Branch Accounts 2021 PDF

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TOPIC THREE – SPECIALIZED ACCOUNTS: (3a)- BRANCH ACCOUNTS A branch is refers to an outlet or sub-division of an organization located in various geographical areas either nationally and or internationally. It is a separate segment of a business. In order to increase the sales, business entities are required to market their products over a larger territory and may generally split their businesses into certain divisions or parts. These various parts or divisions may be located in different part of the same city or in different cities of the same country or in different countries in the world. These are known as branches. Therefore, such business organizations are said to operate branches for the following reasons; a- In order magnify/ increase sales volumes of the organization and this can be achieved when large quantity of goods are sold and services rendered to a large number of clients. b- To tap new markets that are un-served c- For tax planning purposes, an organization may want to benefit from tax reliefs from government; when the organization establishes an investment in a particular area. d- To create job opportunities for the locals which is in line with government policy of job creation e- Others establish and operate branches as a tool to out compete their competitors. f- Etc. Therefore branch accounts when a large organization establishes and operates an outlet (s) in different locations. Such organizations maintaining branch accounts to achieve the following objective; a- To safeguard the assets that are in the hands of the branches and this can be achieved when adequate records are maintained. b- To ascertain the performance of branch operations for decision making on whether to expand the branches or to close/ discontinue some branches c- To compare profitability of different branches

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d- To maintain adequate records about the transactions between the organization/ head office and the branches e- To ensure proper control of branches Types of branches Branches can be categorized into three, namely; centrally controlled branches, autonomous/ independent branches and foreign branches

With centrally controlled branches; i- All accounts for the branch are maintained by the head office (HO). However, the branch is expected to maintain a sales day book in the event that it is allowed to sell goods on credit; and a petty cash book to record small/petty transactions. ii- All goods are purchased and supplied by the HO to the branches. However, the branches may also purchase goods from local supplier upon authorization by the HO iii- The branches only act as selling agents to the HO; i.e. they sell goods on behalf of the head office either on cash basis or on credit basis or both. iv- The amount received from cash sales from branch debtors is either remitted to the head office on a daily basis or deposited in the account of the head office in some local bank. With autonomous or independent branches; Branches act independently within the broad policies established by the HO in carrying out their day to day activities. Therefore, independent branches are characterized by; i. They maintain their own accounting record but at the end of a given period they (branches) send their trial balances to the head office to be incorporated in the head office books, ii. The branches can purchase their own goods locally although the head office may sometimes purchase and send goods to the branches. iii. The relations that exist between the HO and the autonomous branches is that of a creditor and a debtor.

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ACCOUNTS MAINTAINED BY HEAD OFFICE IN CASE OF CENTRALLY CONTROLLED BRANCHES; a- Branch Inventory Account This account serves as the trading account of the branch and helps in controlling inventory. The account is debited with the following; opening inventory held at the branch, goods sent to the branch by the head office, returns from the branch customers and goods purchased locally. The account is credited with; cash sales, credit sales, returns to the head office by the branch, goods lost at the branch and closing inventory at the branch. (See below)

Note: If the closing inventory is given in the question, the balancing figure represents a gross profit or loss which should be taken to the branch statement of profit or loss.

Dr. Branch Inventory Account Opening balance (Bal b/d) **** Cash sales Goods sent **** Credit sales Returns from customers **** Inventory lost/ stolen Local purchases **** Returns to the head office Gross profit (balancing figure) **** Closing balance (Bal. b/c) xxxx

Cr. **** **** **** **** **** xxxx

b- Goods sent to the branch account This records the cost of goods that are sent to branch during a particular year. The account is debited with returns from the branch to the head office and credited with the cost of goods sent to the branch. The balancing figure on this account represents the value of purchase delivered to the branch. This value is normally transferred to the head office Statement of profit or loss as an adjustment to its purchases. E.g.

Dr.

