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CHAPTER, , 13, , ACCOUNTING FOR BRANCHES, INCLUDING FOREIGN, BRANCHES, LEARNING OUTCOMES, After studying this unit, 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., , , , Differentiate, branches., , , , Learn the techniques of foreign currency translation in case of, foreign branches., , between, , integral, , © The Institute of Chartered Accountants of India, , and, , non-integral, , foreign

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13.2, , ACCOUNTING, , Classification of Branches, , Inland Branches, , Independent Branches which, maintain independent, accounting records, , Foreign Branches, , Dependent Branches for which, whole accounting records are, kept at Head Office, , Methods of maintaining accounts of Dependent, Branches, Goods invoiced at, cost or selling price, , Debtors, Method, , Stock and, Debtors, Method, , Goods invoiced at, wholesale price, Trading and profit, and loss account, method (final, Accounts method, , © The Institute of Chartered Accountants of India, , Whole sale, branches, method

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.3, , 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:, •, , Inland Branches which can be further classified as:, , •, , Independent Branches which maintain independent accounting records, , •, , Dependent Branches for which whole accounting records are kept at Head, Office, , •, , Foreign Branches, , 2. DISTINCTION, ACCOUNTS, ACCOUNTS, , BETWEEN, BRANCH, AND, DEPARTMENTAL, , Basis of distinction, , Branch Accounts, , 1., , Maintenance, of accounts, , Branch accounts may be Departmental accounts are, maintained either at maintained at one place only., branch or at head office., , 2., , Allocation, common, expenses, , 3., , Reconciliation, , of No allocation problem, arises, since, the, expenses in respect of, each branch can be, identified., , Departmental Accounts, , Common, expenses, are, distributed, among, the, departments concerned on, some, equitable, basis, considered suitable in the, case., , Reconciliation of head No such problem arises., office, and, branch, accounts is necessary in, case, of, Branches, maintaining, independent accounting, records at the end of, the accounting year., , © The Institute of Chartered Accountants of India

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13.4, , 4., , ACCOUNTING, , Conversion of At, the, time, of No such problem arises in, foreign, finalization of accounts, departmental accounts., currency, conversion of figures of, figures, foreign, branch, is, necessary., , 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 Dependent 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 center for the sale of goods 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 authorized, 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., , © The Institute of Chartered Accountants of India

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 4. METHODS OF, BRANCHES, , CHARGING, , 13.5, , GOODS, , TO, , Goods may be invoiced to branches (1) at cost; or (2) at selling price; or (3) in case, of retail branches, at wholesale price; or (4) arbitrage 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, 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:, Methods of maintaining accounts of Dependent Branches, •, , If Goods are invoiced at cost or selling price: Debtors Method; Stock and, Debtors Method; Trading and profit and loss account method (Final, Accounts method), , •, , If Goods are invoiced at wholesale price: Whole Sale branch 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., , © The Institute of Chartered Accountants of India

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13.6, , ACCOUNTING, , 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, Cash, Stock, Debtors, , Petty Cash, Fixed Assets, Prepaid Expenses, To Goods sent to Branch, , By Bank A/c (Cash remitted), By Return to H.O., By, , To Bank A/c, , Sundry Expenses, , To Profit & Loss A/c—Profit, , Cash, Stock, Debtors, Petty Cash, , Fixed Assets, , Salaries, Rent, , Balance c/d, , Prepaid Expenses, , By, , (if credit side is larger), , © The Institute of Chartered Accountants of India, , Profit and Loss A/c—Loss, , (if debit side is larger)

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13.7, , ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, 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, 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 (1-1-20X1), Imprest Cash, , `, Bad Debts, , 1,000, , 2,000, , Sundry Debtors, , 25,000 Discount to Customers, , Stock: Transferred from H.O., , 24,000 Remittances to H.O., , Direct Purchases, , 16,000 (recd. by H.O.), , Cash Sales, , 45,000 remittances to H.O., , Credit Sales, Direct Purchases, Returns from Customers, Goods sent to branch from, H.O., Transfer from H.O. for Petty, , 1,65,000, , 1,30,000 (not recd. by H.O. so far), 45,000 Branch Exp. directly paid, by H.O., 3,000 Closing, 20X1), , Balance, , © The Institute of Chartered Accountants of India, , 5,000, 30,000, , (31-12-, , 60,000 Stock: Direct Purchase, 4,000 Transfer from H.O., , 2,000, , 10,000, 15,000

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13.8, , ACCOUNTING, , Cash expenses, , Debtors, , ?, , Imprest Cash, , ?, , Petty Cash expenses, , 4,000, , Solution, In the Books of Buckingham Bros, Bombay, Nagpur Branch Account, , `, To, , Opening, Assets, , Branch, , `, By, , Bank –, Remittances, received from, branch, , Stock, (24,000+16,000), , 40,000, , Cash Sales, , Debtors, , 25,000, , Cash, Debtors, , Imprest Cash, , 2,000, , To, , Goods, sent, Branch A/c, , To, , Creditors, Purchases), , To, , Bank (Sundry exp.), , To, , Bank, exp.), , cash, , 4,000 By, , To, , Net Profit transferred, to General Profit &, Loss A/c, , By, , (Petty, , to, , (Direct, , 60,000 By, , 45,000, from, , 1,20,000, , Cash, from, Debtors in transit, , 5,000, , 1,70,000, , 45,000, , Stock:, Transfer, H.O., , 30,000, , Direct Purchase, , 10,000, , Sundry Debtors, (W.N. 2), , 24,000, , Imprest, (W.N. 3), , from, , Cash, , 15,000, , 2,000, , 15,000, 2,21,000, , © The Institute of Chartered Accountants of India, , 2,21,000

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.9, , Working Notes:, (1) Collections from debtors:, `, Total remittances (` 1,65,000 + ` 5,000), Less: Cash sales, , 1,70,000, , (45,000), , 1,25,000, , (2) Calculation of Sundry Debtors closing Balance:, , `, Opening Balance, , 25,000, , Add: Credit Sales, , 1,30,000, , Less: Returns, Discount, Bad debts & collections (3,000 + 2,000 +, 1,000 + 1,25,000), Closing balance, , 1,55,000, (1,31,000), 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, , 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 the Stock and Debtors Method., According to this method, the following accounts are maintained by the Head, Office:, Account, , Purpose, , 3. Branch Debtors Account, , Ascertainment of closing balance of, debtors, , 1. Branch Stock Account (or Branch Ascertainment of shortage or surplus, Trading Account), 2. Branch Profit and Loss Account, Calculation of net profit or loss, , © The Institute of Chartered Accountants of India

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13.10, , ACCOUNTING, , 4. Branch Expenses Account, 5. Goods sent to Branch Account, , Ascertainment of total expenses, incurred, 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:, (a), (b), (c), , (d), (e), (f), (g), , (h), (i), (j), , (k), (l), , Transaction, , Account debited, , Cost of goods sent to Branch Stock A/c, the Branch, Remittances, expenses, , for Branch Cash A/c, , Any, assets, (e.g. Br Asset (Furniture) A/c, furniture) provided by, , Account credited, , Goods sent to Branch, A/c, (H.O.) Cash A/c, , (i) (H.O.) Cash A/c or, (ii) Creditors A/c, , H.O., (iii) (H.O.) Furniture A/c, Cost of goods returned Goods sent to Branch Branch Stock A/c, by the branch, A/c, Cash Sales, Branch, Credit Sales, Branch, Return of, debtors, , at, , the Branch Cash A/c, , Branch Stock A/c, , at, , the Branch Debtors A/c, , Branch Stock A/c, , goods, , to the Branch, , Cash paid by debtors, , by, , Branch Stock A/c, , Branch Debtors A/c, , Branch Cash A/c, , Branch Debtors A/c, , Discount & allowance Branch Expenses A/c, to debtors, bad debts, Remittances to H.O., (H.O.) Cash A/c, Expenses met by H.O., , Branch Expenses A/c, , Branch Debtors A/c, Branch Cash A/c, (H.O.) Cash A/c, , 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, , © The Institute of Chartered Accountants of India

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.11, , 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 2, From the information given in the illustration 1, prepare Nagpur Branch Trading, and Profit and Loss Account in the books of head office., , Solution, , Buckingham Bros. Bombay, Nagpur Branch-Trading and Profit and Loss Account, for the year ending 31st December, 20X1, , `, To, To, To, To, , Opening Stock, Goods, transferred, from Head Office, Purchases, Gross Profit c/d, , `, , 40,000 By, 60,000, 45,000, 52,000, , By, , © The Institute of Chartered Accountants of India, , Sales, Cash, Credit sales, Less: Returns, Closing Stock, , 45,000, 1,30,000, 1,75,000, (3,000), , `, , 1,72,000, 25,000

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13.12, , To, To, To, To, To, , Expenses, Discounts, Bad Debts, Petty Cash Expenses, Net Profit transferred, to General P&L A/c, , ACCOUNTING, , 1,97,000, 30,000 By, 2,000, 1,000, 4,000, 15,000, , Gross Profit, b/d, , 1,97,000, 52,000, , 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 3, 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, 20X1., , `, Balances as on 1.1.20X1:, Stock, Debtors, Petty Cash,, , `, , 7,000 Bad Debts, , 600, , 12,600 Goods returned by customers, 200 Salaries & Wages, , 500, 6,200, , Goods sent from H.O., , 26,000 Rent & Rates, , 1,200, , Goods returned to H.O., Cash Sales, , 1,000 Sundry Expenses, 17,500 Cash received from Sundry, , 800, , Credit Sales, Allowances to customers, , 28,400 Debtors, 200 Balances as on 31.12.20X1:, , 28,500, , Discount to customers, , 1,400, , Stock, , 6,500, , Debtors, , 9,800, , Petty Cash, , © The Institute of Chartered Accountants of India, , 100

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.13, , 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) Branch Trading and Profit & Loss Account to, prove the results as disclosed by the Branch Account., , Solution, (a) Debtors Method, Delhi Branch Account, 20X1, Jan. 1, , `, To, , Balance b/d, Stock, Debtors, Petty cash, , Dec., 31, , 20X1, , `, , Dec., 31, , Cash Sales, , 12,600, , Cash from, 19,800, , Sundry, Debtors, , Goods sent, to, Branch, A/c, , To, , Bank:, , Returns, , Salaries &, , to H.O., 6,200, &, , Sundry Exp., To, , 26,000, , By, , 1,200, 800, , 8,200, , Balance, being, Profit, carried, to, (H.O.) P & L, A/c, Balance b/d, , 17,500, 28,500, , 46,000, , Goods sent, to Branch, A/c –, 1,000, , Balance c/d, Stock, , 6,500, , Debtors, , 9,800, , Petty Cash, , 100, , 16,400, , 9,400, 63,400, , To, , By, , `, , Bank, , To, , Rent, Rates, , 20X2, , By, , 7,000, 200, , Wages, , Jan. 1,, , `, , 16,400, , © The Institute of Chartered Accountants of India, , 63,400

