Some Peculiar Items

In respect of independent branches, there are certain items which require special accounting treatment. These items are:




i)     Goods in transit

ii)     Cash in transit

iii)    Head Office expenses chargeable to branch

iv)    Depreciation on branch fixed assets, the accounts of which are maintained at the head office level

v)    Inter-branch transactions

Let us discuss these items one by one.

 

Goods in Transit

The Head Office and the branch send goods to each other quite frequently. When goods are sent by the Head Office to the branch, the Head Office debits the Branch Account in its books immediately. But the branch credits the Head Office Account only when it receives the goods. Similarly, when the branch sends or returns some goods to the Head Office, it (the branch) debits the Head Office Account in its books immediately, but the Head Office credits the Branch Account only when it receives the same. It is quite possible that goods sent in the later part of the accounting year may not have been received by the closing date of the accounting year by the Head Office or the branch, as the case may be. Such goods are called ‘goods in transit’ for which no entry will appear in the books at the receiving end at the time of the closing the accounts. Hence, the balance in the Head Office Account in branch books will not tally with the balance in the Branch Account in the Head Office books. This will require an adjustment entry which may be passed either in the Head Office book or in the branch books, but not in both sets of books.

 

If  the Head Office decides to pass the adjustment entry, it will be as follows:

Goods in Transit A/c                                        Dr.

To Branch A/c

 

If, however, the adjustment is made in branch books, the entry will be:

Goods in Transit A/c                                        Dr.

To Head Office A/c

 

It should be noted that the adjustment entry for goods in transit shall be passed only in one set of books, either at the Head Office level or the branch level. Usually, such entry is made in the books of the Head Office.

 

Cash in Transit

Like goods, cash is also regularly remitted by the Head Office and the branch to each other. For this, the entries are made in both sets of books in the same manner, as they are made for the goods. In this case also, it is possible that some remittances are in transit at the time of closing the books for the accounting year. This would again lead to difference in Branch Account balance in the Head Office books and Head Office Account balance in branch books. Hence, an adjustment entry will have to be passed to reconcile the same. This may be done either by the Head Office or by the branch, but not by both.

 

In case the Head Office decides to pass the adjustment entry, it will be as follows:

Cash in Transit A/c                              Dr.

To Branch A/c

 

If, however, the adjustment is made in the branch books, the entry will he:

Cash in Transit A/c                              Dr.

To Head Office A/c

 

It should be noted that for cash in transit also, the entry shall be passed in one set of books, either at the Head Office level or at the branch level. This entry is also made usually at the Head Office level. The reason for passing such adjustment entries in Head Office books lies in the fact that all in-transit items are noticed by the Head Office at the time of receiving the branch Trial Balance and, at this stage, it is not considered desirable to alter the balances in the branch books.

 

Head Office Expenses Chargeable to Branch

The Head Office may like to allocate a part of its expenses to branches for the centralised services at the Head Office level. As a matter of fact, quite a good amount of time of the Head Office staff may be spent in doing the work of the branches.  Hence, it may decide to charge a part of its expenditure  on salaries to the branches. The same thing may be true for certain other items of expenses.

 

If the Head Office so decides to charge some expenses to the branch, the journal entry passed in the books of the Head Office is as follows:

Branch A/c                                             Dr.

To Expenses (Salaries A/c)

(Being Head Office expenses chargeable to branch)

 

The branch will also pass a corresponding entry in its books as follows:

Head Office Expenses A/c                  Dr.

To Head Office

(Being Head Office expenses chargeable to branch)

 

Like all other expenses accounts, the Head Office Expenses Account will be closed by transferring its balance to the Profit & Loss Account at the end of the accounting year.

 

Depreciation on Branch Fixed Assets, Accounts Maintained by Head Office

Sometimes, the accounts for the fixed assets of independent branches are maintained at the Head Office level. In such a situation, all entries in respect of branch fixed assets are made in the Head Office books. For example, when a fixed asset is purchased for the branch, the Head Office debits the Branch Fixed Assets Account and credits the Cash Account. No entry for this transaction is passed by the branch unless the payment is made by the branch for this purchase. Even if the payment for the  purchase of such fixed assets is made by the branch, it will not debit the Fixed Assets Account. In fact such payment is treated like a remittance to the Head Office, Therefore,  is debited to the Head Office Account. But when it comes to depreciation on such fixed assets, the branch has to pass the necessary entry in its books because the assets were used by the branch and not by the Head Office. Normally an entry for the depreciation on fixed assets is passed by debiting the Depreciation Account and crediting the Fixed Asset Account. But in this situation, the branch cannot credit the Fixed Asset Account because the accounts for its fixed assets are maintained at the Head Office level. Hence, the entry passed for depreciation on such fixed assets is different from the normal entry for depreciation. It is as follows:

 

Depreciation A/c                                                Dr.

          To Head Office A/c

(Being depreciation on fixed assets)

 

Since the account for the branch fixed assets is maintained in head office books, the Head Office must reduce the balance in Branch Fixed Assets Account by the amount of depreciation thereon. But, it cannot debit the Depreciation Account because the loss relates to the branch. Hence, it makes the following journal entry for depreciation on branch fixed assets when their accounts are maintained by the Head Office:

Branch A/c                                                         Dr.

To Branch Fixed Assets A/c

(Being depreciation on branch fixed assets)

 

It should be noted that the above entries are passed only for such branch fixed assets accounts of which are maintained by the Head Office. Any branch fixed assets for which the branch itself maintains the accounts, the branch will pass the normal entry for depreciation. The Head Office need not pass an entery in its books for the amount of depreciation on such fixed assets.

 

Inter-branch Transactions

When an organisation has more than one branch, it is possible that some transactions take place between one branch and the other. This usually happens under instructions from the Head Office. For example, a branch may be asked to transfer its surplus stock to some other branch which may need the same (it may be facing shortage). In such a situation, the usual practice for the sending branch is to regard it as a transaction of returning the goods to the Head Office. Similarly, the receiving branch shall regard it as a transaction of receiving the goods from the Head Office. Hence, entries are passed on the same basis in the books of the branches and the Head Office. These are as follows:

 

In the books of the Head Office

Receiving Branch A/c                           Dr.

To Sending Branch A/c

(Being goods transferred from .......... branch to ............ branch)

 

In the books of the sending branch

Head Office A/c                                                Dr.

To Goods Sent to H.O. A/c

(Being goods sent to ............ branch under instructions from H. O.)

 

In the books of the receiving branch

Goods from H.O. A/c                                      Dr.

To Head Office A/c

(Being goods received from ............ branch under instruction from H.O.)

 

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