Good sent to branch A/c

Returns from the branch Branch purchases (Bal. c/d)

**** Branch Inventory **** xxxx 3

Cr. **** xxxx

c- Branch accounts receivable/ debtors Account This account records the goods sold to the branch debtors on credit. It is debited with the balance at the beginning of the period and credit sales during the year. It is credited with returns to the branch, cash paid, discount allowed, bad debts written off and closing balance at the end of the year. E.g.

Branch Accounts receivable/ Debtors A/c Opening balance (Bal. b/d) **** Cash/ Bank Credit sales **** Discount Allowed **** Bad debts written off Returns to the branch Closing balance (Bal. b/c) xxxx

**** **** **** **** **** xxxx

d- Branch cash account This account records cash transactions like; cash received from cash customers and also from credit customers and cash paid out to settle branch expenses. E.g.

Dr. Branch cash A/c Opening balance (Bal. b/d) **** Cash lost at the branch Cash from debtors **** Branch expenses paid Cash sales **** Closing balance (Bal. c/d) xxxx

Cr. **** **** **** xxxx

e- Branch expense account This account records all the expenses incurred at the branch. This may include branch expenses paid by the HO and those paid for by the branch. E.g.

Dr. Branch Expense A/c Rent **** Branch P or L (Bal. c/d) Goods lost/ stolen at the branch **** Discount allowed **** Bad debts written off **** xxxx

f- Brach profit or loss account 4

Cr. ****

xxxx

It is debited with the total branch expenses and credited with the branch gross profit (from the branch inventory account which serves as a trading account when goods are sent to the branch at their cost price.)- See below The branch net profit or loss from this account is transferred to the head office statement of profit or loss

Branch Profit or loss A/c Gross profit (from branch Branch expenses **** inventory A/c) Branch net profit (Bal. c/d) **** Branch net loss (Bal. c/d) xxxx

**** **** xxxx

g- Branch stock adjustment account [To be looked at later; in the next section] This is the trading account of the branch when goods are sent to the branch at selling price and helps to record unrealized profits on goods held by the branch. It also called the branch mark- up account. It is debited with profit element on returned by the branch to the head office, profit element on lost inventory (normal, abnormal, stolen) at the branch and profit element on closing inventory. It is credited with profit element on opening inventory, profits element on goods sent to the branch.

METHODS OF CHARGING GOODS TO THE BRANCH Goods may be sent to the branches at their cost price or at their selling prices. A)- GOODS SENT TO THE BRANCH AT THEIR COST PRICE Here the branch inventory account serves the purpose of a trading account such that the balance on this account represents gross profit (as earlier mentioned)

ACCOUNTING ENTRIES INVOLVED INCLUDE; 5

***(As you go through the entries below, follow them up to the T- Accounts as shown above to understand how to post transactions) i)- When goods are sent to the branch Dr. Branch inventory a/c *** Cr. Goods sent to the branch A/c

***

ii)- When the branch returns some of or all the goods to the head office Dr. Goods sent to the branch A/c

***

Cr. Branch inventory a/c

***

iii)- When goods are sold at the branch for cash basis Dr. Branch cash A/c *** Cr. Branch inventory A/c

***

iv)- When goods are sold at the branch on credit basis Dr. Branch debtors A/c Cr. Branch Inventory A/c

*** ***

v)- When expenses are incurred and paid for by the branch Dr. Branch expenses A/c Cr. Branch cash A/c

*** ***

vi)- When goods are stolen or lost at the branches Dr. Branch expenses A/c Cr. Branch inventory A/c

*** ***

vii)- When bad debts are written off in relation branch debtors/ accounts receivable Dr. Branch expenses A/c *** Cr. Branch debtors/ receivable A/c

***

viii)- When branch debtors/ accounts receivable are given discounts Dr. Branch Expense A/c *** Cr. Branch Debtors/ Accounts receivable ***

Example One 6

Oil Libya whose head office is in Kampala operates a branch in Gulu town. All goods are purchased by the head office and invoiced to and sold by the branch at cost plus. Other than the sales ledger kept in Gulu, all the transactions are recorded in the books of the head office in Kampala. The following details are given as the transaction at the branch during the year ended 31st December 2020 Inventory in hand January 1, 2020

