
informed to the branch, hence not recorded by the branch.
 A sum of ` 14,500 paid by branch to the suppliers of head office not recorded at
Head office.
 Head office expenditure allocation to the branch `12,000 not recorded in the branch.
 ` 7,500 being FD interest of head office received by the branch on oral
instructions from H.O., not recorded in the head office books.
Head Office Books Branch Books
Dr. Cr. Dr. Cr.
` ` ` `
(i) Goods in - - Goods in Transit A/c 10,000
transit (`
10,000) To Head office A/c 10,000
(ii) Cash in Transit: Cash in Transit A/c 15,000 (No Entry)
To Branch A/c 15,000
(iii) Direct Collection by Head Office A/c 10,500
H.O. on behalf of the To Debtors A/c 10,500
Branch
(iv) Direct payment of Sundry Crs. A/c 14,500
 Accounting for Branches including Foreign Branches 8.35

` 14,500 by Branch
on To Branch A/c 14,500
behalf of H.O
(v) Expenditure Allocated to Branch Exp. A/c 12,000
Branch
To H.O. A/c 12,000
(vi) Fixed Deposit interest Branch A/c 7,500
of ` 7,500 directly To Sundry 7,500
received by the Income
Branch

In Branch Books
Head Office Account
` `
To Sundry Debtors A/c 10,500 By Balance b/d 78,500
To Balance c/d 90,000 By Goods in transit 10,000
By Branch expenses 12,000
1,00,500 1,00,500
By Balance b/d 90,000
In the Books of Head Office
Branch A/c
` `
To Balance b/d 1,12,000 By Cash in Transit 15,000
To Sundry Income 7,500 By Sundry Creditors 14,500
By Balance c/d 90,000
1,19,500 1,19,500
To Balance b/d 90,000
Important Points to be noted:
(i) the balance of Head Office A/c in Branch books and Branch A/c in Head Office books
have tallied.
(ii) Adjustment are made only at the point:
Where the recording has been omitted, and
Other than the point where action has been effected.
7.2 Other points
(1) Inter-Branch Transactions
Inter-branch transactions are usually adjusted as if they were entered into only with the
head office. It is a very convenient method of treating such transaction especially where
the number
8.36 Advanced Accounting

of branches are large. Suppose Kolkata Branch incurred an expenditure on advertisement of

` 1,000 on account of Delhi Branch, the entries that would be made in such a case
would be as follows:
Dr. Cr.
`
In Kolkata Books:
Head Office A/c Dr. 1,000
To Cash 1,000
In Delhi Books:
Advertisement A/c Dr. 1,000
To H.O. A/c 1,000
In H.O. Books:
Delhi Branch A/c Dr. 1,000
To Kolkata Branch A/c 1,000
(2) Fixed Assets
Often the accounts of fixed assets of a branch are kept in the head office books; in such
a case, at the end of the year, the amount of depreciation on the assets is debited to the
branch concerned by recording the following entry:
Branch Account Dr.
To Branch Asset Account
The branch will pass the following entry:
Depreciation Account Dr.
To Head Office Account
(3) Head office Expenses charged to Branch
Usually the head office has to devote considerable time in attending to the affairs of the
branch; on that account, it may decide to raise a charge against the branch in respect of
the cost of such time. In such a case the amount is debited to the branch as ‘Expenses’
and is credited to appropriate revenue head such as Salaries Accounts, General Charges
Account, Entertainment Account etc. The branch credits the H.O. Account and debits
Expenses Account.

8. Incorporation of Branch Balance in Head Office Books

The method that will be adopted for incorporating the trading result of the branch with
that of the head office would depend on whether it is desired to prepare separate Profit
& Loss Account and Balance Sheet of the branch and the Head Office or consolidated
statement of account of both branch and head office.
 Accounting for Branches including Foreign Branches 8.37

In the first-mentioned case, the amount of profit or loss shown by the Profit & Loss
Account of the branch only will be transferred to Head office Account in the branch
books and a converse entry will be passed in the Head Office books by debit to the
Branch Account. This method has already been illustrated above. In such a case, not
only the Profit & Loss Account of the branch and that of the head office would be
prepared separately but also there would be separate Balance Sheet for the branch and
the head office. The branch Balance Sheet would show the amount advanced by the
head office to it, as capital. In the head office Balance Sheet, the same amount would be
shown as an advance to the branch.
If however, it is desired to prepare a consolidated Profit & Loss Account and Balance
Sheet, individual balances of all the revenue accounts would be separately transferred
to the Head Office Account by debit or credit in the branch books and the converse
entries would be passed in the head office books. The effect thereof will be similar to the
amount of net profit or loss of the branch having been transferred since it would be
composed of the balances that have been transferred. In case it is also desired that
consolidated balance sheet of the branch and the head office should be prepared, it will
also be necessary to transfer the balance of assets and liabilities of the branch to the
head office. The adjusting entries that would be passed in this respect are shown below:
(a) Head Office Account Dr.
To Asset (individual) Account
(b) (Individual) Liability Account Dr.
To Head Office Account
Converse entries are passed in the head office books.
It is obvious that after afore-mentioned entries have been passed, the Branch Account in
the Head Office books and Head Office Account in the branch books will be closed and it
will be necessary to restart them at the beginning of the next year.
In consequence, at the beginning of the following year, the under-mentioned entry is
recorded by the branch:
Asset Account (In Detail) Dr.
To Liability Accounts
To H.O. Account (The difference between assets and liabilities)
Illustration 13
Messrs Ramchand & Co., Hyderabad have a branch in Delhi. The Delhi Branch deals
not only in the goods from Head Office but also buys some auxiliary goods and deals in
them. They, however, do not prepare any Profit & Loss Account but close all accounts to
the Head Office at the end of the year and open them afresh on the basis of advice from
their Head Office. The fixed assets accounts are also maintained at the Head Office.
The goods from the Head Office are invoiced at selling prices to give a profit of 20 per
cent on the sale price. The goods sent from the branch to Head Office are at cost. From
the following prepare Branch Trading and Profit & Loss Account and Branch Assets
Account in the Head Office Books.
8.38 Advanced Accounting