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13.14, , ACCOUNTING, , (b) Stock and Debtors Method, Branch Stock Account, 20X1, , `, , Jan. 1, , To, , Stock, , Dec., 31, , To, , Goods Sent, , To, , 7,000, , to, Branch, A/c, Branch P&L, A/c, , 20X1, , `, , Dec. 31, , By, , 26,000, , Sales:, Cash, , 17,500, , Credit, 19,900, , 28,400, , Less: Return, By, , Goods sent, to Branch, A/c, Return, , By, , Balance c/d, (Stock), , (500), , 27,900, , 52,900, 20X2, Jan. 1, , To, , Balance b/d, , `, , 45,400, 1,000, , 6,500, 52,900, , 6,500, , Delhi Branch Debtors Account, 20X1, , ` 20X1, , `, , Jan. 1, , To, , Balance b/d, , 12,600 Dec. 31, , By, , Cash, , Dec. 31, , To, , Sales, , 28,400, , By, , Returns, , 500, , By, , Allowances, , 200, , By, , Discounts, , 1,400, , By, , Bad debts, , 600, , By, , Balance c/d, , 41,000, 20X2 Jan. 1, , To, , Balance b/d, , 28,500, , 9,800, 41,000, , 9,800, , Delhi Branch Expenses Account, 20X1, Dec. 31, , ` 20X1, To, , Salaries & Wages, , 6,200, , © The Institute of Chartered Accountants of India, , Dec. 31, , `, By Branch P & L, , 10,500

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13.15, , ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , To, , Rent & Rates, , 1,200, , To, , Sundry Expenses, , 800, , To, , Petty, expenses, 100), , Cash, (200-, , 100, , To, , Allowances, customers, , to, , 200, , To, , Discounts, , 1,400, , To, , Bad Debts, , 600, , A/c, , 10,500, , 10,500, , Delhi Branch Profit & Loss Account, 20X1, Dec. 31, , To Branch Exp. A/c, To Net Profit to, General P & L, A/c, , (c), , 10,500 Dec. 31, , `, By Gross, b/d, , Profit, , 19,900, , 9,400, 19,900, , 19,900, , Branch Trading and Profit and Loss Account, `, , To, , Stock, , To, , Goods sent, Less:, H.O., , `, 7,000, , Returns, , `, By, , 26,000, to, , Gross profit c/d, , (1,000), , Credit, 25,000, 19,900, , 17,500, 28,400, , Less:, Returns, By, , Closing Stock, , 51,900, To, , Salaries & Wages, , 6,200, , To, , Rent & Rates, , 1,200, , To, , Sundry Exp., , 800, , To, , Petty Cash Exp., , 100, , To, , Allowances, Customers, , to, , `, , Sales:, Cash, , from H.O., , To, , 20X1, , `, , (500), , 27,900, , 45,400, 6,500, 51,900, , By, , 200, , © The Institute of Chartered Accountants of India, , Gross Profit b/d, , 19,900

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13.16, , ACCOUNTING, , 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:, , (i), , 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:, , (i), , Journal Entries:, , (a), , ` Transaction, , Sale price of the, goods sent from, H.O. to the Branch, , Accounts debited, , Branch Stock A/c, (at selling price), , © The Institute of Chartered Accountants of India, , Accounts credited, , (i) Goods sent to, Branches A/c with, cost of the goods, sent.

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , (b), , (c), (d), (e), , (f), , Return of goods, (i), By the Branch to, H.O., (ii), Cash sales at the, Branch, Credit Sales at the, Branch, Goods returned to, Branch, by, customers, Goods lost in, (i), Transit or stolen, (ii), , 13.17, , (ii) Branch, Adjustment, A/c, (with the loading, i.e.,, Difference, between, the selling and cost, price)., Goods sent to Branch Branch Stock A/c, A/c (with the cost of, goods returned)., Branch Adjustment A/c, (with the loading), Cash/Bank A/c, , Branch Stock A/c, , Branch Debtors A/c, , Branch Stock A/c, , Branch Stock A/c, , Branch Debtors A/c, (at selling price), , Goods Lost in Transit Branch Stock A/c, A/c, or Goods Stolen A/c, (with cost of the goods), 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., , © The Institute of Chartered Accountants of India

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13.18, , ACCOUNTING, , 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.`, Goods Lost A/c, , Dr., , 80, , Branch Adjustment A/c, To Branch Stock A/c, , Dr., , 20, , Cr. `, , 100, , If on the other hand, a part of the sale proceeds has been misappropriated, then the, adjusting entry would be:, Dr., Loss by theft A/c, , Dr., , XX, , Branch Adjustment A/c, , Dr., , XX, , To Branch Stock A/c, , Cr., , 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, © The Institute of Chartered Accountants of India

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.19, , 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 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 unrealized 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 unrealized 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., © The Institute of Chartered Accountants of India

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13.20, , ACCOUNTING, , Illustration 4, 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, 20X1:, , `, Cost of goods sent to Branch at cost, Goods received by Branch till 31-12-20X1 at invoice price, , 2,00,000, 2,20,000, , Credit Sales for the year @ invoice price, Cash Sales for the year @ invoice price, , 1,65,000, 59,000, , Cash Remitted to head office, , 2,22,500, , Expenses paid by H.O., Bad Debts written off, , 12,000, 750, , Balances as on, Stock, Debtors, , 1-1-20X1, , 31-12-20X1, , `, , `, , 25,000 (Cost), 32,750, , 28,000 (invoice price), 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, 20X1., , Solution, Books of Harrison, Branch Stock Account, , `, To Balance b/d, , To Goods Sent to Branch A/c, To Branch Adjustment A/c, (Excess of sale, over invoice price), , `, , 30,000 By Branch Debtors, , 2,40,000 By Branch Bank, 2,000 By Balance c/d, , Goods in Transit, (` 2,40,000 –` 2,20,000), , 2,72,000, , © The Institute of Chartered Accountants of India, , Stock at Branch, , 1,65,000, , 59,000, , 20,000, 28,000, , 2,72,000

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.21, , Branch Debtors Account, `, To Balance b/d, , `, , 32,750, , To Branch Stock, , By Bad debts written off, , 1,65,000, , By Branch, Cashcollection (bal. fig.), By Balance c/d, , 1,97,750, , 750, , 1,71,000, , 26,000, , 1,97,750, , Branch Cash Account, `, To Balance b/d, To Branch Stock, , To Bank (as per contra), To Branch Debtors, , 5,000, 59,000, , 12,000, 1,71,000, , 2,47,000, , `, By Bank Remit to H.O., By Branch profit & loss A/c, (exp. paid by H.O.), By Branch profit & loss A/c, , [Bal. fig. (exp. paid by, Branch)], By Balance c/d, , 2,22,500, 12,000, 10,000, , 2,500, , 2,47,000, , Branch Adjustment Account, `, To Stock Reserve (on closing, stock (48,000 × 1/6), To Gross Profit c/d, , 8,000, 39,000, 47,000, , `, By Stock Reserve opening, (25000 × 20%), By Goods sent to Branch A/c, By Branch Stock A/c, , 5,000, 40,000, , 2,000, , 47,000, , Branch Profit and Loss Account, `, To Branch Expenses (paid by, HO: ` 12,000 and paid by, Branch ` 10,000), To Branch Debtors-Bad debts, To Net Profit, , 22,000 By Gross Profit b/d, , `, 39,000, , 750, , 16,250, 39,000, , © The Institute of Chartered Accountants of India, , 39,000

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13.22, , ACCOUNTING, , Goods Sent to Branch Account, `, To Branch Adjustment A/c, , `, , 40,000 By Branch to Stock A/c, , To Purchase A/c - Transfer, , 2,00,000, 2,40,000, , 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:, (a), (b), , (c), (d), (e), , (f), (g), , Transaction, , Account debited, , ‘Loading being the, difference, between, selling price and cost, of goods, Returns to H.O. at, selling price, , Goods Sent to Branch Branch A/c, A/c, , Goods sent to Branch Branch A/c, at selling price, , Account credited, , Goods Sent to Branch, A/c, , Goods Sent to Branch Branch A/c, A/c, , ‘Loading’ in respect of Branch A/c, goods returned to H.O., ‘Loading’ included in Stock Reserve A/c, the opening stock to, reduce it, , Goods Sent to Branch, A/c, Branch A/c, , ‘Loading’ included in Branch A/c, closing stock to reduce, it to cost, , Stock Reserve A/c, , Closing stock at selling Branch Stock A/c, price, , Branch A/c, , 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., © The Institute of Chartered Accountants of India

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.23, , 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 5, Take figures from Illustration 4 and prepare branch account following debtors’ method., , Solution, Books of Harrison, New Delhi Branch Account, `, To Balance b/d, Stock, Debtors, Cash, , To Goods Sent to Branch A/c, (2,00,000 + 20% of, 2,00,000), To Bank (Exp. paid by, H.O.), To Net Profit Transferred, to H.O. Profit and Loss, A/c, To Balance, reserve, stock), , c/d (Stock, on closing, , `, , By Balance b/d, 30,000, Stock Reserve, , 32,750 By Goods Sent to Branch A/c, 5,000 By Bank-Remittance, , 2,40,000, , 5,000, , 40,000, , received from the Branch:, , 12,000, , Cash sales, , 16,250, , Debtors Collection1,63,500 2,22,500, (W.N.1), (Net of expense), , 8,000, , By Balance c/d, , 3,44,000, , © The Institute of Chartered Accountants of India, , 59,000, , Stock (including Transit), (W.N.2), Debtors, Cash, , 48,000, 26,000, , 2,500, , 3,44,000

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13.24, , ACCOUNTING, , Working Note:, 1. Collection from debtors = Total collection – Cash sales, = 2,22,500 – 59,000 = 1,63,500, 2. Closing stock = Stock at branch + Goods sent by H.O. – Goods received by Branch, = 28,000 +2,40,000 – 2,20,000 = 48,000, , 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., , Illustration 6, Following is the information of the Jammu branch of Best New Delhi for the year, ending, 31st March, 20X2 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 01.04.20X1(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., , © The Institute of Chartered Accountants of India

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.25, , Solution, (i), , Calculation of profit earned by the branch, In the books of Jammu Branch, Trading Account and Profit and Loss Account, , Particulars, , Amount Particulars, , `, To Opening stock, To Goods received by Head, office, To Expenses, To Net profit, (ii), , Amount, , `, , 2,20,000 By Sales, 11,00,000 By Closing stock (Refer, W.N.), 45,000, 1,95,000, , 12,00,000, 3,60,000, , ________, , 15,60,000, , 15,60,000, , Stock reserve in respect of unrealised profit, = ` 3,60,000 x (20/120) = ` 60,000, , Working Note:, `, Cost Price, , 100, , Sale Price, Calculation of closing stock at invoice, price, , 150, `, , Invoice Price, , Opening stock at invoice price, , 120, , 2,20,000, , Goods received during the year at invoice, price, , 11,00,000, , Less : Cost of goods sold at invoice price, , (9,60,000) [12,00,000 x (120/150)], , Closing stock, , 13,20,000, , 3,60,000, , Illustration 7, Sell Well who carried on a retail business opened a branch X on January 1st, 20X1, 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 Institute of Chartered Accountants of India