88,000

Inventory in hand December 31, 2020

129,000

Accounts receivable January 1st 2020

78,920

Goods sent to Gulu

78,960

Credit sales

496,000

Cash sales

420,000

Cash discount allowed to customers

48,000

Normal Loss

8,560

Local purchases from cash sales

650,000

Returns to head office

2,000

Cash from customers

468,000

Value of goods stolen

12,000

Bad debts written off

2,960

Required Prepare the branch ledger accounts including profit or Loss in the head office books for the year ended 31st December 2020 in respect to Gulu branch.

Question one 7

XY limited is a trading company with the head office in Kampala and a branch in Tororo. Goods are invoiced to branch at cost and all the accounting work is done at the head office. The branch is authorized to buy goods locally either for cash or on credit. The following transactions took place in the month of July 2019 Ugx Goods sent from head office Cash sales received by the Head office from branch Goods returned by branch to the head office Branch accounts receivable as at 1st July 2019 Cash collected by head office from branch customers Credit sales to branch customers Discount allowed to branch customers Goods returned by branch customers Branch receivable bad debts written office Local goods purchased by branch from cash sale Cost of goods stolen at branch Head office purchases Head office sales Head office expenses

340,000 40,000 10,400 480,000 421,600 284,000 10,000 14,400 6,000 6,800 28,000 800,000 940,000 92,000

Inventory at 1st July 2019 Branch Head office

28,000 248,000

Inventory at 31 July, 2019 Branch Head office

` 49,600 192,000

You are required To prepare Tororo branch ledger accounts in the head office books, and the head office profit or loss accounts for the month ended July .2019

B)- WHEN GOODS ARE SENT TO THE BRANCH AT THEIR SELLING PRICE

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Selling prices normally have profit components which must be taken into account especially for goods that are in the hands of the branch. Therefore, we must take note of the profit components on the following items;  Opening inventory at the branch  Closing inventory at the branch  Good sent to the branch  Goods returned to the HO by the branch  Goods stolen at the branch  Normal loss of goods at the branch  Abnormal loss of gods at the branch We must note that when goods are sent to the branch at selling prices, the branch inventory account may be prepared using any of the following two methods namely a)

Inventory adjustment method Following this method, the branch inventory account records the details and amount of goods held by the branch at their selling price such that any discrepancy on account is treated as abnormal loss; whereas the Inventory adjustment account records the profit element on goods held by the branch (as mentioned above), such that the balance on account is gross profit.

Accounting entries when goods are sent to the branch at selling price i)

When goods are sent to the sent to the branch Dr. Branch Inventory A/c (With selling price)

***

Cr. Goods sent to branch A/c (with the cost price)

***

Cr. Inventory adjustment A/c (with profit component) ii)

***

When goods have been returned by the branch to the HO Dr. Goods sent to branch A/c (with cost)

***

Dr. Inventory Adjustment A/c (with profit component) *** Cr. Branch Inventory A/c (Selling price) iii)

When goods are lost or stolen at the branch 9

***

Dr. Branch expense A/c (with cost)

***

Dr. Inventory adjustment A/c (with profit component) *** Cr. Branch inventory A/c (selling price)

***

b) Memorandum method Following this method, the branch inventory account records the details and amount of goods held by the branch both at their selling price and cost price. This means that branch Inventory account is prepared with two columns on either side of the account to record the cost price and selling price relating to the inventory; such that any discrepancy in the selling price/ memo column is treated as abnormal loss; whereas the cost column shall reveal the gross profit of the branch. E.g.

Dr. Cr.