Trial Balance of the Delhi Branch as on 31-12-2012

Debit ` Credit `
Head office opening balance on 1-1- 15,000 Sales 1,00,000
12
Goods from H.O. 50,000 Goods to H.O. 3,000
Purchases 20,000 Head Office Current A/c 15,000
Opening Stock Sundry Creditors 3,000
(H.O. goods at invoice prices) 4,000
Opening Stock of other goods 500
Salaries 7,000
Rent 3,000
Office expenditure 2,000
Cash on Hand 500
Cash at Bank 4,000
Sundry Debtors 15,000
1,21,000 1,21,000
The Branch balances as on 1st January, 2012, were as under: Furniture ` 5,000;
Sundry Debtors ` 9,500; Cash ` 1,000, Creditors ` 30,000; Stock (H.O. goods at
invoice price)
` 4,000; other goods ` 500. The closing stock at branch of the head office goods at
invoice price is ` 3,000 and that of purchased goods at cost is ` 1,000. Depreciation is to
be provided at 10 per cent on branch assets.
Solution
Delhi Branch Trading and Profit & Loss Account
for the year ended 31st Dec., 2012
` `
To Opening Stock: By Sales 1,00,000
Head office Goods 3,200 By Goods from Branch 3,000
Others 500 3,700 By Closing Stock :
To Goods To Branch 40,000 Head Office goods 2,400
To Purchases 20,000 Others 1,000 3,400
To Gross Profit c/d 42,700
1,06,400 1,06,400
To Salaries 7,000 By Gross profit b/d 42,700
To Rent 3,000
To Office Expenses 2,000
To Dep. on furniture 500
@ 10%
To Net profit 30,200
42,700 42,700
 Accounting for Branches including Foreign Branches 8.39

Branch (Fixed) Assets Account (In Head Office Books)

2012 ` 2012 `
Jan. 1 To Balance b/d 5,000 Dec. 31 By Delhi Branch 500
A/c
(Depreciation) 4,500
5,000 By Balance c/d 5,000
2013
Jan. 1 To Balance b/d 4,500

Working Notes:
Cash/Bank Account (Branch Books)
` ` `
To Balance b/d 1,000 By Salaries 7,000
To Sales Proceeds By Rent 3,000
Sales 1,00,000 By Office Exp. 2,000
Opening balance By Creditors* 47,000
of Debtors 9,500 By Head Office (Balancing fig.) 32,000
1,09,500 By Cash Balance 500
Less: Closing balance (15,000) By Bank Balance 4,000
To Cash Received 94,500 94,500
95,500 95,500
*Opening Balance + Purchases – Closing balance = Payment
` 30,000 + ` 20,000 – ` 3,000 = ` 47,000.
Trial Balance of Delhi Branch as on 1-1-2012
Dr. Cr.
` `
Debtors 9,500
Cash 1,000
Stock H.O. Goods 4,000
Others 500 4,500
Creditors 30,000
Head Office Account 15,000
30,000 30,000
8.40 Advanced Accounting

Head Office Account

` `
To Balance (transfer) 15,000 By Goods from Head Office 50,000
To Cash 32,000
To Goods sent 3,000
50,000 50,000
Credit balance in Head Office Account before this transfer will be ` 15,000 credit.
Note : Furniture A/c is maintained in Head office books; it is not a part of either opening or
closing balance.
Illustration 14
Ring Bell Ltd. Delhi has a Branch at Bombay where a separate set of books is used. The
following is the trial balance extracted on 31st December, 2012.
Head Office Trial Balance
` `
Share Capital (Authorised: 10,000 Equity Shares of ` 100
each):
Issued: 8,000 Equity Shares 8,00,000
Profit & Loss Account - 1-1-2012 25,310
Interim Dividend paid - Aug. 2012 30,000
General Reserve 1,00,000
Fixed Assets 5,30,000
Stock 2,22,470
Debtors and Creditors 50,500 21,900
Profit for 2012 82,200
Cash Balance 62,730
Branch Current Account 1,33,710
10,29,410 10,29,410
Branch Trial Balance
` `
Fixed Assets 95,000
Profit for 2012 31,700
Stock 50,460
Debtors and Creditors 19,100 10,400
Cash Balance 6,550
Head Office Current Account 1,29,010
1,71,110 1,71,110
 Accounting for Branches including Foreign Branches 8.41