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13.26, , ACCOUNTING, , The following were the transactions:, Jan. 20X1, , Feb. 20X1, , March 20X1, , `, , `, , `, , Goods sent to Branch (Purchase Price), , 40,000, , 50,000, , 60,000, , Sales as shown by the branch monthly, report, Cash received from Debtors and remitted to, H.O., Returns to H.O. (Invoice price to, Branch), , 38,000, , 42,000, , 55,000, , 20,000, , 51,000, , 35,000, , 1,200, , 600, , 2,400, , The stock of goods held by the branch on March 31, 20X1 amounted to ` 53,400 at, invoice to branch., Record these transactions in the Head Office books, showing balances as on 31st, March, 20X1 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, Branch A/c, [, , 110, ×1,50,000, 100, , To Stock, (W.N.2), , to, , ], Reserve, , To Profit, (bal.), transferred, to, General Profit &, Loss A/c, , `, By Cash-collected, from debtors, , 1,06,000, , By Goods sent to, Branch-returns, , 4,200, , 4,855 By Goods sent to, Branch (W.N. 1), , 14,618, , 1,65,000, , 37,363 By Balance c/d, , 2,07,218, , © The Institute of Chartered Accountants of India, , Stock, , 53,400, , Debtors, , 29,000, , 82,400, 2,07,218

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.27, , Memorandum Branch Debtors Account, , `, To Balance b/d, To Sales, , — By Cash/Bank, 1,35,000 By Balance c/d, 1,35,000, , `, 1,06,000, 29,000, 1,35,000, , Goods Sent to Branch Account, , `, To Branch A/c (Returns), To Branch A/c (Loading), (W.N.1), To Purchases A/c, , 4,200 By Branch A/c, 14,618, 1,46,182, 1,65,000, , `, 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 8, 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 20X1, 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., 20X1, , 60,000, , Sales in the year -, , Cash, , 2,00,000, , Credit, , 3,60,000, , Sundry Debtors at Cochin as on 1st Jan. 20X1, Cash received from Debtors, , © The Institute of Chartered Accountants of India, , 72,000, 3,20,000

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13.28, , ACCOUNTING, , Discount allowed to Debtors, , 6,000, , Bad debts in the year, , 4,000, , Sales returns at Cochin Branch, , 8,000, , Rent, Rates, Taxes at Branch, Salaries, Wages, Bonus at Branch, , 18,000, 60,000, , Office Expenses, Stock at Branch on 31st Dec. 20X1 at invoice price, , 6,000, 1,20,000, , Prepare Branch accounts in books of head office by Stock and debtors method., , Solution, Books of Hindustan Industries, Mumbai, Cochin Branch Stock Account, , `, To Balance b/d, To Goods sent to Branch, A/c, To Branch Debtors A/c, (sales return), To Branch P &, (surplus), , L, , A/c, , `, , 60,000 By Bank A/c (Cash sales), 6,00,000 By Branch Debtors (Cr. sales), By Goods sent to Branch, , 8,000, (Returns to H.O.), 24,000 By Balance c/d (closing, stock), , 6,92,000, , 2,00,000, 3,60,000, , 12,000, 1,20,000, 6,92,000, , Cochin Branch Stock Adjustment Account, , `, To Goods sent to Branch A/c, (1/5 of ` 12,000) (on, returns), To Branch P & L A/c (Profit, on sale at invoice price), To Balance c/d (1/5 of `, 1,20,000), , 2,400 By Balance b/d, (1/5 of ` 60,000), 1,05,600 By Goods sent to Branch, A/c, (1/5, of, `, 6,00,000), , `, 12,000, , 1,20,000, , 24,000, 1,32,000, , © The Institute of Chartered Accountants of India, , 1,32,000

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13.29, , ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, Goods Sent to Branch Account, , `, To Cochin, Branch, Adjustment A/c, , `, , Stock, , 1,20,000 By Cochin Branch Stock, A/c, , 6,00,000, , To Cochin Branch Stock A/c, (Returns), , 12,000 By Cochin Branch Stock, Adj. A/c, , 2,400, , To Purchases A/c, , 4,70,400, 6,02,400, , 6,02,400, , Branch Debtors Account, , `, To Balance b/d, , `, , 72,000 By Bank, , To Branch Stock A/c, , 3,20,000, , 3,60,000 By Branch P & L A/c, Discount, Bad Debts, , 6,000, 4,000, , 10,000, , By Branch Stock, (Sales Returns.), 4,32,000, , 8,000, , By Balance c/d, , 94,000, , 4,32,000, , Branch Expenses Account, , `, To Bank A/c (Rent, Rates &, Taxes), To Bank A/c (Salaries &, Wages), To Bank A/c (office exp.), , 18,000, 60,000, , `, By Branch Profit & Loss, A/c (Transfer), , 6,000, , 84,000, , 84,000, , 84,000, , Branch Profit & Loss Account for the year ending 31st Dec. 20X1, , `, To Branch Expenses A/c, (60,000+6,000+18,000), , `, , 84,000 By Branch, A/c, , Stock, , Adj., , 1,05,600, , By Branch, , stock, , A/c, , 24,000, , Discount, , © The Institute of Chartered Accountants of India

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13.30, , Bad debts, , ACCOUNTING, , 6,000, 4,000, , To Net Profit transferred to, Profit & Loss A/c, , 10,000, , (Sale over invoice, price), , 35,600, , 1,29,600, , 1,29,600, , Illustration 9, 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:, , Purchases, , Delhi, , Lucknow, , `, , `, , Ghee, , 14,75,000, , -, , Oil, , 29,32,000, , -, , 3,83,275, -, , 14,250, , 18,46,350, 27,41,250, , 3,42,750, 3,15,730, , -, , 6,47,330, , -, , 6,13,250, , Direct expenses, Expenses paid by H.O., Sales, , Ghee, Oil, , Collection during the year (including Cash, Sales), Remittance by Branch to Head Office, , (Delhi), Balance as on:, Stock :, , Ghee, Oil, , Debtors, Cash on Hand, Furniture & Fittings, Plant/Machinery, , © The Institute of Chartered Accountants of India, , 1-1-20X1, , 31-12-20X1, , 1,50,000, 3,50,000, , 3,12,500, 4,17,250, , 7,32,750, 70,520, , 55,250, , 21,500, , 19,350, , 3,07,250, , 7,73,500

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13.31, , ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , (Lucknow), Balance as on:, , 1-1-20X1, , 31-12-20X1, , Ghee, , 17,000, , 13,250, , Oil, , 27,000, , 44,750, , 75,750, , ?, , Cash on Hand, , 7,540, , 12,350, , Furniture & Fittings, Plant/Machinery, , 6,250, -, , 5,625, , Stock :, Debtors, , Addition to Plant/Machinery on 1-1-20X1 ` 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, Opening stock:, , To, , By Bank (Remittance to, H.O.), , Ghee, , 17,000, , Debtors, Cash on hand, , 75,750, 7,540, , Oil, , Furniture & fittings, Goods sent to Branch, A/c, Ghee (15 x 1500 x 12), , `, , 27,000, , 6,250, , 2,70,000, , © The Institute of Chartered Accountants of India, , 6,13,250, , By Balance c/d, , Closing stock:, Ghee, , 13,250, , Cash on hand (W.N. 2), Furniture & fittings, , 12,350, 5,625, , Oil, Debtors (W.N. 1), , 44,750, 86,900

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13.32, , To, To, , To, , Oil (25 x 1000 x 12), , Bank (Expenses paid by, H.O.), Branch, Manager, commission, (` 58,335 × 1/11), Net Profit transferred, to General P & L A/c, , ACCOUNTING, , 3,00,000, , 14,250, , 5,303, 53,032, , 7,76,125, , 7,76,125, , Arnold, Trading and Profit and Loss account for the year ended 31st December, 20X1, (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:, Ghee, , By Closing Stock:, 14,75,000, , Less: Goods sent, to Branch, (2,70,000), Oil, , 12,05,000, , Ghee, , 3,12,500, , Oil, , 4,17,250, , 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, , To Manager’s Salary, , 24,000 By Gross Profit, , To General Expenses, , 24,000 By Branch, transferred, , To Depreciation, Furniture @ 10% 2,150, , © The Institute of Chartered Accountants of India, , 53,17,350, 5,97,075, Profit, , 53,032

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , Plant & Machinery, , @ 15% (W.N.3) 1,36,500, , To General, Manager’s, Commission @ 10%, (i.e., 4,63,457 × 1/11), , To Net profit, , 13.33, , 1,38,650, , 42,132, 4,21,325, 6,50,107, , 6,50,107, , Working Notes:, (1) Debtors Account, , `, To Balance b/d, , `, , 75,750 By Cash Collections, , To Sales made during, , By Balance c/d, , 6,47,330, 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, To Collections, , 7,540 By Remittance, , 6,47,330 By Exp. (Balance fig.), By Balance c/d, , 6,54,870, (3) Depreciation on Plant & Machinery, , `, 6,13,250, , 29,270, 12,350, , 6,54,870, , 3,07,250 x 15% + 6,02,750 x 15%, , 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, © The Institute of Chartered Accountants of India

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13.34, , ACCOUNTING, , 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., 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 10, 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, 31.3.20X2:, , `, Stock at the outlet 1.4.20X1, Goods invoiced to the outlet during the year, Gross profit made by the outlet, , © The Institute of Chartered Accountants of India, , 30,000, 3,24,000, 60,000

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.35, , Goods lost by fire, , ?, , Expenses of the outlet for the year, , 20,000, , Stock at the outlet 31.3.20X2, 36,000, You are required to prepare the following accounts in the books of Rahul Limited, for the year ended 31.3.20X2 :, (a), , Outlet Stock Account., , (b), , Outlet Profit & Loss Account., , (c), , Stock Reserve Account., , Solution, Outlet Stock Account, , `, To Balance b/d, To Goods sent to outlet, To Gross Profit c/d, , `, , 30,000 By Sales (Working Note 1), , 3,60,000, , 3,24,000 By Goods lost by fire (b.f.), , 18,000, , 60,000 By Balance c/d, 4,14,000, , 36,000, 4,14,000, , Outlet Profit & Loss Account, , `, , `, , To Expenses, , 20,000 By Gross Profit b/d, , To Goods lost by fire (W.N., 2), , 18,000, , To Profit transferred, , 22,000, 60,000, , 60,000, , 60,000, , Stock Reserve Account, , `, To HO P & L A/c – Transfer, To Balance, required), , c/d, , (Stock, , Res., , `, , 6,000 By Balance b/d, , 6,000, , 7,200 By HO P&L A/c (W.N., 3), , 7,200, , 13,200, , © The Institute of Chartered Accountants of India, , 13,200

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13.36, , ACCOUNTING, , Working Notes :, `, (1), , Wholesale Price, , 100+25, , = 125, , Retail Price, , 125 + 20%, , = 150, , Gross Profit at the outlet, Wholesale Price – Retail Price (150 – 125), Retail sales value = 60,000 ×, (2), , 150, 25, , 25, , = ` 3,60,000, , 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, Opening Stock, , = 30,000 × 25, , = ` 6,000, , Closing Stock, , = 36,000 × 25, , = ` 7,200, , 125, 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., , 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., , © The Institute of Chartered Accountants of India

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.37, , 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., (i), , (ii), , (iii), , (iv), (v), , (vi), , Transactions, , Head office books, , Branch books, , Dispatch, of Branch A/c, Dr. Goods received from Dr., goods to branch, H.O. A/c, To Good sent to, by H.O., Branch A/c, To Head Office A/c, When goods are, Goods, sent, to Dr. Head Office A/c, Dr., Branch A/c, returned by the, To Goods received, Branch to H.O., To Branch A/c, from H.O. A/c, Branch Expenses No Entry, Expenses A/c, Dr., are paid by the, To Bank or Cash A/c, Branch, Branch Expenses, , Branch A/c, , Sales effected by, the Branch, , No Entry, , paid by H.O., To Bank or cash, Outside, No Entry, purchases, made by the, Branch, , (vii) Collection from, Cash or Bank A/c, Debtors of the, To Branch A/c, Branch recd. by, H.O., (viii) Payment by H.O. Branch A/c, for, purchase, To Bank, made by Branch, , © The Institute of Chartered Accountants of India, , Dr. Expenses A/c, , Dr., , To Head Office A/c, Purchases A/c, Dr., To Bank (or) Creditors, A/c, Cash or Debtors A/c, To Sales, , Dr. Head office A/c, To Sundry, A/c, , Debtors, , Dr., Dr., , Dr. Purchases (or) Sundry Dr., Creditors A/c, To Head Office

