Branch Accounting 2 - examples PDF

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BRANCH ACCOUNTING The increase in competition and the need to meet the ever changing customer needs has seen the opening of branches in several parts of the country. Many companies, especially those in the retail trade such as Power Sales, OK Bazaars, TM Stores have several branches country wide. The need to control the activities of branches, especially the treatment of stock and sales has led to the introduction of branch accounting the world over. The accounts of a branch may be in two forms: a. The branch may just be a trading centre with all the accounting records including purchases of goods being done at the Head Office. b. The branch may be allowed some degree of autonomy and be allowed to maintain an accounting system of its own.

Non-autonomous branch: Head Office Maintain The Books of Accounts Here what usually happens is that the Head Office operates a central buying office. The branches submit their stock requisitions and the Head Office sources and supplies those goods. The goods are usually despatched to the branch at cost plus mark-up. This is very simple to operate. Imagine you were running a bicycle shop and you have two hundred bicycles in stock. Imagine further that I am your agent in Marondera and I request for ten bicycles to beef up my stocks. Assume further that each bicycle cost $100.00 and is sold for $150.00. if you sent me the ten bicycles you would not bother yourself about the cost of the bicycle. All you would want from me is your $150 x 10 = $1 500.00. If I sent you $1 400.00 you would want to know about the difference of $100. Now, how would you account for the transfer of the ten bicycles from your stocks to the agent in Marondera? The logical thing to do is to credit your stock account with the value of ten bicycles and debit the Marondera agent with the value of the ten bicycles. This would be like this: Head Office Books Bicycles Account

Bal b/d (assumed)

20 000

Marondera Agent Balance c/d

20 000 Bal b/d

19 000 1

1 000 19 000 20 000

Marondera Agent Stock Control Account Bicycle

1 000

These would be accounting entries if you despatched the bicycles to Marondera at cost. For the purpose of making it easy to control the agent’s stock you may actually want to dispatch these at selling price which is $150 x 10 = $1 500. In this case, you may have to open the Marondera account as before and debit it with the goods at selling price $1 500 and the credit in the Head Office stock remaining at cost. This would be like this: Bicycle Account Bal b/d

20 000

Marondera Agent Bal c/d

20 000 Bal b/d

1 000 19 000 20 000

19 000

Marondera Agent Stock Control Account $ Bicycles

1 500

But now, the dilemma is that these two figures: the $1 000 credit in the bicycles account and the $1 500 in Marondera agent stock control account are not the same. Besides stock should always be valued at cost. So what do we do? We should open a suspense account which we shall offload the unrealized profit in stock of ($1 500 - $1 000) = $500. This is an Unrealized Profit Account. It is also sometimes called the Branch Stock Adjustment Account of Profit Loading Account. The extra $500 is credited to this account.

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Unrealized Profit Account Branch Stock a/c

Unrealized Profit in goods to branch

500

In actual fact the goods in the Marondera Branch account are valued at cost, ie Goods to Marondera at Selling Price Less: Unrealised profit in stock (credit bal.) Goods to Marondera at cost

= = =

$1 500 $ 500 $1 000

Remember that all these entries are in the Head Office books.

Goods returned by Branch to Head Office It sometimes happens that the branch returns goods to Head Office for various reasons. Such goods when returned will need to be reflected as such in the Goods To Branch Account. The Unrealised Profit Account will need to be adjusted for goods returned as such profits can no longer be expected from the branch.

Example 1 On 01/01/2014 Mahaso Ltd had 20 bicycles in stock and sent 10 to their Marondera Brach at selling price. These had cost $100 each and they were sold at 50% mark up. The branch returned 2 bicycles which were faulty. You are required to show, in the Head Office books to following accounts: a. The Bicycles Account b. The Marondera Branch Account c. The Unrealized Profit Account

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Authorized Price Reductions Sometimes branches are authorized to reduce prices. Thus if goods worth $1 500 at selling price are sent to the branch, the head office expects $1 500 from the branch. If however, the Head office authorizes the Branch to reduce selling prices of goods by $200, it cannot expect to receive $1 500 from the Branch still. It must expect to receive ($1 500 - $200) = $1 300. Price reductions thus should be credited to the Branch stock a/c to indicate the amount due and debited to the unrealized profit a/c to indicate the expected reduced profits. Thus price reductions will reduce both the amount expected to be received from a branch by the Head Office and the profit the Head Office should expect to earn from the goods sent to branch.