The difference between the balances of the Current Account in the two sets of books is
accounted for as follows:
(a) Cash remitted by the Branch on 31st December, 2012, but received by the Head
Office on 1st January 2013 - ` 3,000.
(b) Stock stolen in transit from Head Office and charged to Branch by the Head Office,
but not credited to Head Office in the Branch books as the Branch Manager declined
to admit any liability (not covered by insurance) - ` 1,700.
Give the Branch Current Account in Head Office books after incorporating Branch Trial Balance
through journal. Also prepare the company’s Balance Sheet as on 31st December, 2012.
Solution
The Branch Current Account in the Head Office Books and Head Office Current Account
in the Branch Books do not show the same balances. Therefore, in order to reconcile
them, the following journal entries will be passed in the Head Office books :
Journal Entries
Dr. Cr.
2012 ` `
Dec., 31 Cash in Transit A/c Dr. 3,000
To Branch Current A/c 3,000
(Cash sent by the Branch on 31st Dec.,
2012 but received at H.O. on 1st Jan.,
2013)
Loss by theft A/c Dr. 1,700 1,700
To Branch Current A/c
(Stock lost in transit from H.O. to Branch)
In order to incorporate, in the H.O. books, the given Branch trial balance which has been
drawn up after preparing the Branch Profit & Loss Account, the following journal entries
will be necessary:
Journal Entries
2012 ` `
Dec. 31 Branch Current Account Dr. 31,700
To Profit & Loss 31,700
Account (Branch Profit for
2012) 95,000
Branch Fixed Assets Dr. 50,460
Branch Stock Dr. 19,100
Branch Debtors Dr. 6,550
Branch Cash Dr.
8.42 Advanced Accounting

To Branch Current Account 1,71,110

(Branch assets brought into H.O. Books)
Branch Current A/c Dr. 10,400
To Branch Creditors 10,400
(Branch creditors brought into H.O. Books)
Branch Current Account
` `
To Balance b/d 1,33,710 By Cash in transit 3,000
To Profit & Loss A/c 31,700 By Loss of theft 1,700
To Branch Creditors 10,400 By Sundry Branch Assets 1,71,110
1,75,810 1,75,810
Profit and Loss Account for 2012
` `
To Loss by Theft 1,700 By Balance b/d 25,310
To Interim Dividend for Aug., 30,000 By Year’s Profit : H.O. 82,200
2012 Branch
To Balance c/d 1,07,510 31,700
1,39,210 1,39,210
Balance Sheet of the Company as on 31st Dec., 2012
Particulars Note No Amount (`)
I. Equity and Liabilities
(1)Shareholder's Funds
(a)Share Capital 1 8,00,000
(b)Reserves and Surplus 2 2,07,510
(2)Current
Liabilities Trade 3 32,300
payables Total 10,39,810

II. Assets
(1)Non-current assets 4 6,25,000
Fixed assets
(2)Current assets 5 2,72,930
(a)Inventories 6 69,600
(b)Trade Receivables 7 72,280
(c) Cash and cash equivalents 10,39,810
Total
 Accounting for Branches including Foreign Branches 8.43

Notes to Accounts
`
1. Share Capital
Authorised capital :
10,000 Equity Shares of ` 100 10,00,000
each Issued and Subscribed Capital :
8,000 Equity Shares of ` 100 each fully 8,00,000
2. paid
Reserves and Surplus 1,00,000
General Reserve 1,07,510 2,07,510
3. Profit & Loss Account
Trade payables
Creditors 21,900
H.O. 10,400 32,300
4. Branch
Fixed Assets 5,30,000
H.O. 95,000 6,25,000
5. Branch
Inventories 2,22,470
H.O. 50,460 2,72,930
6. Branch
50,500
Trade Receivables
19,100 69,600
H.O.
7.
Branch
Cash and cash equivalents
62,730
Cash in Hand :
6,550 69,280
H.O. 3,000
Branch 72,280
Cash in Transit
Illustration 15
KP manufactures a range of goods which it sells to wholesale customers only from its
head office. In addition, the H.O. transfers goods to a newly opened branch at factory
cost plus 15%. The branch then sells these goods to the general public on only cash
basis.
The selling price to wholesale customers is designed to give a factory profit which
amounts to 30% of the sales value. The selling price to the general public is designed to
give a gross margin (i.e., selling price less cost of goods from H.O.) of 30% of the sales
value.
KP operates from rented premises and leases all other types of fixed assets. The rent
and hire charges for these are included in the overhead costs shown in the trial
balances.
8.44 Advanced Accounting

From the information given below, you are required to prepare for the year ended 31st
Dec., 2012 in columnar form.
(a)A Profit & Loss account for (i) H.O. (ii) the branch (iii) the entire business.
(b)Balance Sheet as on 31st Dec., 2012 for the entire business.
H.O. Branch
` ` ` `
Raw materials purchased 35,000
Direct wages 1,08,500
Factory overheads 39,000
Stock on 1-1-2012
Raw materials 1,800
Finished goods 13,000 9,200
Debtors 37,000
Cash 22,000 1,000
Administrative Salaries 13,900 4,000
Salesmen’s Salaries 22,500 6,200
Other administrative &
selling overheads 12,500 2,300
Inter-unit accounts 5,000 2,000
Capital 50,000
Sundry Creditors 13,000
Provision for unrealized profit in stock 1,200
Sales 2,00,000 65,200
Goods sent to Branch 46,000
Goods received from H.O. 44,500
3,10,200 3,10,200 67,200 67,200
Notes:
(1) On 28th Dec., 2012 the branch remitted ` 1,500 to the H.O. and this has not yet
been recorded in the H.O. books. Also on the same date, the H.O. dispatched goods to
the branch invoiced at ` 1,500 and these too have not yet been entered into the branch
books. It is the company’s policy to adjust items in transit in the books of the recipient.
(2) The stock of raw materials held at the H.O. on 31st Dec., 2012 was valued at `
2,300.
(3) You are advised that:
 there were no stock losses incurred at the H.O. or at the branch.
 it is KP’s practice to value finished goods stock at the H.O. at factory cost.
 there were no opening or closing stock of work-in-progress.
 Accounting for Branches including Foreign Branches 8.45