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13.38, , ACCOUNTING, , (ix), , Purchase of Asset, , (x), , Asset purchased Branch Asset A/c, by the Branch but, To Branch A/c, Asset, A/c, retained at H.O., books, Depreciation on Branch A/c, (x) above, To Branch Asset, , (xi), , by Branch, , No Entry, , Sundry Assets, , To Bank (or) Liability, , Dr., , Dr. Head office, , Dr., , Dr. Depreciation A/c, , Dr., , To Bank (or) Liability, , To Head Office A/c, , (xii) Remittance, of Branch A/c, Dr. Bank A/c, funds by H.O. to, To Bank, To Head Office, Branch, (xiii) Remittance, of Reverse entry of(xii), Reverse entry of, funds by Branch, above, above, to H.O., , Dr., , (xii), , (xiv) Transfer of goods (Recipient) Branch Dr. Supplying Branch H.O. Dr., A/c, A/c, from one Branch, to, another, To, Supplying, To Goods Received, branch, Branch A/c, from H.O. A/c, Recipient Branch, Goods Received from Dr., H.O. A/c, 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., © The Institute of Chartered Accountants of India

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.39, , 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 :, Goods in transit A/c, , Dr., , Cr., , 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:, •, , 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, Goods sent to Branch, © The Institute of Chartered Accountants of India, , Dr., , Branch, Cr., , 1,50,000, , Dr., -, , Cr.

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13.40, , ACCOUNTING, , Goods recd. from H.O. A/c, Branch A/c, , 1,12,000, , Head office A/c, , -, , -, , 1,40,000, , -, , -, , 78,500, , On analysis of Branch A/c in Head office books and Head office A/c in branch, books, you find:, •, , Goods valued `10,000 sent by head office has not been received by brand,, hence not recorded in the branch books., , •, , ` 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, , (i), , (ii), , Goods, transit, (` 10,000), , in, , Cash in Transit:, , (iii) Direct, Collection by, H.O. on behalf, of the Branch, (iv) Direct payment, , Branch Books, , Dr., , Cr., , Dr., , Cr., , `, , `, , `, , `, , -, , -, , Goods, in, Transit A/c, To, , Cash, in, Transit A/c, , 15,000, , To Branch, A/c, , Sundry, , Crs., , 10,000, , Head, office A/c, , 10,000, , (No Entry), 15,000, Head, A/c, , 14,500, , © The Institute of Chartered Accountants of India, , Office, , To Debtors, A/c, , 10,500, 10,500

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13.41, , ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , of ` 14,500 by, Branch on, behalf of H.O, (v), , A/c, To Branch, A/c, , 14,500, Branch, A/c, , Expenditure, Allocated, to, Branch, , (vi) Fixed Deposit, interest of `, 7,500 directly, received by the, Branch, , Branch A/c, , To Sundry, Income, , 7,500, , To, A/c, , Exp., , H.O., , 12,000, , 12,000, , 7,500, , In Branch Books, Head Office Account, `, To Sundry Debtors A/c, , `, , 10,500 By Balance b/d, , To Balance c/d, , 90,000 By Goods in transit, 1,00,500, , By Branch expenses, By Balance b/d, , 78,500, 10,000, 12,000, , 1,00,500, , 90,000, , In the Books of Head Office, Branch A/c, `, To Balance b/d, , To Sundry Income, , To Balance b/d, Important Points to be noted:, (i), , `, , 1,12,000 By Cash in Transit, , 7,500 By Sundry Creditors, , 1,19,500, , 90,000, , By Balance c/d, , 15,000, 14,500, 90,000, , 1,19,500, , the balance of Head Office A/c in Branch books and Branch A/c in Head, Office books have tallied., , © The Institute of Chartered Accountants of India

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13.42, , (ii), , ACCOUNTING, , 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 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, To Cash, , In Delhi Books:, , Advertisement A/c, To H.O. A/c, In H.O. Books:, Delhi Branch A/c, , To Kolkata Branch A/c, , Dr., , 1,000, , Dr., , 1,000, , Dr., , 1,000, , 1,000, , 1,000, , 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, To Head Office Account, , © The Institute of Chartered Accountants of India, , Dr.

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.43, , (3) Head office Expenses charged to Branch, Usually the head office devotes 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., 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, To Asset (individual) Account, , © The Institute of Chartered Accountants of India, , Dr.

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13.44, , (b), , ACCOUNTING, , (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 (In Detail), To H.O. Account (The difference between assets and liabilities), , Illustration 11, 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., Trial Balance of the Delhi Branch as on 31-12-20X1, Debit, , ` Credit, , Head office opening balance on, 1-1-20X1, Goods from H.O., , 15,000 Sales, , Purchases, , 20,000 Head Office Current A/c, , 50,000 Goods to H.O., , Opening Stock, (H.O. supplies goods at invoice, prices), , Sundry Creditors, 4,000, , © The Institute of Chartered Accountants of India, , `, 1,00,000, 3,000, 15,000, 3,000

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , Opening Stock of other goods, , 500, , Salaries, , 7,000, , Rent, , 3,000, , Office expenditure, Cash on Hand, , 2,000, 500, , Cash at Bank, , 4,000, , Sundry Debtors, , 13.45, , 15,000, 1,21,00, 0, , 1,21,000, , The Branch balances as on 1st January, 20X1, were as under: Furniture ` 5,000;, Sundry Debtors ` 9,500; Cash ` 1,000, Creditors ` 30,000. 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., 20X1, `, To Opening Stock:, , By, , Head, office 3,200, Goods, (4,000 x 80%), Others, , 500, , By, By, 3,700, , To Goods, to, Branch, (50,000 x 80%), , 40,000, , To Gross Profit c/d, , 42,700, , To Purchases, , To Salaries, To Rent, , `, Sales, , 1,00,000, , Goods, from, Branch, Closing Stock :, Head, Office, goods, (3,000 x 80%), Others, , 3,000, , 2,400, , 1,000, , 3,400, , 20,000, 1,06,400, , 7,000 By, 3,000, , © The Institute of Chartered Accountants of India, , Gross profit b/d, , 1,06,400, , 42,700

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13.46, , To Office, Expenses, To Dep., furniture, 10%, , ACCOUNTING, , 2,000, on, @, , 500, , To Net profit, , 30,200, 42,700, , 42,700, , Branch (Fixed) Assets Account (In Head Office Books), 20X1, Jan. 1, , ` 20X1, To, , Balance b/d, , `, , 5,000 Dec., 31, , By, , Delhi Branch A/c, , By, , Balance c/d, , (Depreciation), , 5,000, , 500, 4,500, 5,000, , 20X2, Jan. 1, , To, , Balance b/d, , 4,500, , Working Notes:, Cash/Bank Account (Branch Books), `, To Balance b/d, , To Cash, Received, Debtors **, , from, , `, , `, , 1,000 By, , Salaries, , 7,000, , By, , Office Exp., , 2,000, , By, By, , Cash Balance, Bank Balance, , 500, 4,000, , 94,500 By, , By, By, , Rent, , Creditors*, 47,000, Head Office (Balancing 32,000, fig.), , 95,500, *Opening Balance + Purchases – Closing balance = Payment, ` 30,000 + ` 20,000 – ` 3,000 = ` 47,000., © The Institute of Chartered Accountants of India, , 3,000, , 95,500

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13.47, , ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, ** Opening Balance + Sales – Closing balance = Received, ` 9,500 + ` 1,00,000 – ` 15,000 = ` 94,500, Trial Balance of Delhi Branch as on 1-1-20X1, , Debtors, Cash, , Stock, , Dr., , Cr., , `, , `, , 9,500, H.O. Goods, Others, , 1,000, , 4,000, 500, , 4,500, , Creditors, , Head Office Account, , 15,000, 30,000, , 30,000, 30,000, , Head Office Account, `, To Balance (transfer), , 15,000 By Goods, Office, 32,000, , To Cash, , To Goods sent, , `, from, , 3,000, , 50,000, , Head 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 12, 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, 20X1., Head Office Trial Balance, , `, , `, , Share Capital (Authorised: 10,000 Equity, Shares of ` 100 each):, Issued: 8,000 Equity Shares, , © The Institute of Chartered Accountants of India, , 8,00,000

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13.48, , ACCOUNTING, , Profit & Loss Account - 1-1-20X1, , 25,310, , General Reserve, , 1,00,000, , Fixed Assets, , 5,30,000, , Stock, , 2,22,470, , Debtors and Creditors, , 50,500, , 21,900, , Profit for 20X1, , 52,200, , Cash Balance, , 62,730, , Branch Current Account, , 1,33,710, 9,99,410, , 9,99,410, , Branch Trial Balance, , `, Fixed Assets, , 95,000, , Profit for 20X1, , 31,700, , Stock, , 50,460, , Debtors and Creditors, , 19,100, , Cash Balance, , `, , 10,400, , 6,550, , Head Office Current Account, , 1,29,010, 1,71,110, , 1,71,110, , 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, 20X1, but received by the, Head Office on 1st January 20X2 - ` 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., , 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, © The Institute of Chartered Accountants of India

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13.49, , ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , to reconcile them, the following journal entries will be passed in the Head Office, books :, Journal Entries, 20X1, , Dec., 31, , Cash in Transit A/c, To Branch Current A/c, , Dr., , Cr., , `, , `, , Dr., , 3,000, , Dr., , 1,700, , (Cash sent by the Branch on 31st Dec., 20X1, but received at H.O. on 1st Jan., 20X2), Loss by theft A/c, , To Branch Current A/c, , (Stock lost in transit from H.O. to Branch), , 3,000, , 1,700, , 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, 20X1, Dec. 31, , `, Branch Current Account, , Dr., , `, , 31,700, , To Profit & Loss Account, , 31,700, , (Branch Profit for the year), Branch Fixed Assets, , Dr., , 95,000, , Branch Stock, , Dr., , 50,460, , Branch Debtors, , Dr., , 19,100, , Branch Cash, , Dr., , 6,550, , To Branch Current Account, (Branch, Books), , assets, , brought, , into, , 1,71,110, H.O., , Branch Current A/c, To Branch Creditors, (Branch creditors brought into H.O., Books), © The Institute of Chartered Accountants of India, , Dr., , 10,400, 10,400

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13.50, , ACCOUNTING, , 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, 1,75,810, , 1,71,110, 1,75,810, , Profit and Loss Account for 20X1, , `, To Loss by Theft, To Balance c/d, , `, , 1,700 By Balance b/d, 1,07,510 By Year’s Profit :, , 25,310, H.O., , 52,200, , Branch, , 31,700, , 1,09,210, , 1,09,210, , Illustration 13, 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., From the information given below, you are required to prepare for the year ended, 31st Dec., 20X1 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., 20X1 for the entire business., , © The Institute of Chartered Accountants of India

