Stock And Debtors System [Branch Account]

Under Stock and Debtors System, the Head Office does not open a Branch Account in its books. It maintains a few control accounts for recording the various branch transactions. These accounts usually are :




(i) Branch Stock Account,

(ii) Branch Debtors Account,

(iii) Branch Expenses Account,

(iv) Branch Cash Account,

(v) Goods Sent to Branch Account, and

(vi) Branch Fixed Assets Account.

At the end of the accounting year, it prepares the Branch Adjustment Account and the Branch Profit & Loss Account. This system is used only when goods are invoiced at selling price which the branch is not allowed to vary.

Let us now study the working of each account opened by the Head Office when such a system is followed.

 

Branch Stock Account: This is the most important account which helps the Head Office in controlling the branch stock. It shows all branch transactions relating to goods. The goods sent to branches and the sales returns are shown on its debit side, and the sales (both cash and credit) and the goods returned to head office on the credit side. All these items are recorded at the invoice price. Hence, if the figure of any of these items is given at cost, the same should be converted into invoice price before recording it in the Branch Stock Account. The balance of this account would show the unsold goods (stock) lying with the branch. If it is found that the actual stock with the branch is less than the balance shown by the Branch Stock Account, it means that there is a ‘shortage’ in the stock with the branch. Similarly, if the actual stock with the branch is more than the balance shown by the Branch Stock Account, it would reflect ‘surplus’. Both situations warrant investigation. But, so far as their recording goes, the shortage will be shown on the credit side of the Branch Stock Account and if there is surplus, the same will be recorded on its debit side. Then, the balance of the Branch Stock Account will be the exact amount of actual stock with the branch. In other words, while preparing the Branch Stock Account, you will show the actual stock with branch as the balance in this account, and then if the totals of both sides do not tally, you will show the difference as shortage or surplus as the case may be.

 

Branch Debtors Account: This account shows all transactions relating to branch debtors. The credit sales are shown on its debit side, and cash received from debtors, sales returns, bad debts, discount allowed, etc. on the credit side. The balance of this account represents the closing debtors of the branch.

 

Branch Expenses Account: This account shows all expenses incurred by the branch. In addition, the items like bad debts, discount allowed, depreciation on branch fixed assets, etc. are also debited to this account. This account is closed by transfer to the Branch Adjustment Account.

 

Branch Cash Account: This account shows all cash transactions of the branch where the branch is not required to remit all collection of cash immediately to the Head Office, but use it for branch expenses and remit the balance to the Head Office from time to time. This account helps the Head Office to keep control over branch cash.  Normally, the dependent branch is not allowed the freedom to retain cash collections. Hence, this account need not be maintained.

 

Branch Fixed Assets Account: The Head Office maintains separate account for each type of branch asset such as furniture, equipment, building, etc. These accounts are prepared in the usual manner. The depreciation on branch fixed assets is, however, debited to Branch Expenses Account and credited to the respective account.

 

Goods Sent to Branch Account: This account is prepared in the same manner as in case of branches to which the goods are sent at the invoice price.

 

Branch Adjustment Account: This account is like a Trading Account of the branch. It is prepared to ascertain the gross profit or gross loss made at the branch by recording the loading (difference between invoice price and cost price) on various items. The loading on branch closing stock and shortage is shown on its debit side while the loading on branch opening stock, goods sent to branch (less returns) and surplus on the credit side. The balance of this account reflects the gross profit or gross loss which is transferred to Branch Profit & Loss Account.

 

Branch Profit & Loss Account: This account is prepared to ascertain the net profit or net loss made at the branch. As stated earlier, the gross profit or gross loss ascertained by the Branch Adjustment Account is transferred to this account. It is debited with branch expenses as per the Branch Expenses Account and the loss on account of shortage being the cost of such shortage. In case the Branch Stock Account reveals some surplus, the amount equal to the cost of such surplus will be shown on the credit side of the Branch Profit & Loss Account. The balance of the Branch Profit & Loss Account represents the net profit or net loss made at the branch which is transferred to the General Profit & Loss account.

The following journal entries are passed in the Head Office books for opening the above accounts relating to the various branch transactions:

 

1) When goods are sent to the branch (at invoice price)

Branch Stock Ale                                          Dr.

To Goods Sent to Branch A/c

 

2) When goods are returned by the branch to the H.O. (at invoice price)

Goods Sent to Branch A/c                          Dr.

To Branch Stock A/c

 

3) When sales are made by the branch

i) For Cash Sales

   Cash A/c                                                   Dr.

To Branch Stock A/c

 

ii) For Credit Sales

  Branch Debtors A/c                                  Dr.

To Branch Stock A/c

 

4) When cash is received from debtors

Cash A/c                                                         Dr.

To Branch Debtors A/c

 

5) For sales returns

Branch Stock A/c                                          Dr.

To Branch Debtors A/c

 

6) For discount allowed, bad debts, etc.

Branch Expenses A/c                                    Dr.

To Branch Debtors A/c

 

7) For shortage of stock

Branch Adjustment A/c                                 Dr.

(with amount of loading)

Branch P & L A/c                                        Dr.

(with cost of shortage)

To Branch Stock A/c

For surplus at branch, the reverse entry will be passed.

 

8) For Branch expenses paid in Cash

Branch Expenses A/c                                    Dr.

To Cash A/c

 

9) For closing branch expenses account

Branch P & L A/c                                        Dr.

To Branch Expenses A/c

 

10) For adjustment of loading on the opening stock

Stock Reserve A/c                                        Dr.

To Branch Adjustment A/c

 

11) For adjustment of loading on the closing stock

Branch Adjustment A/c                                 Dr.

To Stock Reserve A/c

 

12) For adjustment of loading on net goods sent to branch

Goods Sent to Branch A/c                          Dr.

To Branch Adjustment A/c

 

13) For transfer of gross profit

Branch Adjustment A/c                                 Dr.

To Branch P & L A/c

 

14) For transfer of net profit to General Profit & Loss Account

Branch Adjustment A/c                                 Dr

To General P & L A/c

The entry will be reversed if there is net loss.

 

15) For closing the Goods Sent to Branch Account

Goods Sent to Branch A/c                          Dr.

To Trading A/c

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