(4) Branch employees are entitled to a bonus of ` 156 under a bilateral

agreement. Solution
In the books of KP
Trading and Profit & Loss Account for the year ended 31st Dec., 2012
H.O. Branch Total H.O. Branch Total
` ` ` ` ` `
To Material 34,500 - 34,500 By Sales 2,00,000 65,200 2,65,200
consumed
To Wages 1,08,500 - 1,08,500 By Goods
Sent to
To Factory Branch 46,000 - -
Overheads 39,000 - 39,000
To Opening By Closing
stock of stock 15,000 9,560 24,560
finished
goods 13,000 9,200 22,200
To Goods from 46,000
H.O.
To Gross
Profit c/d 66,000 19,560 85,560
2,61,000 74,760 2,89,760 2,61,000 74,760 2,89,760
To Admn. 13,900 4,000 17,900 By Gross 66,000 19,560 85,560
Salaries Profit b/d
To Salesmen 22,500 6,200 28,700
Salaries
To Other
Admn. &
Overheads 12,500 2,300 14,800
To Stock
Reserve
(increase) 47 - 47
To Bonus to - 156 156
Staff
To Net Profit 17,053 6,904 23,957
66,000 19,560 85,560 66,000 19,560 85,560
8.46 Advanced Accounting

Balance Sheet as on 31st Dec., 2012

H.O. Branch Total H.O. Branch Total
` ` ` ` ` ` `
Capital 50,000 - 50,000 Fixed Assets - - -
Profit : H.O. 17,053 Current
Branch 6,904 23,957 23,957 Assets: Raw 2,300 2,300
Trade material
Creditors 13,000 13,000 Finished 15,000 9,560 23,313
Goods *
Bonus 156 156
Payable (Less Stock
H.O. Res.) 37,000 - 37,000
Account 10,404 Debtors
Stock 23,500 1,000 24,500
Reserve 1,247 Cash
(including
transit item) 10,404*
Branch A/c
88,204 10,560 87,113 88,204 10,560 87,113

*9,560 × 100/115 i.e., (8,313 + 15,000) = ` 23,313

** (5,000 + 6,904) – 1500 = ` 10,404.

9. Incomplete Information in Branch Books

If it is desired that profitability of the branch should be kept secret from the branch staff,
the head office would hold back some key information from the branch, e.g., amount of
opening stock, cost of goods sent to the branch, etc. The head office, in such a case
would maintain a record of goods sent to the branch by passing the entry:
Goods Supplied to the Branch Account Dr.
To Purchases Account
The value of the closing stock will also be adjusted only in head office books.
In such a case, for closing its books at the end of the year, the branch will simply transfer
various revenue accounts to the head office without drawing up a Trading and Profit &
Loss Account.
On that basis, supplemented by the record of transactions maintained at the head office, it will
be possible to construct the Trading and Profit & Loss Account of the branch.
 Accounting for Branches including Foreign Branches 8.47

Illustration 16
AFFIX of Kolkata has a branch at Delhi to which the goods are supplied from Kolkata but
the cost thereof is not recorded in the Head Office books. On 31st March, 2012 the
Branch Balance Sheet was as follows :
Liabilities ` Assets `
Creditors 40,000 Debtors Balance 2,00,000
Balance Head 1,68,000 Building Extension A/c closed by
Office transfer to H.O. A/c ---
Cash at Bank 8,000
2,08,000 2,08,000
During the six months ending on 30-9-2012, the following transactions took place at Delhi.
` `
Sales 2,40,000 Manager’s Salary 4,800
Purchases 48,000 Collections from Debtors 1,60,000
Wages paid 20,000 Discounts allowed 8,000
Salaries (inclusive of advance Discount earned 1,200
of ` 2,000) 6,400 Cash paid to Creditors 60,000
General Expenses 1,600 Building Account (further 4,000
payment)
Fire Insurance (paid for one 3,200 Cash in Hand 1,600
year)
Remittance to H.O. 38,400 Cash at Bank 28,000
Set out the Head Office Account in Delhi books and the Branch Balance Sheet as on 30-
9-2012. Also give journal entries in the Delhi books.
Solution
Journal Entries
2012 Dr. Cr.
30 Sept. ` `
Salary Advance A/c Dr. 2,000
To Salaries A/c 2,000
(The amount paid as advance adjusted by debit to Salary
Advance Account)
Prepared Insurance A/c Dr. 1,600
To Fire Insurance A/c 1,600
(Six months premium transferred to the Prepaid Insurance A/c)
Head Office Account Dr. 88,400
8.48 Advanced Accounting

To Purchases A/c 48,000

To Wages A/c 20,000
To Salaries A/c 4,400
To General Expenses A/c 1,600
To Fire Insurance A/c 1,600
To Manager’s Salary A/c 4,800
To Discount Allowed A/c 8,000
(Transfer of various revenue accounts (Dr.) to the H.O. Account
for closing the accounts)
Sales Accounts Dr. 2,40,000
Discount Earned A/c Dr. 1,200
To Head Office A/c 2,41,200
[Revenue accounts (Cr.) transferred to H.O.]
Head Office Account Dr. 4,000
To Building Account 4,000
(Transfer of amounts spent on building extension to H.O. A/c)
Head Office Account
2012 ` 2012 `
Sep. 30 To Cash-remittance 38,400 April 1 By Balance b/d 1,68,000
To Sundries (Revenue A/cs) 88,400 Sep. 30 By Sundries 2,41,200
To Building A/c 4,000 (Revenue A/cs)
To Balanced c/d 2,78,400
4,09,200 4,09,200
Balance Sheet of Delhi Branch as on Sept. 30, 2012
Liabilities ` Assets `
Creditors Balances 26,800 Debtors Balances 2,72,000
Head Office Account 2,78,400 Salary Advance 2,000
Prepaid Insurance 1,600
Building Extension A/c
transferred to H.O. —
Cash in Hand 1,600
Cash at Bank 28,000
3,05,200 3,05,200
Cash and Bank Account
` `
To Balance b/d 8,000 By Wages 20,000
 Accounting for Branches including Foreign Branches 8.49