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.51, , H.O., , `, Raw materials purchased, Direct wages, Factory overheads, , Branch, , `, , `, , `, , 35,000, 1,08,500, 39,000, , Stock on 1-1-20X1, Raw materials, , 1,800, , Finished goods, Debtors, , 13,000, 37,000, , 9,200, , Cash, , 22,000, , 1,000, , Administrative Salaries, , 13,900, , 4,000, , Salesmen Salaries, , 22,500, , 6,200, , Other administrative &, selling overheads, , 12,500, , 2,300, , Inter-unit accounts, Capital, , 5,000, , 2,000, 50,000, , Sundry Creditors, Provision for unrealized profit in, stock, Sales, , 13,000, 1,200, 2,00,000, , Goods sent to Branch, Goods received from H.O., , 65,200, , 46,000, 44,500, 3,10,200, , 3,10,200, , 67,200, , 67,200, , Notes:, (1), , On 28th Dec., 20X1 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., 20X1 was valued at `, 2,300., , (3), , You are advised that:, •, , there were no stock losses incurred at the H.O. or at the branch., , © The Institute of Chartered Accountants of India

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13.52, , (4), , ACCOUNTING, , •, , 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., , 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., 20X1, , To Material, consumed, (W.N.1), To Wages, To Factory, Overheads, To Opening, stock of, finished, goods, , H.O., , Branch, , Total, , H.O., , Branch, , Total, , `, , `, , `, , `, , `, , `, , 34,500, , -, , 34,500, , 2,00,000, , 65,200, , 2,65,200, , 1,08,500, , -, , 1,08,500, , 46,000, , -, , -, , 39,000, , -, , 39,000, , By Goods, Sent to, Branch, By Closing, stock, including, transit, (W.N.2), , 15,000, , 9,560, , 24,560, , 74,760, , 2,89,760, , 19,560, , 85,560, , 13,000, , To Goods, from H.O., To Gross, Profit c/d, (W.N.3), , 9,200, , 22,200, , 46,000, 66,000, , 19,560, , 85,560, , 2,61,000, , 74,760, , 2,89,760, , To Admn., Salaries, , 13,900, , 4,000, , 17,900, , To Salesmen, Salaries, , 22,500, , 6,200, , 28,700, , 12,500, , 2,300, , 14,800, , To Other, Admn. &, selling, , By Sales, , Overheads, , © The Institute of Chartered Accountants of India, , 2,61,000, By Gross, Profit b/d, , 66,000

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13.53, , ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , To Stock, Reserve, , 47, , -, , 47, , -, , 156, , 156, , 17,053, , 6,904, , 23,957, , 66,000, , 19,560, , 85,560, , (W.N.4), , To Bonus to, Staff, To Net Profit, , 66,000, , 19,560, , 85,560, , Balance Sheet as on 31st Dec., 20X1, `, Capital, Profit :, , H.O., , H.O., , Branch, , Total, , H.O., , Branch, , Total, , `, , `, , `, , `, , `, , `, , 50,000, , -, , -, , -, , -, , 50,000 Fixed Assets, , 17,053, , Branch, , 6,904, , Trade, , Creditors, , Current Assets:, 23,957, , 23,957 Raw material, Finished, , 13,000, , 13,000 Goods, , Bonus, , 156, , Payable, H.O., , Account*, , 156 (Less, Res.), , 10,404, , Stock, , Reserve, (W.N.4), , 15,000, , 9,560 23,313*, , Debtors, , 37,000, , -, , 37,000, , Cash, , 23,500, , 1,000, , 24,500, , 10,560, , 87,113, , transit item), Branch A/c, , 88,204, , 2,300, , Stock, , (including, , 1,247, , 2,300, , 10,560, , 87,113, , 10,404*, 88,204, , *9,560 × 100/115 i.e., (8,313 + 15,000) = ` 23,313, ** (5,000 + 6,904) – 1500 = ` 10,404., , Working Notes:, (1), , Material Consumed, Opening raw material + Raw Material Purchased – Closing raw material, = 1,800 + 35,000 - 2,300 = 34,500, , (2), , Closing stock at head office, (a), , Calculation of total factor cost = Material consumed + Wages +, Factory overhead, , © The Institute of Chartered Accountants of India

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13.54, , ACCOUNTING, , = 34,500 + 1,08,500 + 39,000 = 1,95,000, (b), , Cost (factory cost) of goods sold = Sales – Gross profit, = 2,00,000 – 2,00,000 x 70% = 1,40,000, , (3), , (c), , Stock transferred to branch = 46,000 x 100/115 = 40,000, , (d), , Closing stock = 1,95,000 – 1,40,000 – 40,000 = 15,000, , Gross profit of Branch = Sales x Gross profit ratio, = 65,200 x 30% = 19,560, , (4), , Closing stock reserve = 9,560 x 15/115 = 1,246, Charge to profit and loss = 1,247 – 1,200 = 47, , 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., , Illustration 14, 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, 20X1 the Branch Balance Sheet was as follows :, , © The Institute of Chartered Accountants of India

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , Liabilities, , ` Assets, , Creditors Balance, Head Office, , 13.55, , `, , 40,000 Debtors Balance, , 2,00,000, , 1,68,000 Building Extension A/c closed, by transfer to H.O. A/c, Cash at Bank, , —, 8,000, , 2,08,000, , 2,08,000, , During the six months ending on 30-9-20X1, the following transactions took place, at Delhi., , `, Sales, Purchases, Wages paid, Salaries (inclusive of advance, of ` 2,000), General Expenses, Fire Insurance (paid for one, year), Remittance to H.O., , `, , 2,40,000 Manager’s Salary, 48,000 Collections from Debtors, 20,000 Discounts allowed, Discount earned, , 4,800, 1,60,000, 8,000, 1,200, , 6,400 Cash paid to Creditors, , 60,000, , 1,600 Building Account (further, payment), 3,200 Cash in Hand, 38,400 Cash at Bank, , 4,000, 1,600, 28,000, , Set out the Head Office Account in Delhi books and the Branch Balance Sheet as on, 30-9-20X1. Also give journal entries in the Delhi books., Solution, Journal Entries, 20X1, 30 Sept., , Salary Advance A/c, To Salaries A/c, , (The amount paid as advance adjusted by debit to, Salary Advance Account), Prepared Insurance A/c (3,200 x 6/12), To Fire Insurance A/c, , (Six months premium transferred to the Prepaid, Insurance A/c), © The Institute of Chartered Accountants of India, , Dr., `, Dr., , 2,000, , Dr., , 1,600, , Cr., `, 2,000, , 1,600

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13.56, , ACCOUNTING, , Head Office Account, , Dr., , To Purchases A/c, , 88,400, , To Wages A/c, , 48,000, 20,000, , To Salaries A/c (6,400 – 2,000), To General Expenses A/c, , 4,400, 1,600, , To Fire Insurance A/c (3,200 x 6/12), To Manager’s Salary A/c, , 1,600, 4,800, , To Discount Allowed A/c, , (Transfer of various revenue accounts (Dr.) to the, H.O. Account for closing the accounts), Sales Accounts, , Discount Earned A/c, To Head Office A/c, , 8,000, , Dr., Dr., , [Revenue accounts (Cr.) transferred to H.O.], Head Office Account, , To Building Account, , Dr., , 2,40,000, , 1,200, , 4,000, , (Transfer of amounts spent on building extension to, H.O. A/c), , 2,41,200, , 4,000, , Head Office Account, 20X1, , ` 20X1, , Sep. 30 To Cash-remittance, To Sundries (Revenue, A/cs), To Building A/c, To Balanced c/d, , `, , 38,400 April 1 By Balance b/d, , 1,68,000, , 88,400 Sep. 30 By, Sundries, (Revenue A/cs), , 2,41,200, , 4,000, 2,78,400, 4,09,200, , 4,09,200, , Balance Sheet of Delhi Branch as on Sept. 30, 20X1, Liabilities, Creditors Balances, , Head Office Account, , ` Assets, 26,800 Debtors Balances, , 2,78,400 Salary Advance, , © The Institute of Chartered Accountants of India, , Prepaid Insurance, Building Extension A/c, , `, 2,72,000, , 2,000, 1,600

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.57, , transferred to H.O., , —, , Cash in Hand, 3,05,200, , 1,600, , Cash at Bank, , 28,000, , 3,05,200, , Cash and Bank Account, `, To, To, , Balance b/d, Collection, Debtors, , from, , `, , 8,000 By, , 1,60,000 By, , Insurance, , By, By, , H.O. A/c, Manager’s Salary, , By, By, By, By, By, , 20,000, , Salaries, , By, By, , 1,68,000, , Wages, , 6,400, 3,200, , General Exp., , 1,600, , 38,400, 4,800, , Creditors, Building A/c, Balance c/d, , Cash in Hand, Cash at Bank, , 60,000, 4,000, 1,600, 28,000, , 29,600, , 1,68,000, , Debtors Account, `, To Balance b/d, To Sales, , To Balance b/d, , `, , 2,00,000 By Cash Collection, 2,40,000 By Discount (allowed), , 1,60,000, 8,000, , 4,40,000, , 4,40,000, , By Balance c/d, , 2,72,000, , 2,72,000, , Creditors Account, To Cash, To Discount (earned), To Balance c/d, , `, 60,000 By Balance b/d, 1,200 By Purchases, 26,800, 88,000, By Balance b/d, , © The Institute of Chartered Accountants of India, , `, 40,000, 48,000, 88,000, 26,800

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13.58, , ACCOUNTING, , Illustration 15, The following Trial balances as at 31st December, 20X1 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, Dr., , Cr., , Dr., , Cr., , `, , `, , `, , `, , 18,901, 23,715, , (Note 3), , Share Capital, Fixed Assets, Current Assets, , 1,50,000, 75,125, 1,21,809, , Current Liabilities, Stock Reserve, 1st Jan., 20X1, , 34,567, , (Note 2), Revenue Account, Branch Account, , Branch, , 9,721, , 693, 43,210, , 10,250, , 31,536, , Head Office Account, , 22,645, 2,28,470, 2,28,470, 42,616, 42,616, You are required to record the following in the appropriate ledger accounts in both, sets of books:, 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, 20X1., , 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, 20X1, as was also a remittance of ` 3,500 from the Branch., , 5., , At 31st December, 20X1, 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, 20X1 from one of the Branch debtors, ` 750., , © The Institute of Chartered Accountants of India

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.59, , Solution, H.O. Books, Branch Account, 20X1, Dec. 31, , ` 20X1, To Balance b/d, , 31,536 Dec. 31, 31,536, , `, By Cash in transit, By Balance b/d, , 3,500, , 28,036, 31,536, , Cash in transit Account, 20X1, Dec. 31, , ` 20X1, To, , Branch A/c, , 3,500 Dec. 31, , `, By, , Balance c/d, , 3,500, , Stock Reserve Account, 20X1, Dec. 31, , ` 20X1, To Balance c/d, , (4,565+3,641) x, 10/110, , 746 Jan. 1, , `, By Balance c/d, , By Revenue A/c (b.f.), , 746, , 693, , 53, , 746, , Revenue Account, 20X1, Dec. 31, , ` 20X1, To Stock Reserve, To Balance c/d, , 53 Dec. 31, , `, By Balance b/d, , 43,210, , 43,157, 43,210, , 43,210, , Branch Books, Head Office Account, 20X1, , ` 20X1, , Dec. 31 To Current Assets, To (Debtors), Balance c/d, , 750 Dec. 31, 28,036, 28,786, , © The Institute of Chartered Accountants of India, , `, By Balance b/d, , 22,645, , By Goods in transit, , 3,641, , By Motor Vehicle, , 2,500, 28,786