Examples 2 On 01.01.2014 Nyoni Ltd had 20 bicycles in stock of a unit cost of $100 each. 10 of these were sent to the Branch in Marondera at a unit selling price of $150. Unfortunately, all the 10 bicycles were faulty and had to be sold at $130 each as the head office and directed. You are required to show how the above transactions would appear in the books of the head office.

Inter Branch Stock Transfers Sometimes a company may have several branches. It may be necessary sometimes to transfer stocks from one branch to another. When this happens the stock do transferred is credited off the Branch Stock Account of the transferring branch to the Branch Stock Account of the transferee branch. The unrealized profit in stock has to be transferred off the Unrealized Profit Account of the transferring branch to the Unrealised Profit Account of the transferee branch. This is mainly because the transferee branch has to account for both the stock and the profit.

Example 3 The following balances appeared in the branch stock accounts of Success Ltd’s Marondera and Mutare Branches: Marondera Branch Mutare

10 000 6 000

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The stocks are valued at selling price, which is cost + 1/3. During the year, Marondera transferred goods worth $2 000 to Mutare. You are required to show how the above accounts would appear after the transfer, assuming no other transactions took place during the year.

Goods sent to Branches With this non autonomous system where the head office is in charge of all purchases and branches just concentrate on selling, all goods sent to branches need to be separately recorded. These are usually recorded in the Goods To Branch Account. The Goods to Branch a/c is credited with the cost of goods sent to the branches at cost and the corresponding entries are debited to the Branch Stock Account at selling price.

Goods In Transit Sometimes goods sent by the head office to the branch do not reach the branch until after the year end. There will thus be discrepancies between goods reflected as having been sent to the branch and the goods actually received by the branch. What must happen therefore is to open up a Goods In Transit (GIT) account and debit it with the value of goods in transit at selling price. The corresponding entry goes to the credit side of the branch stock account to reduce it by the value of goods sent but not received. The unrealized profit account is debited with the profit element of the goods transit. This reduces the profit the head office is expecting from the branch.

Example 4 During the year ended 31/12/2014, Mawere Ltd sent goods costing $10 000 to its Marondera Branch. $2 000 of these goods had not reached Marondera Branch by 31/12/2014. Mawere Ltd despatches goods to its branches at a gross profit of 25%.

You are required to show: i. ii. iii. iv.

The Goods To Branch a/c The Branch Stock a/c The Unrealised Profit a/c The Goods in transit

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Assume that there were no other stock movements during the year and that at 01.01.2014, the stock at the Head Office was $28 000.

Closing Stock Invariably there is bound to be closing stock at the branch at the end of a period. This should be carried down in the relevant branch stock account and the unrealized profit in stocks is also carried down in the Unrealised Profit Account.

Sales Both credit sales and cash sales are credited to the Branch Stock account at selling price. No adjustment though is required in respect of the profit on the sales which will be in the unrealized profit account as this will eventually be the resultant balance in the account to be transferred to the Head Office’s Profit and Loss account.

Authorized Local Purchases Should the branch make any unauthorized local purchases these are debited to the branch stock account at selling price as well. The unrealized profit is credited to unrealized profit account.

Branch Stock Losses Where there are stock losses, these should be credited off the branch stock account at selling price and debited to the unrealized profit account at selling price still. The Branch Stock account is credited because all the stock supplied from Head Office have to be accounted for. The unrealized profit account is debited with the selling price in order to deduct from the profits: i. ii.

The profit which would have been made on the goods lost The actual cost of the goods lost

Thus the cost of the assets in (ii) above and the forgone profits in (i) above make up the selling price of the goods. Thus if you have an expecting cow and you lose it, your loss is not only on the expected calf but the cow as well. Should any cash be received from an insurance company in compensation of 6

such a loss, the money should be debited to bank account and credited to the unrealized profit account.

Goods Returned By Debtors and Bad Debts When debtors return goods to the branch these should be debited to the Branch Stock Account as a way of reducing the original credit entry on sales. If debtors return goods directly to the head office, then the Goods To Branch Account should be debited and not the branch stock account. Bad debts though have nothing to do with stocks and therefore they are not deducted from stocks. Discounts allowed too, do not enter the Branch Stock Account as these have nothing to do with stocks but with payment from debtors and hence they are credited against debtors.

Incorrect Opening Balance Should there be a wrong opening balance of stock which gets discovered, the correct opening balance is the one taken for the purpose of the Branch Stock Account and Unrealised Profit Account.