To Collection from 1,60,000 By Salaries 6,400

Debtors
By Insurance 3,200
By General Exp. 1,600
By H.O. A/c 38,400
By Manager’s Salary 4,800
By Creditors 60,000
By Building A/c 4,000
By Balance c/d
By Cash in Hand 1,600
By Cash at Bank 28,000 29,600
1,68,000 1,68,000
Debtors Account
` `
To Balance b/d 2,00,000 By Cash Collection 1,60,000
To Sales 2,40,000 By Discount (allowed) 8,000
By Balance c/d 2,72,000
4,40,000 4,40,000
To Balance b/d 2,72,000
Creditors Account
` `
To Cash 60,000 By Balance b/d 40,000
To Discount (earned) 1,200 By Purchases 48,000
To Balance c/d 26,800
88,000 88,000
By Balance b/d 26,800
Illustration 17
The following Trial balances as at 31st December, 2012 have been extracted from the
books of Major Ltd. and its branch at a stage where the only adjustments requiring to be
made prior to the preparation of a Balance Sheet for the undertaking as a whole.
Head Office Branch
Dr. Cr. Dr. Cr.
` ` ` `
Share Capital 1,50,000
Fixed Assets 75,125 18,901
Current Assets 1,21,809 23,715 (Note 3)
8.50 Advanced Accounting

Current Liabilities 34,567 9,721

Stock Reserve, 1st Jan., 2012
(Note 2) 693
Revenue Account 43,210 10,250
Branch Account 31,536
Head Office 22,645
Account 2,28,470 2,28,470 42,616 42,616
Notes :
1. Goods transferred from Head Office to the Branch are invoiced at cost plus 10% and
both Revenue Accounts have been prepared on the basis of the prices charged.
2. Relating to the Head Office goods held by the Branch on 1st January, 2012.
3. Includes goods received from Head Office at invoice price ` 4,565.
4. Goods invoiced by Head Office to Branch at ` 3,641 were in transit at 31st
December, 2012, as was also a remittance of ` 3,500 from the Branch.
5. At 31st December, 2012, the following transactions were reflected in the Head
Office books but unrecorded in the Branch books.
The purchase price of lorry, ` 2,500, which reached the Branch on December 25th; a sum
received on December 30, 2012 from one of the Branch debtors, ` 750.
You are required:
(i) to record the foregoing in the appropriate ledger accounts in both sets of books;
(ii) to prepare a Balance Sheet as at 31st December, 2012 for the undertaking as a
whole. Solution:
H.O. Books
Branch Account
2012 ` 2012 `
Dec. 31 To Balance b/d 31,536 Dec. 31 By Cash in 3,500
transit By 28,036
31,536 Balance b/d 31,536
Cash in Transit Account
2012 ` 2012 `
Dec. 31 To Branch A/c 3,500 Dec. 31 By Balance c/d 3,500
 Accounting for Branches including Foreign Branches 8.51

Stock Reserve Account

2012 ` 2012 `
Dec. 31 To Balance c/d 746 Jan. 1 By Balance c/d 693
By Revenue A/c 53
746 746
Revenue Account
2012 ` 2012 `
Dec. 31 To Stock 53 Dec. 31 By Balance c/d 43,210
Reserve To 43,157
Balance c/d 43,210 43,210
Branch Books
Head Office Account
2012 ` 2012 `
Dec.31 To Current Assets 750 Dec. 31 By Balance b/d 22,645
To (Debtors) By Goods in transit 3,641
Balance c/d 28,036 By Motor Vehicle 2,500
28,786 28,786
Goods in Transit Account
2012 ` 2012 `
Dec. 31 To Head Office 3,641 Dec. 31 By Balance c/d 3,641
Motor Vehicle Account
2012 ` 2012 `
Dec. 31 To Head Office 2,500 Dec. 31 By Balance c/d 2,500
Sundry Current Assets A/c
2012 ` 2012 `
Dec. 31 To Balance b/d 23,715 Dec. 31 By H.O. (Remittance
by Debtor) 750
By Balance c/d 22,965
23,715 23,715
Balance Sheet of Major Ltd. as on 31st Dec., 2012
Particulars Note No Amount (`)
I. Equity and Liabilities
(1)Shareholder's Funds
Share Capital 1,50,000
8.52 Advanced Accounting

(2) Non-Current Liabilities

Long-term borrowings 1 53,407
(3) Current Liabilities 44,288
Total 2,47,695
II. Assets
(1) Non-current assets
Fixed assets 96,526
(2) Current assets 1,51,169
Total 2,47,695
Notes to Accounts
`
Long term borrowings
Secured Loans 53,407
Working Notes:
`
(i) Fixed Assets: Head Office 75,125
Branch 18,901
Motor Vehicle 2,500
96,526
(ii) Current Assets : Head Office 1,21,809
Cash in transit 3,500
Branch (23,715–750) 22,965
Stock in transit 3,641
1,51,915
Less : Stock Reserve (746)
1,51,169
(iii) Revenue Account Head Office (43,210 – 53) 43,157
Branch 10,250
53,407
(iv) Current Liabilities : Head Office 34,567
Branch 9,721
44,288

10. Foreign Branches

Foreign branches generally maintain independent and complete record of business transacted
by them in currency of the country in which they operate. Thus problems of incorporating
balances of foreign branches relate mainly to translation of foreign currency into Indian
rupees. This is because exchange rate of Indian rupee is not stable in relation to foreign
currencies due to international demand and supply effects on various currencies. The
 Accounting for Branches including Foreign Branches 8.53

accounting principles which apply to inland branches also apply to a foreign branch after
converting the trial balance of the foreign branch in the Indian currency.