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13.60, , ACCOUNTING, , Goods in Transit Account, 20X1, Dec. 31, , ` 20X1, To Head Office, , 3,641 Dec. 31, , `, By Balance c/d, , 3,641, , Motor Vehicle Account, 20X1, Dec. 31, , ` 20X1, To Head Office, , 2,500 Dec. 31, , `, By Balance c/d, , 2,500, , Sundry Current Assets A/c, 20X1, Dec. 31, , ` 20X1, To Balance b/d, , 23,715 Dec. 31, , `, By H.O. (Remittance, by Debtor), By Balance c/d, , 23,715, , 750, 22,965, 23,715, , 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 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., , © The Institute of Chartered Accountants of India

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.61, , 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. 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., , •, , 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,, © The Institute of Chartered Accountants of India

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13.62, , ACCOUNTING, , 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, TRANSLATION, , FOREIGN, , CURRENCY, , 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, , © The Institute of Chartered Accountants of India

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.63, , that operation together with the rates. Weekly or monthly average rate is, permitted if there are no significant variations in the rate., (2), , Translation at the balance sheet date(i), , Monetary items 1 at closing rate;, , (ii), , Non-monetary items 2: 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 nonmonetary – 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 nonintegral foreign operation”., , 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., 1, , © The Institute of Chartered Accountants of India

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13.64, , ACCOUNTING, , Illustration 16, On 31st December, 20X2 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., 20X2, , 2,34,000, , Purchases and Sales, Debtors and Creditors, , 15,62,500, 7,65,000, , 23,43,750, 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, Bank A/c, , 91,000, 5,68,650, , -, , -, , 5,99,150, , 36,31,400, , 36,31,400, , New York Account, st, , Stock on 31 December, 20X2 was ` 6,37,500., Branch account in New York books showed a debit balance of $ 13,400 on 31st, December, 20X2 and Furniture appeared in the Head Office books at $ 1,750., The rate of exchange for 1 $ on 31st December, 20X1 was ` 52 and on 31st, December, 20X2 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 assuming integral foreign operation., , Solution, In the books of English Firm (Head Office in New York), Chennai Branch Profit and Loss Account, for the year ended 31st December, 20X2, $, To Opening stock, , $, , 4,500 By Sales, , To Purchases, , 31,250 By Closing stock, , To Gross profit c/d, , 23,625, , 2,000 By Gross profit b/d, , © The Institute of Chartered Accountants of India, , 12,500, , (6,37,500 / 51), , 59,375, To Salaries, , 46,875, , 59,375, 23,625

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13.65, , ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 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, 20X2, Liabilities, , $ Assets, , $, , Head Office A/c, Add : Net profit, Trade creditors, , 13,400, 17,500, , $, , Furniture, 30,900 Closing Stock, , 1,750, 12,500, , 10,000 Trade Debtors, , Bills Payable, , 15,000, , 3,500 Bills Receivable, Cash at bank, , 4,000, 11,150, , 44,400, , 44,400, , Working Note:, , Calculation of Exchange Translation Loss, Chennai Branch Trial Balance (converted in $), as on 31st December, 20X2, Dr., , Cr. Conversion, , `, , `, , Rate, , Stock on 1st Jan., 20X2, Purchases & Sales, , 2,34,000, 15,62,500, , 23,43,750, , 52, 50, , Bills Receivable and, Bills Payable, Salaries and wages, , 2,04,000, , 1,78,500, , 51, , Debtors & creditors, , Rent, Rates and Taxes, Furniture, Bank A/c, New York Account, , Exchange translation, loss (bal. fig.), , 7,65,000, , 5,10,000, , 51, , Dr., , Cr., , ($), , ($), , 4,500, 31,250, , 46,875, , 4,000, , 3,500, , 15,000, , 1,00,000, , 50, , 2,000, , 5,68,650, , 51, , 11,150, , 1,06,250, 91,000, , 50, , 5,99,150, , 36,31,400 36,31,400, , © The Institute of Chartered Accountants of India, , 10,000, , 2,125, 1,750, , 2,000, , 73,775, , 13,400, , 73,775

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13.66, , ACCOUNTING, , Illustration 17, 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, 20X2, the following ledger balances have been extracted, from the books of the Bombay Office and the Sydney Office:, Bombay, (` thousands), , Sydney, (Austr dollars, thousands), , Debit, , Credit, , Debit, , Credit, , –, , 2,000, , –, , –, , –, 500, , 1,000, –, , –, –, , –, –, , Buildings (Cost), Buildings Dep. Reserve, , 1,000, –, , –, 200, , –, –, , –, –, , Plant & Machinery (Cost), , 2,500, , –, , 200, , –, , –, , 600, , –, , 130, , Debtors / Creditors, , 280, , 200, , 60, , 30, , Stock (1.4.20X1), Branch Stock Reserve, , 100, –, , –, 4, , 20, –, , –, –, , Cash & Bank Balances, Purchases / Sales, , 10, 240, , –, 520, , 10, 20, , –, 123, , –, , 100, , 5, , –, , Managing Director’s salary, Wages & Salaries, , 30, 75, , –, –, , –, 45, , –, –, , Rent, Office Expenses, , –, 25, , –, –, , 12, 18, , –, –, , –, , 256, , –, , 100, , 120, , –, , –, , 7, , 4,880, , 4,880, , 390, , 390, , Share Capital, Reserves & Surplus, Land, , Plant & Machinery Dep. Reserve, , Goods sent to Branch, , Commission Receipts, Branch / H.O. Current A/c, , The following information is also available:, (1), , Stock as at 31.3.20X2:, Bombay ` 1,50,000, Sydney A $ 3,125, , © The Institute of Chartered Accountants of India

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.67, , 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, 20X2, Conversion, Plant & Machinery (cost), , Plant & Machinery Dep. Reserve, Debtors / Creditors, Stock (1.4.20X1), , Cash & Bank Balances, Purchase / Sales, , Goods received from H.O., Wages & Salaries, Rent, Office expenses, , Commission Receipts, H.O. Current A/c, , Exchange loss (balancing figure), , (` ‘000), , rate per A$, , Dr., , ` 18, , 36,00, , ` 18, ` 24, ` 20, ` 24, ` 22, –, ` 22, ` 22, ` 22, ` 22, , Cr., , 14,40, , 23,40, 7,20, , 2,40, 4,40, , 27,06, , 4,00, , 1,00, 9,90, 2,64, 3,96, , 22,00, , 1,20, , 78,70, , 80,86, , 80,86, , 80,86, , 2,16, , Illustration 18, 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, 20X2 and the, additional information given thereafter:, , © The Institute of Chartered Accountants of India

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13.68, , ACCOUNTING, , Dr., , Cr., , Rupees in thousands, Stock on 1st April, 20X1, , 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, , –, , –, , 1,620, , 3,360, , 3,360, , New York office a/c, , 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, 20X2., , (c), , The rates of exchange may be taken as follows:, •, , on 1.4.20X1 @ ` 40 per US $, , •, , on 31.3.20X2 @ ` 42 per US $, , •, , average exchange rate for the year @ ` 41 per US $, , •, , conversion in $ shall be made upto two decimal accuracy., , You are asked to prepare in US dollars the revenue statement for the year ended, 31st March, 20X2 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, 31.3.20X2 in New York books and there were no items pending reconciliation., , © The Institute of Chartered Accountants of India

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13.69, , ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , Solution, M/s Carlin, Mumbai Branch Trial Balance in (US $), as on 31st March, 20X2, Conversion, rate per US $, Stock on 1.4.X1, , (`), 40, , Sundry debtors and creditors, Bills of exchange, , 42, 42, , Purchases and sales, , Wages and salaries, Rent, rates and taxes, Sundry charges, Bank balance, , US $, , US $, , 7,500.00, , –, , 19,512.20, , 29,268.29, , 41, 41, , 13,658.54, 8,780.49, , –, –, , –, , 6,000.00, , 42, , New York office A/c, , Cr., , 41, , 41, , Computers, , Dr., , –, , 9,523.81, 2,857.14, , 3,902.44, , 10,000.00, –, , 81,734.62, , 7,142.86, 5,714.29, , –, –, –, , 39,609.18, 81,734.62, , Trading and Profit & Loss Account, for the year ended 31st March, 20X2, US $, To Opening Stock, To Purchases, , 7,500.00 By Sales, 19,512.20 By Closing stock, (4,20,000/42), 13,658.54 By Gross Loss c/d, , To Wages and salaries, , 40,670.74, , To Gross Loss b/d, , 1,402.45 By Net Loss, , To Rent, rates and taxes, To Sundry charges, To, Depreciation, computers, (US $ 6,000 × 0.6), , 8,780.49, on, , US $, 29,268.29, 10,000.00, 1,402.45, , 40,670.74, 17,685.38, , 3,902.44, 3,600.00, , 17,685.38, , © The Institute of Chartered Accountants of India, , 17,685.38

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13.70, , ACCOUNTING, , Balance Sheet of Mumbai Branch, as on 31st March, 20X2, Liabilities, New, York, Office A/c, Less : Net, Loss, Sundry, creditors, , US $, 39,609.18, , (17,685.38), , Assets, Computers, , 21,923.80, , Bills payable, , Less:, Depreciation, , 7,142.86, , Closing stock, , 5,714.29, , Sundry, debtors, Bank balance, , 34,780.95, , US $, , US $, , 6,000.00, , (3,600.00), , 2,400.00, , 10,000.00, , 9,523.81, 10,000.00, , Bills, receivable, , 2,857.14, , 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 Branches), and, , , , Foreign Branches., , independent, , accounting, , records, , 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, , © The Institute of Chartered Accountants of India

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.71, , 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:, , , , 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 nonmonetary – 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;, , © The Institute of Chartered Accountants of India

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13.72, , ACCOUNTING, , , , 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., , TEST YOUR KNOWLEDGE, MCQs, 1., , 2., , 3., , 4., , If goods are invoiced to branches at cost, trading results of branch can be, ascertained by, (a), , Debtors method., , (b), , Stock and debtors method., , (c), , Either (a) or (b)., , Under branch trading and profit loss account method, (a), , H.O prepares profit and loss account., , (b), , Each branch is treated separate entity., , (c), , Both (a) and (b)., , Goods may be invoiced to branch at, (a), , Cost or Selling price., , (c), , Wholesale price., , (d), , Both (a) and (b)., , Under debtors method, opening balance of debtors is, (a), , Debited to branch account., , (b), , Credited to branch account., , © The Institute of Chartered Accountants of India

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, (c), 5., , 6., , 7., , 8., , 9., , 10., , 13.73, , Debited to H.O account., , Cost of goods returned by branch will have the following effect, (a), , Goods sent to branch account will be debited., , (b), , Branch stock account will be credited., , (c), , (a) and (b)., , Assets and liabilities of a non-integral foreign operation should be, converted at, (a), , Closing exchange rate., , (b), , Average exchange rate., , (c), , Opening exchange rate., , All of the following are examples of monetary assets except:, (a), , Trade Payables., , (b), , Inventory., , (c), , Trade Receivables., , If asset of an integral foreign operation is carried at cost, cost and, depreciation of tangible fixed assets is translated at, (a), , Average exchange rate., , (b), , Closing exchange rate., , (c), , Exchange rate at the date of purchase of asset., , Incomes and expenses of a NFO is translated at, (a), , Average rate that approximates the actual exchange rates., , (b), , Exchange rate at the date of transaction., , (d), , Either (a) or (b)., , AS 11 classifies foreign branches are classified as, (a), , Autonomous branches and non-autonomous branches., , (b), , Uncontrolled and fully controlled branches., , (c), , Integral and non-integral foreign operations., , © The Institute of Chartered Accountants of India