Example 5 Tatenda Ltd, a distributer of local and imported vehicle spares has its head office in Harare and branches in Bulawayo and Mutare. The branches obtain most of their merchandise from head Office at selling price which is cost price plus 20%. The branches are permitted to purchase any other spares not obtained from head office from local suppliers for cash, such purchases being made out of cash sales receipts as in the case of local purchases. The following information relates to the Mutare branch for the year ended 30 June 2015:

$ Goods delivered to branch at selling price Returns to head office at selling price Cash sales (after deducting $2 000 local purchases of cost price $2 000 and petty cash expense $1 680) Credit sales 7

163 140 720 82 400 73 600

Discount allowed to debtors Bad debts written off Goods returned by debtors at selling price Administration and selling expenses paid by Head Office Bad debts recovered Stock at selling price 01/07/14 Deliveries by Mutare branch to Bulawayo branch at selling price

1 730 480 960 16 000 150 21 000 1 920

Additional Information i. Stock (selling price) at 30 June 2015 amounted to $24 180. ii. Goods invoiced to the branch at $360 were still in transit at 30 June and were not included in the branch’s stock at 30 June 2015. iii. A burglary took place during the year and goods of $2.50 (cost) were stolen. The cash sales figure included $240 received from Old Mutual insurance company in full settlement of the branch’s claim for the theft. iv. During the year the accountant discovered a casting error on the stock sheets for the previous year ended 30 June 2014 which had resulted in an understatement of stocks at $21 000 instead of $21 200. Required: Prepare the following ledger accounts as they appear in the head office book at 30 June 2015: 1. Branch stock account 2. Branch adjustment 3. Branch profit and loss account Autonomous Branches n autonomous branch is one that keeps its own full set of accounts, divorced from those of the head office. However there is still a high rate of interaction between the branch and the head office. The relationship between the head office and the branch is one of debtors and creditors. Thus the head office may have an account for the branch in its sales ledger as a debtor and in its purchases ledger as a creditor and the branch will also have similar records in its books in respect of the head office. Instead of having two accounts in two different books, the branch and the head office may each keep one common account in each book. This account is called a current account. Current Account The Head Office will maintain a Branch Current Account in its Sales ledger mainly because the head office supplies more goods to the branch than the branch supplies to the head office. The Branch will keep a Head Office Current Account in its purchases ledger. Any transactions between the head office and the branch are dealt with strictly through the current accounts. Thus if the Head office sends anything to the branch it will credit items sent and debit branch current 8

account. Any money or goods received from the branch will be credited to the Branch Current account and debited to the bank or stock accounts. On the part of the branch, for any asset received from the head office it will debit the asset received and credit head office current account. Any items sent to head office are credited to the various items sold and debited to the Head Office Current Account. Usually the current accounts are reconciled at the end of every month. Any differences are investigated immediately. In the consolidated profit and loss account, the treatment is simply the same as normal consolidated profit and loss accounts. In the consolidated balance sheet, the assets are added together as in the case with normal consolidated balance sheets. It is important to note though that stocks are despatched at cost and not at selling price.

Example 6 Darlington Ltd had always operated from Harare. On 01.01.2015 the company decided to open a main branch in Bulawayo. The Branch was to maintain its own accounting records. The following balances were extracted from the Darlington Ltd’s books. Non-current assets Stock Debtors Bank Creditors Ordinary Share Capital Retained Profits

100 000 80 000 40 000 60 000 30 000 200 000 50 000

During the month of January 2015, the following took place: Head Office Activities i. Opened a branch in Bulawayo and opened a bank account immediately, into which Darlington Ltd deposited $30 000 by a cheque drawn on the Harare bank account. ii. Sent some non-current assets which included refrigerators, furniture and fittings to Bulawayo. They had a book value of $40 000. iii. Sent goods worth $35 000 to Bulawayo. iv. Paid for branch purchases by a cheque drawn on Harare branch $8 000. v. Purchased goods for resale for cash $45 000. vi. Sold goods for cash $77 000. vii. Paid for Sundry expenses $12 000. Branch Activities i. Bought goods for resale $10 000. 9

ii. iii. iv. v. vi. vii.

Sold goods on credit $60 000. Received $40 000 from debtors. A debtor of $15 000 paid directly to the head office. Paid hotel and travelling expenses for a Harare branch executive $2 000. Paid wages, salaries and expenses $5 600. Sold goods for $20 000 cash. Sent $25 000 to the Head Office as a general return funds.

Additional Information Stock at 31/01/2015 were as follows: Head office Branch

$34 000 $14 000

Required: Assuming that there were no movement in the debtors and creditors of the Head Office: Prepare 1. Head office Trading Profit and Loss a/c and the Statement of Financial Position. 2. Branch Trading Profit and Loss a/c and the Statement of Financial Position.

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