Branch Inventory A/c

Details Opening balance (b/d) Goods sent to branch

Gross profit (Balancng fig)

Selling Px/ Memo

**** ****

Cost Details *** Cash sales *** Credit sales Inventory stolen Returns to the HO *** Normal loss Deficiency/ Abnormal loss (if any) Closing balance (c/d) xxxx

Selling Px/ Memo *** *** *** *** *** *** ***

Note: Normal loss and abnormal loss (if any) are treated as branch expenses at Cost

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Cost *** *** *** *** *** *** *** xxxx

Illustration Oil Libya whose head office is in Kampala operates a branch in Gulu town. All goods are purchased by the head office and invoiced to and sold by the branch at cost plus 33 1/3%. Other than the sales ledger kept in Gulu, all the transactions are recorded in the books of the head office in Kampala. The following details are given as the transaction at the branch during the year ended 31st December 2020 Inventory in hand January 1st 2020 at in invoice price

880,000

Inventory in hand December 31, 2017

129,000

Accounts receivable January 1st 2020

178,000

Goods sent to Gulu at invoice price

378,900

Credit sales

496,000

Cash sales

420,000

Cash discount allowed to customers

48,000

Normal Loss at invoice price

8,500

Returns to head office at invoice price

2,000

Cheques from customers

448,000

Invoice value of goods stolen

12,000

Bad debts written off

2,960

Required Prepare the branch ledger accounts including profit and Loss in the head office books for the year ended 31st December 2020 in respect to Gulu branch. Using; a) Adjustment method b) Memorandum method

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AUTONOMOUS BRANCHES As discussed earlier – on page 2, it is also important to note the following; that;1- The head office is treated as the creditor and the branch is treated as a debtor 2- The HO maintains the branch current account while the branch maintains the HO current account

Accounting entries involved a) In the Head Office books i- When goods are sent to the branchDr. Branch Current Account Cr. Goods sent to branch. Account

*** ***

ii- When goods are returned to the HO Dr. Goods sent to branch Account Cr. Branch Current Account iii-

*** ***

When cash is received from the branch Dr. Head Office Cash Account Cr. Branch Current Account

*** ***

b) In the books of the branch i-

When goods are received Dr. Branch Inventory/ purchases Account Cr. Head Office current Account

ii-

When the goods are returned to the HO Dr. Head Office Current Account Cr. Branch Inventory/ purchases Account

iii-

*** ***

*** ***

When cash is remitted/ sent to the HO Dr. Head Office Current Account Cr. Branch Cash Account

*** ***

NOTE At the end of a given period, the balances in the 2 current accounts (i.e. Branch Current account and HO current current) must balance (be equal). However, this may not be the case because of the following items. a- Goods in transit, 12

b- Cash in transit c- Returns in transit

For the items in transit a)

b)

c)

Dr. Cash in Transit A/c *** Cr. Branch current Account

***

Dr. Goods in Transit A/c *** Cr. Branch Current Account

***

Dr. Returns in transit *** Cr. Branch Current Account

***

For any profit realized at the branch Dr. Branch. Current Account

***

Cr. Head Office. Current Account

***

SAMPLE QUESTION 13

a). Briefly describe the accounting treatment of items in transit for the purpose of accounting for autonomous branches (b). Uganda Clays Ltd whose head office in Kampala operates a branch in Masaka. The trial balance prepared as at 30th June, 2020 revealed the following;

Details

Head Office Dr. (000) Cr. (000) 290,000 40,000 55,000 47,500 35,000

Share Capital Share Premium Accumulated Profits brought forward Receivables and Payables Head Office Current A/c Balance Furniture and Fittings, Cost Delivery Vans at Cost Stock at Cost / mark - up 1st July 2019 Bank Balance Purchases/ Sales Goods sent to Branch Branch Current A/c Balance Selling & Distribution expenses Provision for unrealized profits on stock Administration & General expenses Totals

39,900 291,400 48,500 15,900 255,000

Branch Dr. (000) Cr. (000)

64,700

7,200 51,500

13,600

229,700 154,000

15,400 3,100 148,500

60,000 15,900

199,700

2,600 1,400

31,000 805,100

805,100

10,500 258,400

258,400

Additional information 

All goods are sent to the branch at cost plus 10%. Goods at invoice price of 5,500,000 were in transit to the branch as at 30th June 2020



There was cash in transit of Ugx 3,000,000 from the ...