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13.74, , ACCOUNTING, , Theoretical Questions, 1., , Why goods are marked on invoice price by the head office while sending, goods to the branch?, , 2., , Differentiate Branch Accounts with Departmental accounts., , Practical Questions, Question 1, Goods worth ` 50,000 sent by head office but the branch has received till the, closing date goods for worth ` 40,000 only. Give journal entry in the books of, H.O. and branch for goods in transit., Question 2, Alphs having head office in Mumbai has a branch in Nagpur. The branch at, Nagpur is an independent branch maintaining separate books of account. On, 31.3.20X1, it was found that the goods dispatched by head office for ` 2,00,000, was received by the branch only to the extent of ` 1,50,000. The balance goods, are in transit. What is the accounting entry to be passed by the branch for, recording the goods in transit, in its books?, Question 3, Show adjustment journal entry in the books of head office at the end of April,, 20X1 for incorporation of inter-branch transactions assuming that only head, office maintains different branch accounts in its books., A., , B., , C., , Delhi branch:, (1), , Received goods from Mumbai – ` 35,000 and ` 15,000 from Kolkata., , (2), , Sent goods to Chennai – ` 25,000, Kolkata – ` 20,000., , (3), , Bill Receivable received – ` 20,000 from Chennai., , (4), , Acceptances sent to Mumbai – ` 25,000, Kolkata – ` 10,000., , Mumbai Branch (apart from the above) :, (5), , Received goods from Kolkata – ` 15,000, Delhi – ` 20,000., , (6), , Cash sent to Delhi – ` 15,000, Kolkata – ` 7,000., , Chennai Branch (apart from the above) :, (7), , Received goods from Kolkata – ` 30,000., , © The Institute of Chartered Accountants of India

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, (8), D., , 13.75, , Acceptances and Cash sent to Kolkata – ` 20,000 and `10,000, respectively., , Kolkata Branch (apart from the above) :, (9), , Sent goods to Chennai – ` 35,000., , (10) Paid cash to Chennai – `15,000., (11) Acceptances sent to Chennai – `15,000., Question 4, Give Journal Entries in the books of Branch A to rectify or adjust the following:, (i), , Head Office expenses ` 3,500 allocated to the Branch, but not recorded in, the Branch Books., , (ii), , Depreciation of branch assets, whose accounts are kept by the Head Office, not provided earlier for ` 1,500., , (iii), , Branch paid ` 2,000 as salary to a H.O. Inspector, but the amount paid has, been debited by the Branch to Salaries account., , (iv), , H.O. collected ` 10,000 directly from a customer on behalf of the Branch,, but no intimation to this effect has been received by the Branch., , (v), , A remittance of ` 15,000 sent by the Branch has not yet been received by, the Head Office., , (vi), , Branch A incurred advertisement expenses of ` 3,000 on behalf of Branch B., , Question 5, Widespread invoices goods to its branch at cost plus 20%. The branch sells goods, for cash as well as on credit. The branch meets its expenses out of cash collected, from its debtors and cash sales and remits the balance of cash to head office after, withholding, ` 10,000 necessary for meeting immediate requirements of cash. On 31st March,, 20X1 the assets at the branch were as follows:, ` (‘000), Cash in Hand, , 10, , Trade Debtors, , 384, , Stock, at Invoice Price, , 1,080, , Furniture and Fittings, , 500, , © The Institute of Chartered Accountants of India

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13.76, , ACCOUNTING, , During the accounting year ended 31st March, 20X2 the invoice price of goods, dispatched by the head office to the branch amounted to ` 1 crore 32 lakhs. Out, of the goods received by it, the branch sent back to head office goods invoiced at, ` 72,000. Other transactions at the branch during the year were as follows:, (` ‘000), Cash Sales, , 9,700, , Credit Sales, , 3,140, , Cash collected by Branch from Credit Customers, , 2,842, , Cash Discount allowed to Debtors, , 58, , Returns by Customers, , 102, , Bad Debts written off, , 37, , Expenses paid by Branch, , 842, , On 1st January, 20X2 the branch purchased new furniture for ` 1 lakh for which, payment was made by head office through a cheque., On 31st March, 20X2 branch expenses amounting to ` 6,000 were outstanding, and cash in hand was again ` 10,000. Furniture is subject to depreciation @ 16%, per annum on diminishing balance method., Prepare Branch Account in the books of head office for the year ended 31st, March, 20X2., Question 6, On 31st March, 20X2 Kanpur Branch submits the following Trial Balance to its, Head Office at Lucknow :, Debit Balances, , Furniture and Equipment, , Depreciation on furniture, Salaries, Rent, , Advertising, , Telephone, Postage and Stationery, Sundry Office Expenses, , Stock on 1st April, 20X1, , Goods Received from Head Office, © The Institute of Chartered Accountants of India, , ` in lacs, 18, , 2, , 25, , 10, 6, 3, 1, , 60, , 288

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13.77, , ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , Debtors, , 20, , Cash at bank and in hand, , 8, , Carriage Inwards, , 7, , 448, , Credit Balances, , Outstanding Expenses, , 3, , Goods Returned to Head Office, , 5, , Sales, Head Office, , 360, 80, , 448, , Additional Information:, Stock on 31st March, 20X2 was valued at ` 62 lacs. On 29th March, 20X2 the Head, Office dispatched goods costing ` 10 lacs to its branch. Branch did not receive, these goods before 1st April, 20X2. Hence, the figure of goods received from, Head Office does not include these goods. Also the head office has charged the, branch ` 1 lac for centralized services for which the branch has not passed the, entry., You are required to:, (i), , Pass Journal Entries in the books of the Branch to make the necessary, adjustments, , (ii), , Prepare Final Accounts of the Branch including Balance Sheet, and, , (iii), , Pass Journal Entries in the books of the Head Office to incorporate the, whole of the Branch Trial Balance., , Question 7, The Washington branch of XYZ Mumbai sent the following trial balance as on, 31st December, 20X1:, Head office A/c, Sales, , Debtors and creditors, Machinery, , Cash at bank, , © The Institute of Chartered Accountants of India, , $, , $, , _, , 22,800, , 4,800, , 3,400, , _, , 24,000, , 1,200, , 84,000, _, _

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13.78, , ACCOUNTING, , Stock, 1 January, 20X1, Goods from H.O., , 11,200, , _, , 5,000, , _, , 64,000, , Expenses, , 1,10,200, , _, , 1,10,200, , In the books of head office, the Branch A/c stood as follows:, Washington Branch A/c, To, To, , Balance b/d, Goods, branch, , sent, , to, , `, 8,10,000, , By, , 29,26,000, , By, , Cash, , Balance c/d, , 37,36,000, , `, 28,76,000, , 8,60,000, , 37,36,000, , Goods are sent to the branch at cost plus 10% and the branch sells goods at, invoice price plus 25%. Machinery was acquired on 31st January, 2007, when $, 1.00 = ` 40., Rates of exchange were:, 1st January, 20X1, , $ 1.00, , =, , ` 46, , 31st December, 20X1, , $ 1.00, , =, , `48, , Average, , $ 1.00, , =, , ` 47, , Machinery is depreciated @ 10% and the branch manager is entitled to a, commission of 5% on the profits of the branch., You are required to:, (i), , Prepare the Branch Trading & Profit & Loss A/c in dollars., , (ii), , Convert the Trial Balance of branch into Indian currency and prepare Branch, Trading & Profit and Loss A/c and the Branch A/c in the books of head, office., , © The Institute of Chartered Accountants of India

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13.79, , ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , ANSWERS, MCQs, 1. (c) 2. (c) 3. (c) 4. (a) 5. (c) 6. (a) 7. (b) 8. (c) 9. (c) 10. (c), , Theory Questions, Answer 1, Goods are marked on invoice price to achieve the following objectives:, (i), , To keep secret from the branch manager, the cost price of the goods and, profit made, so that the branch manager may not start a rival and, competitive business with the concern; and, , (ii), , To have effective control on stock i.e. stock at any time must be equal to, opening stock plus goods received from head office minus sales made at, branch., , (iii), , To dictate pricing policy to its branches, as well as save work at branch, because prices have already been decided., , Answer 2, Refer Para 2 of the Chapter to know the differences ., , Practical Questions, Answer 1, , Journal entry in the books of Head Office, No entry, Journal entry in the books of Branch, `, , Goods-in-transit account, , To Head Office account, (Being goods sent by head office is still in transit), , Dr., , 10,000, , `, 10,000, , Answer 2, Nagpur branch must include the inventory in its books as goods in transit., The following journal entry must be made by the branch:, , Goods in transit A/c, Dr., 50,000, To Head office A/c, 50,000, [Being Goods sent by Head office is still in transit on the closing date], © The Institute of Chartered Accountants of India

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13.80, , ACCOUNTING, , Answer 3, (a), Date, , Journal entry in the books of Head Office, Particulars, , 30th April, Mumbai Branch Account, 20X1, Chennai Branch Account, , To Delhi Branch Account, To Kolkata Branch Account, , Dr., , Cr., , `, , `, , Dr., 3,000, , Dr., , 70,000, , (Being adjustment entry passed by head office, in respect of inter-branch transactions for the, month of April, 20X1), , 15,000, 58,000, , Working Note:, Inter – Branch transactions, , A., (1), (2), (3), , Delhi Branch, Received goods, Sent goods, Received, Bills, receivable, (4) Sent acceptance, B. Mumbai Branch, (5) Received goods, (6) Sent cash, C. Chennai Branch, (7) Received goods, (8) Sent cash and, acceptances, D. Kolkata Branch, (9) Sent goods, (10) Sent cash, (11) Sent acceptances, , Delhi, `, , Mumbai, `, , 50,000 (Dr.), 45,000 (Cr.), 20,000 (Dr.), , 35,000 (Cr.), , Chennai, `, , 25,000 (Dr.), 20,000 (Cr.), , Kolkata, `, 15,000 (Cr.), 20,000 (Dr.), , 35,000 (Cr.) 25,000 (Dr.), , 10,000 (Dr.), , 20,000 (Cr.) 35,000 (Dr.), 15,000 (Dr.) 22,000 (Cr.), , 15,000 (Cr.), 7,000 (Dr.), 30,000 (Dr.), 30,000 (Cr.), , 15,000 (Cr.), , 35,000, 15,000, 15,000, 3,000 (Dr.) 70,000, , © The Institute of Chartered Accountants of India, , (Dr.), (Dr.), (Dr.), (Dr.), , 30,000 (Cr.), 30,000 (Dr.), , 35,000, 15,000, 15,000, 58,000, , (Cr.), (Cr.), (Cr.), (Cr.)