11. Accounting for Foreign Branches

For the purpose of accounting, AS 11 (revised 2003) classifies the foreign branches may
be classified into two types:
 Integral Foreign Operation;
 Non- Integral Foreign Operation.
Let us discuss these two types of foreign branches in detail.
11.1 Integral Foreign Operation (IFO): It is a foreign operation, the activities of
which are an integral part of those of the reporting enterprise. The business of IFO is
carried on as if it were an extension of the reporting enterprise’s operations. Generally,
IFO carries on business in a single foreign currency, ie. of the country where it is
located. For example, sale of goods imported from the reporting enterprise and
remittance of proceeds to the reporting enterprise.
11.2 Non-Integral Foreign Operation (NFO): It is a foreign operation that is not an
Integral Foreign Operation. The business of a NFO is carried on in a substantially
independent way by accumulating cash and other monetary items, incurring expenses,
generating income and arranging borrowing in its local currency. An NFO may also enter
into transactions in foreign currencies, including transactions in the reporting currency.
An example of NFO may be production in a foreign currency out of the resources
available in such country independent of the reporting enterprise.
The following are the indicators of Non- Integral Foreign Operation-
 Control by reporting enterprises - While the reporting enterprise may control the
foreign operation, the activities of foreign operation are carried independently
without much dependence on reporting enterprise.
 Transactions with the reporting enterprises are not a high proportion of the foreign
operation’s activities.
 Activities of foreign operation are mainly financed by its operations or from local
borrowings. In other words it raises finance independently and is in no way
dependent on reporting enterprises.
 Foreign operation sales are mainly in currencies other than reporting currency.
 All the expenses by foreign operations are primarily paid in local currency, not in
the reporting currency.
 Day-to-day cash flow of the reporting enterprises is independent of the foreign
enterprises cash flows.
8.54 Advanced Accounting

 Sales prices of the foreign enterprises are not affected by the day-to-day changes
in exchange rate of the reporting currency of the foreign operation.
 There is an active sales market for the foreign operation product.
The above are only indicators and not decisive/conclusive factors to classify the foreign
operations as non-integral, much will depend on factual information, situations of the particular
case and, therefore, judgment is necessary to determine the appropriate classification.
Controversies may arise in deciding the foreign branches of the enterprises into integral
or non-integral. However, there may not be any controversy that subsidiary associates
and joint ventures are non-integral foreign operation.
In case of branches classified as independent for the purpose of accounting are generally
classified as non-integral foreign operations.

12. Change in Classification

When there is a change in classification, accounting treatment is as under-
12.1 Integral to Non-Integral
(i) Translation procedure applicable to non-integral shall be followed from the date of
change.
(ii) Exchange difference arising on the translation of non-monetary assets at the date
of re- classification is accumulated in foreign currency translation reserve.
12.2 Non-Integral to Integral
(i) Translation procedure as applicable to integral should be applied from the date of
change.
(ii) Translated amount of non-monetary items at the date of change is treated as historical
cost.
(iii) Exchange difference lying in foreign currency translation reserve is not to be
recognized as income or expense till the disposal of the operation even if the
foreign operation becomes integral.

13. Techniques for Foreign Currency Translation

13.1 Integral Foreign Operation (IFO): Following are the standard recommendations
for foreign currency translation:
(1) All transactions of IFO be translated at the rate prevailing on the date of
transaction. This will require date wise details of the transaction entered by that
operation together with the rates. Weekly or monthly average rate is permitted if
there are no significant variations in the rate.
 Accounting for Branches including Foreign Branches 8.55

(2) Translation at the balance sheet date-

(i) Monetary items1 at closing rate;
(ii) Non-monetary items2: The cost and depreciation of the tangible fixed assets
is translated using the exchange rate at the date of purchase of the asset if
asset is carried at cost. If tangible fixed asset is carried at fair value,
translation should be done using the rate existed on the date of the
valuation.
(iii) The cost of inventories is translated at the exchange rates that existed when
the cost of inventory was incurred and realizable value is translated applying
exchange rate when realizable value is determined which is generally closing
rate.
(iv) Exchange difference arising on the translation of the financial statement of
integral foreign operation should be charged to profit and loss account.
13.2 Non-Integral Foreign Operation: Accounts of non-integral foreign operation
are translated using the following principles:
 Balance sheet items i.e. Assets and Liabilities both monetary and non-monetary –
apply closing exchange rate.
 Items of income and expenses – At actual exchange rates on the date of
transactions. However, accounting standard allows average rate subject to
materiality.
 Resulting exchange rate difference should be accumulated in a “foreign currency
translation reserve” until the disposal of “net investment in non-integral foreign
operation”.
Illustration 18
On 31st December, 2012 the following balances appeared in the books of Chennai
Branch of an English firm having its HO office in New York:
Amount in` Amount in`
Stock on 1st Jan., 2012 2,34,000
Purchases and Sales 15,62,500 23,43,750
Debtors and Creditors 7,65,000 5,10,000
Bills Receivable and Payable 2,04,000 1,78,500
Salaries and Wages 1,00,000 -
Rent, Rates and Taxes 1,06,250 -
Furniture 91,000 -
Bank A/c 5,68,650

1 Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts
of money. Cash, receivables and payables are examples of monetary items.
2 Non-monetary items are assets and liabilities other than monetary items. Fixed assets, investments in equity shares,

inventories are examples of non-monetary assets.