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13.81, , ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, Answer 4, Books of Branch A, Journal Entries, Particulars, , Dr., , Cr., , Amount, , Amount, , `, , `, , (i), , Expenses account, , Dr., , 3,500, , (ii), , Depreciation account, , Dr., , 1,500, , (iii) Head office account, , Dr., , 2,000, , (iv) Head office account, To Debtors account, , Dr., , 10,000, , Dr., , 3,000, , To Head office account, (Being the allocated expenditure by the head, office recorded in branch books), To Head office account, (Being the depreciation provided), To Salaries account, (Being the rectification of salary paid on behalf, of H.O.), , (v), , (Being the adjustment of collection from, branch debtors), No entry in branch books, , (vi) Head Office account, , To Cash account, , (Being the expenditure on account of Branch B,, recorded in books), Note: Entry (vi) Inter branch transactions are routed through Head Office., , © The Institute of Chartered Accountants of India, , 3,500, , 1,500, , 2,000, , 10,000, , 3,000

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13.82, , ACCOUNTING, , Answer 5, In the Head Office Books, Branch Account, for the year ended 31st March, 20X2, ` ‘000, To Balance b/d, Cash in hand, Trade debtors, , 10, 384, , Stock, Furniture and fittings, To Goods sent to branch A/c, To Bank A/c (Payment for, furniture), To Balance c/d Stock reserve, 1, ,  1,470 × 6 , , , , To Outstanding expenses, To Cash expenses, To Discount to debtors, , By, , 245, , 842, 58, , Balance b/d, Stock reserve ` 1,080 ×, 1, 6, , 1,080 By, 500, 13,200 By, 100, , 6, , To Bad debts, To Net profit transferred to, General P/L account, , `’000, , By, , By, , 37, 159, 16,621, , 180, , Goods sent to branch, A/c (Returns to H.O.), , 72, , Goods sent to branch, A/c (Loading on net, goods sent to branch –, 1, ,  13,128 × 6 , , , Bank A/c (Remittance, from branch to H.O.), (W.N.5), Balance c/d, , 2,188, , Cash in hand, Trade debtors (W.N.3), Stock (W.N.1), Furniture and, (W.N.4), , fittings, , 11,700, , 10, 485, , 1,470, 516, , 16,621, , Working Notes:, 1., , Invoice price and cost, Let cost be, , 100, , So, invoice price, , 120, , Loading, Loading: Invoice price, , 20, = 20 : 120 = 1 : 6, , © The Institute of Chartered Accountants of India

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13.83, , ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, 2., , Invoice price of closing stock in branch, Branch Stock Account, ` ‘000, To Balance b/d, , To Goods sent to branch, To Branch debtors, , ` ‘000, , 1,080 By Goods sent to branch, , 13,200 By Branch Cash, , 102 By Branch debtors, By Balance c/d, , 14,382, 3., , 72, , 9,700, 3,140, 1,470, , 14,382, , Closing balance of branch debtors, Branch Debtors Account, ` ‘000, To Balance b/d, To Branch stock, , ` ‘000, , 384 By Branch cash, 3,140 By, Branch, expenses, discount, By Branch stock (Returns), By Branch expenses, (Bad debts), , 3,524, 4., , By Balance b/d, , 2,842, 58, 102, 37, , 485, , 3,524, , Closing balance of furniture and fittings, Branch Furniture and Fittings Account, ` ‘000, , ` ‘000, , To Balance b/d, , 500 By, Depreciation, [(500x16%)+(100x16%x3/12)], , To Bank, , 100 By Balance c/d, , 84, 516, , 600, , 600, , Note: Since the new furniture was purchased on 1 Jan 20X2 depreciation, will be for 3 months., st, , © The Institute of Chartered Accountants of India

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13.84, , 5., , ACCOUNTING, , Remittance by branch to head office, Branch Cash Account, ` ‘000, To Balance b/d, , To Branch stock, To Branch debtors, , ` ‘000, , 10 By Branch expenses, , 842, , 9,700 By Remittances to H.O., (b.f), 2,842 By Balance b/d, 12,552, , 11,700, , 10, 12,552, , Note: The Branch Trading Account will show the following Profit:, , ` ‘000, , Net Profit as per Branch Account, , 1,096, , Less: Cash Expenses, , 842, , Less: Discount to Debtors, , 58, , Less: Bad Debts, , 37, , Net Profit Transferred to General P / L Account, , 159, , Answer 6, (i), , Books of Branch, Journal Entries, (` in lacs), Dr., Goods in Transit A/c, , Dr., , 10, , Expenses A/c, , Dr., , 1, , To Head Office A/c, (Goods dispatched by head office but not, received by branch before 1st April, 20X2), To Head Office A/c, , (Amount charged by head office for centralised, services), , © The Institute of Chartered Accountants of India, , Cr., 10, , 1

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, (ii), , 13.85, , Trading and Profit & Loss Account of the Branch, for the year ended 31st March, 20X2, To Opening Stock, To Goods received from, Head Office, 288+10, Less : Returns, (5), To Carriage Inwards, To Gross Profit c/d, , ` in lacs, 60 By Sales, By Closing Stock, including transit, 293, 7, 72, 422, 25 By Gross Profit b/d, 2, 10, 6, 3, , To Salaries, To Depreciation on Furniture, To Rent, To Advertising, To Telephone, Postage &, Stationery, To Sundry Office Expenses, To Head Office Expenses, (centralised services), To Net Profit Transferred to, Head Office A/c, , ` in lacs, 360, 72, , 422, 72, , 1, 1, 24, 72, , 72, , Balance Sheet as on 31st March, 20X2, Liabilities, , ` in lacs, , Head Office, , 80, , Add : Goods in, transit, , 10, , Head Office, Expenses, Net Profit, , Outstanding, Expenses, , Assets, Furniture &, Equipment, Less : Depreciation, , 1, 24, , ` in lacs, 20, (2), , 18, , Stock in hand, , 62, , Goods in Transit, , 10, , 3 Cash at bank and in, hand, , 8, , 115 Debtors, , 118, , © The Institute of Chartered Accountants of India, , 20, , 118

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13.86, , ACCOUNTING, , (iii), , Books of Head Office, Journal Entries, , Branch Trading Account, , Dr., , `, , `, , Dr., , Dr., , 365, , To Branch Account, , 365, , (The total of the following items in branch, trial balance debited to branch trading, account, ` in lacs, Opening Stock, , 60, , Goods received from Head, Office, Goods purchased, received, , but, , 288, 10, , not, , Carriage Inwards, , 7), , Branch Account, , Dr., , 437, , To Branch Trading Account, , 437, , (Total sales, closing stock and goods, returned to Head Office credited to branch, trading account, individual amount being, as follows:, ` in lacs, Sales, , 360, , Closing Stock, Goods in transit, , 62, 10, , Goods returned to Head Office, , (5), , Branch Trading Account, , Dr., , 72, , To Branch Profit and Loss Account, , 72, , (Gross profit earned by branch credited to, Branch Profit and Loss Account), Branch Profit and Loss Account, © The Institute of Chartered Accountants of India, , Dr., , 48

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ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, , 13.87, , To Branch Account, , 48, , (Total of the following branch expenses, debited, to Branch Profit & Loss Account, ` in lacs, Salaries, , 25, , Rent, , 10, , Advertising, , 6, , Telephone, Postage & Stationery, , 3, , Sundry Office Expenses, , 1, , Head Office Expenses, , 1, , Depreciation on furniture &, , 2, , Branch Profit & Loss Account, , Dr., , 24, , To Profit and Loss Account, , 24, , (Net profit at branch credited to (general), Profit & Loss A/c), Branch Furniture & Equipment, , Dr., , 18, , Branch Stock, , Dr., , 62, , Branch Debtors, , Dr., , 20, , Branch Cash at Bank and in Hand, , Dr., , 8, , Goods in Transit, , Dr., , 10, , To Branch, , 118, , (Incorporation of different assets at the, branch in H.O. books), Branch, To Branch Outstanding Expenses, (Incorporation of Branch Outstanding, Expenses in H.O. books), , © The Institute of Chartered Accountants of India, , Dr., , 3, 3

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13.88, , ACCOUNTING, , Answer 7, (i), , In the Books of Head Office, Branch Trading and Profit & Loss A/c (in Dollars), for the year ended 31st December, 20X1, Particulars, , $, , To, To, , Opening stock, Goods from H.O., , 11,200, 64,000, , To, , Gross profit c/d, , 16,800, , To, , Expenses, , To, To, To, , Depreciation (24,000 x 10%), Manager’s, commission, (W.N.1), Net profit c/d, , 92,000, , 5,000, , 2,400, 470, , Particulars, By, By, , By, , Sales, Closing, (W.N.2), , $, stock, , 92,000, , Gross profit b/d, , 16,800, , 8,930, , 16,800, (ii), , (a), , 84,000, 8,000, , 16,800, , Converted Branch Trial Balance (into Indian Currency), Dr. (`), , Cr. (`), , 40, , 9,60,000, , _, , 46, , 5,15,200, , _, , Actual, , 29,26,000, , _, , Particulars, , Rate per $, , Machinery, Stock January 1, 20X1, Goods from head office, Sales, , 47, , _, , 39,48,000, , Expenses, , 47, , 2,35,000, , _, , Debtors & creditors, , 48, , 2,30,400, , 1,63,200, , Cash at bank, , 48, , 57,600, , _, , _, , 8,60,000, , 47,000, , _, , 49,71,200, , 49,71,200, , Head office A/c, , Actual, , Difference in exchange rate (b.f.), Closing stock $ 8,000 (W.N. 2), , © The Institute of Chartered Accountants of India, , 48, , ` 3,84,000

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13.89, , ACCOUNTING FOR BRANCHES INCLUDING FOREIGN, (b), , Branch Trading and Profit & Loss A/c for the year ended 31st December,, 20X1, `, , To, To, , Opening stock, , To, , Goods from head, office, Gross profit c/d, , To, , Expenses, , To, To, To, To, (c), , Depreciation @ 10%, on ` 9,60,000, Exchange difference, Manager’s, commission (W.N.1), Net Profit c/d, Branch Account, , `, , 5,15,200 By, , 29,26,000 By, 8,90,800, , 43,32,000, , 2,35,000 By, , Sales, , Closing, (W.N.2), , stock, , Gross profit b/d, , To, To, To, , Balance b/d, , Net, profit, Creditors, Outstanding, commission, , 22,560, 4,90,240, 8,90,800, , 8,90,800, , 8,90,800, , 4,90,240, 1,63,200, , By, 22,560 By, By, , Machinery, , 9,60,000, , Less:, Depreciation, , (96,000), , Closing stock, Debtors, Cash at bank, , Working Notes:, i.e., Or, , 43,32,000, , `, , 8,60,000 By, , 15,36,000, 1., , 3,84,000, , 96,000, 47,000, , `, To, , 39,48,000, , Calculation of manager’s commission @ 5% on profit, 5% of $[16,800 – (5,000 + 2,400)], 5% × $9,400 = $ 470, , Manager’s commission in Rupees = $ 470 × ` 48 = ` 22,560, , © The Institute of Chartered Accountants of India, , 8,64,000, 3,84,000, 2,30,400, , 57,600, , 15,36,000

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13.90, , 2., , ACCOUNTING, , Calculation of closing stock, Opening stock, , Add: Goods from head office, , Less: Cost of goods sold (at invoice price), 100, i.e., × 84,000, 125, Closing stock, , Closing stock in Rupees = $8,000 x ` 48 = ` 3,84,000., , $, , 11,200, 64,000, 75,200, , (67,200), 8,000, , Note: Manager is entitled to commission on profits earned at the end of the year., , © The Institute of Chartered Accountants of India