 8.56 Advanced Accounting

New York Account - 5,99,150

36,31,400 36,31,400
Stock on 31st December, 2012 was ` 6,37,500.
Branch account in New York books showed a debit balance of $ 13,400 on 31st
December, 2012 and Furniture appeared in the Head Office books at $ 1,750.
The rate of exchange for 1 $ on 31st December, 2011 was ` 52 and on 31st December,
2012 was
` 51. The average rate for the year was ` 50.
Prepare in the Head Office books the Profit and Loss a/c and the Balance Sheet of the Branch.
Solution
In the books of English Firm (Head Office in New York)
Chennai Branch Profit and Loss Account for the year ended 31st
December, 2012
$ $
To Opening stock 4,500 By Sales 46,875
To Purchases 31,250 By Closing stock 12,500
To Gross profit c/d 23,625 (6,37,500 / 51)
59,375 59,375
To Salaries 2,000 By Gross profit b/d 23,625
To Rent, rates and taxes 2,125
To Exchange translation loss 2,000
To Net Profit c/d 17,500
23,625 23,625

Balance Sheet of Chennai Branch as on 31st December, 2012

Liabilities $ $ Assets $
Head Office A/c 13,400 Furniture 1,750
Add : Net profit 17,500 30,900 Closing Stock 12,500
Trade creditors 10,000 Trade Debtors 15,000
Bills Payable 3,500 Bills Receivable 4,000
Cash at bank 11,150
44,400 44,400
 Accounting for Branches including Foreign Branches 8.57

Working Note:
Calculation of Exchange Translation Loss Chennai Branch Trial
Balance (converted in $) as on 31st December, 2012

Dr. Cr. Conversion Dr. Cr.

` ` Rate ($) ($)

Stock on 1st Jan., 2012 2,34,000 52 4,500
Purchases & Sales 15,62,500 23,43,750 50 31,250 46,875
Debtors & creditors 7,65,000 5,10,000 51 15,000 10,000
Bills Receivable and Bills 2,04,000 1,78,500 51 4,000 3,500
Payable
Salaries and wages 1,00,000 50 2,000
Rent, Rates and Taxes 1,06,250 50 2,125
Furniture 91,000 1,750
Bank A/c 5,68,650 51 11,150
New York Account 5,99,150 13,400
Exchange translation loss
(bal. fig.) 2,000
Illustration 19 36,31,400 36,31,400 73,775 73,775
S & M Ltd., Bombay, have a branch in Sydney, Australia. Sydney branch is an integral
foreign operation of S & M Ltd.
At the end of 31st March, 2013, the following ledger balances have been extracted from the
books of the Bombay Office and the Sydney Office:
Bomba . Sydney
y
(` thousands) (Austr dollars thousands)
Debit Credit Debit Credit
Share Capital – 2,000 – –
Reserves & Surplus – 1,000 – –
Land 500 – – –
Buildings (Cost) 1,000 – – –
Buildings Dep. Reserve – 200 – –
Plant & Machinery (Cost) 2,500 – 200 –
Plant & Machinery Dep. Reserve – 600 – 130
Debtors / Creditors 280 200 60 30
Stock (1.4.2012) 100 – 20 –
8.58 Advanced Accounting

Branch Stock Reserve – 4 – –

Cash & Bank Balances 10 – 10 –
Purchases / Sales 240 520 20 123
Goods sent to Branch – 100 5 –
Managing Director’s salary 30 – – –
Wages & Salaries 75 – 45 –
Rent – – 12 –
Office Expenses 25 – 18 –
Commission Receipts – 256 – 100
Branch / H.O. Current A/c 120 – – 7
4,880 4,880 390 390
The following information is also available:
(1) Stock as at 31.3.2013:
Bombay ` 1,50,000
Sydney A $ 3,125
You are required to convert the Sydney Branch Trial Balance into rupees;
(use the following rates of exchange :
Opening rate A $ = ` 20
Closing rate A $ = ` 24
Average rate A $ = ` 22
For Fixed Assets A$=`
18). Solution
Sydney Branch Trial Balance (in Rupees)
As on 31st March, 2013
(` ‘000)
Conversion rate per A$ Dr. Cr.
Plant & Machinery (cost) ` 18 36,00
Plant & Machinery Dep. Reserve ` 18 23,40
Debtors / Creditors ` 24 14,40 7,20
Stock (1.4.2012) ` 20 4,00
Cash & Bank Balances ` 24 2,40
Purchase / Sales ` 22 4,40 27,06
Goods received from H.O. – 1,00
Wages & Salaries ` 22 9,90
Rent ` 22 2,64
 Accounting for Branches including Foreign Branches 8.59

Office expenses ` 22 3,96

Commission Receipts ` 22 22,00
H.O. Current A/c 1,20
78,70 80,86
Exchange loss (balancing figure) 2,16
80,86 80,86
Illustration 20
M/s Carlin has head office at New York (U.S.A.) and branch at Mumbai (India). Mumbai
branch is an integral foreign operation of Carlin & Co.
Mumbai branch furnishes you with its trial balance as on 31st March, 2013 and the
additional information given thereafter:
Dr. Cr.
Rupees i thousands
n
Stock on 1st April, 2012 300 –
Purchases and sales 800 1,200
Sundry Debtors and creditors 400 300
Bills of exchange 120 240
Wages and salaries 560 –
Rent, rates and taxes 360 –
Sundry charges 160 –
Computers 240
Bank balance 420 –
New York office a/c – 1,620
3,360 3,360
Additional information:
(a) Computers were acquired from a remittance of US $ 6,000 received from New York
head office and paid to the suppliers. Depreciate computers at 60% for the year.
(b) Unsold stock of Mumbai branch was worth ` 4,20,000 on 31st March, 2013.
(c) The rates of exchange may be taken as follows:
 on 1.4.2012 @ ` 40 per US $
 on 31.3.2013 @ ` 42 per US $
 average exchange rate for the year @ ` 41 per US $
 conversion in $ shall be made upto two decimal accuracy.
8.60 Advanced Accounting

You are asked to prepare in US dollars the revenue statement for the year ended 31st
March, 2013 and the balance sheet as on that date of Mumbai branch as would appear
in the books of New York head office of Carlin & Co. You are informed that Mumbai
branch account showed a debit balance of US $ 39609.18 on 31.3.2013 in New York
books and there were no items pending reconciliation.
Solution
M/s Carlin
Mumbai Branch Trial Balance in (US $)
as on 31st March, 2013
Conversion Dr. Cr.
rate per US US US $
$ $
(` )
Stock on 1.4.12 40 7,500.00 –
Purchases and sales 41 19,512.20 29,268.29
Sundry debtors and creditors 42 9,523.81 7,142.86
Bills of exchange 42 2,857.14 5,714.29
Wages and salaries 41 13,658.54 –
Rent, rates and taxes 41 8,780.49 –
Sundry charges 41 3,902.44 –
Computers – 6,000.00 –
Bank balance 42 10,000.00 –
New York office A/c – – 39,609.18
81,734.62 81,734.62
Trading and Profit & Loss Account
for the year ended 31st March,
2013
US $ US $
To Opening Stock 7,500.00 By Sales 29,268.29
To Purchases 19,512.20 By Closing stock 10,000.00
To Wages and salaries 13,658.54 By Gross Loss c/d 1,402.45
40,670.74 40,670.74
To Gross Loss b/d 1,402.45 By Net Loss 17,685.38
To Rent, rates and taxes 8,780.49
To Sundry charges 3,902.44
 Accounting for Branches including Foreign Branches 8.61

To Depreciation on computers 3,600.00

(US $ 6,000 × 0.6)
17,685.38 17,685.38
Balance Sheet of Mumbai Branch
as on 31st March, 2013
Liabilities US $ Assets US $ US $
New York Office 39,609.18 Computers 6,000.00
A/c
Less : Net Loss (17,685.38) 21,923.80 Less: (3,600.00) 2,400.00
Depreciation
Sundry creditors 7,142.86 Closing stock 10,000.00
Bills payable 5,714.29 Sundry debtors 9,523.81
Bank balance 10,000.00
Bills receivable 2,857.14
34,780.95 34,780.95

Summary
 Types of branches
 Dependent branches
 Independent branches
 Classification of Branches from accounting point of view
 Branches in respect of which the whole of the accounting records are kept at
the head office (Dependent Branches)
 Branches which maintain independent accounting records (Independent
Branches), and
 Foreign Branches.
 Systems of accounting followed by Dependent Branches
 Debtors System: under this system head office makes a branch account.
Anything given to branch is debited and anything received from branch
would be credited.
 Branch trading and profit and loss account (Final accounts) method /branch
account method: Under this system head office prepares (a) profit and loss
account (b) branch account taking each branch as a separate entity.
 Stock and debtors system: Under this system head office opens:
8.62 Advanced Accounting

 Branch Stock Account

 Branch Profit and Loss Account
 Branch Debtors Account
 Branch Expenses Account
 Goods sent to Branch Account
 Branch Asset Account
 Maintenance of comprehensive account books by Independent Branches
Preparation of separate trial balance of each branch in H.O.books.
 Types of Foreign branches
 Integral Foreign Operation (IFO): It is a foreign operation, the activities of
which are an integral part of those of the reporting enterprise.
 Non-Integral Foreign Operation (NFO): It is a foreign operation that is not an
Integral Foreign Operation. The business of a NFO is carried on in a
substantially independent way by accumulating cash and other monetary
items, incurring expenses, generating income and arranging borrowing in its
local currency.
 Non-Integral Foreign Operation -translation
 Balance sheet items i.e. Assets and Liabilities both monetary and non-monetary
– apply closing exchange rate.
 Items of income and expenses – At actual exchange rates on the date of
transactions
 Resulting exchange rate difference should be accumulated in a “foreign
currency translation reserve” until the disposal of “net investment in non-
integral foreign operation”.
 Integral Foreign Operation (IFO) - translation
 at the rate prevailing on the date of transaction
 Translation at the balance sheet date-
 Monetary items at closing rate;
 Non-monetary items: The cost and depreciation of the tangible fixed assets
is translated using the exchange rate at the date of purchase of the asset if
asset is carried at cost. If tangible fixed asset is carried at fair value,
translation should be done using the rate existed on the date of the
valuation.
 The cost of inventories is translated at the exchange rates that existed when the
cost of inventory was incurred and realizable value is translated applying
exchange rate when realizable value is determined which is generally closing
rate.
 Exchange difference arising on the translation of the financial statement of
integral foreign operation should be charged to profit and loss account.