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Saturday, October 27, 2018

Financial Accounting Notes: Branch Accounting and Departmental Accounting

Unit – 3: Branch Accounting and Departmental Accounting
Meaning of Branch and Branch Accounting
Branch: The dictionary meaning of the word branch is any subordinate division of a business, subsidiary shop, office etc. Acc to the provisions contained in sec29 of the Companies Act 1956 it would appear that a branch is any establishment carrying on either the same or substantially the same activity as that carried on by head office of the company.
A branch is a separate segment of a business. In order to increase the sales, business houses are requires to market their products over a larger territory and may generally split their business into certain divisions or parts. These various parts or divisions may be located in different part of the same city or in different cities of the same country or in different countries in the world. These are known as branches. The head office controls the activities of various branches.
Branch accounting: Branch accounting is the process through which the accounting system of a branch is maintained.
Objectives of Branch Accounting
The following are the main objects of maintaining branch accounts:
a.       Profit or loss of each branch can be found out
b.      They help in controlling branches
c.       Actual financial position of the business can be found out on the basis of head office and branch accounting periods.
d.      Branch requirements of goods and cash can be estimated.
e.      Suggestions for increasing the efficiency of the branch can be sent on the basis of branch accounts.
f.        They help in complying with the requirements of law because acc to companies act 2013.
Types of Branch:
From the accounting point of view, branches may be classified into
a)      Dependent Branch
b)      Independent Branch
c)       Foreign Branch
(a) Dependent Branch: The term ‘Dependent Branch’ means a branch which does not maintain its own set of books. All records have to be maintained by the head office. When the business policies and the administration of a branch are wholly controlled by the head office, its accounts also are maintained by it. In such a case, Branch accounts are written up at the head office out of reports and returns received from the branch.
The following are the main features of such branches:
a.       Such branches sell only those goods which are received from the head office and are not usually allowed to make purchases in the open market except with the express permission of the head office.
b.      Goods are supplied by the head office to such branches either at cost price or at invoice price.

c.       All expenses of the branch such as rent, salary of staff, advertisement etc., are paid by the head office.
d.      Petty expenses such as cartage, entertainment, freights etc. are paid by the branch manager out of petty cash book balance. Such book is maintained at the branch either as simple petty cash book or on imprest system.
e.      The amount received from cash sales or cash received from debtors is either remitted to the head office daily or deposited in the account of the head office in some local bank.
f.        The branch manager is normally expected to sell the goods for cash only but he may be authorized to sell goods on credit as well.
In case of a dependent branch, the head office may keep accounts of the branch acc to any of the following systems
1)      Debtors System
2)      Stock and Debtors system
3)      Wholesale System
4)      Final Account system 
(1) Debtors System (Synthetic Method): This system is adopted in case of branches of small size. Under this system, a branch account is opened separately for each branch in the books of head office. This account is nominal account in nature. The opening balances of stock, debtors (if any), and petty cash are debited to the branch account.
(2) Stock and Debtors System: Profit and loss of a branch can be found out by preparing branch account but there is another method for the same purpose. This method is known as stock and debtors method. If it is desired to exercise a more detailed account control over the working of a branch, the accounts of the branch are maintained under which is described as the stock and debtors method.
(3) Wholesale Branch System: Manufacturers may sell goods to the consumers either through the wholesalers and approved stockists or through their branches. In order to know whether self-retailing through branch is more profitable than wholesaling, it is necessary to make distinction between profit due to wholesale and profit due to retail business of the branch. Wholesale price is always less than retail price.
(4) Final Accounts System: The head office can also ascertain the profit or loss of a dependent branch by preparing branch trading and profit and loss a/c at cost. In such cases, the head office may also maintain a branch account. 
Treatment of Certain Branch Transactions in case of dependent branch
1)      Branch Expenses paid by the branch out of Petty Cash.  Such expenses will be deducted from the branch cash and at the close reduced balance of cash will be shown on the credit side of the branch account. Such expenses need not be shown in the branch account. If such expenses are re-imbursed by the head office to the branch (if the petty cash is maintained on imprest system), then these must be debited to the branch account. However, same opening and closing balances of petty cash will be shown on the debit and credit side respectively of the branch account.
2)      Depreciation of Fixed assets.  This is not shown in the branch account. But the closing balance of the fixed assets will be shown on the credit side of the branch account after deduction of the amount of depreciation.

3)      Credit sales, bad debts, sales returns, allowances, and discount allowed pertaining to branch.  These items are pertaining to debtors account and will not be shown in the branch account. However, these items will be taken into consideration while ascertaining the amount of opening or closing balance of debtors or amount received from debtors who are shown in the branch account.
4)      Goods in transit. Goods in transit is the difference between goods sent by head office and received by the branch. Such goods will be shown either on the both sides of the branch account or will be ignored totally while preparing the branch account.
5)      Purchase of fixed asset by the branch.  If the branch has purchased any fixed assets, then on one hand branch account will be credited by the head office and on the other the remittance from the branch will be reduced by the amount. If branch has purchased the asset on credit basis and liability arising from such purchase will be shown on the debit side of branch account.
6)      Sale of Fixed Asset. If the sale is for cash, cash remittance will increase from the branch but asset will reduce in value to be shown on the credit side of the branch account as this is automatically adjusted through the above adjustments.
(b) Independent Branch and Their features
Independent branches are those which act independently within the broad policies framed by the Head office in conducting their day-to-day activities.
The main features of independent branches.
a.       They need not depend on the Head office for their requirements of supplies of goods. They can make purchases themselves. Of course, they can also obtain supplies of goods from the head office as and when they want.
b.      They can sell goods only for cash and credit at any price they consider profitable.
c.       They need not remit the money received by them from cash sales and debtors to the Head office periodically. They can retain the funds and meet their day-to-day expenses out of those funds. Finally, if they have surplus cash in their hands, they can remit the same to the Head office.
d.      They keep a complete set of books for recording their transactions. So, they can prepare their own Trial Balance, Trading and Profit and Loss Account and Balance Sheet.
e.      However, as they are ultimately responsible to the Head office, at the end of every financial period, they are required to submit a copy of their Trial Balance to the Head office.
Treatment of some Specific Transactions in case of Independent Branch
(i) Cash in transit: If the cash sent by branch to H.O. or the cash sent by H.O. to branch has not been received by the other party upto the end of the year, it is known as cash in transit. There is a difference in the balances of two accounts on account of this transaction also. To reconcile the two balances, the following journal entry is passed in H.O. books at the end of the year:
Cash in Transit a/c Dr.
To Branch a/c
(Cash in transit taken into books)
At the beginning of the next year, reverse entry will be passed.
(ii) Goods in transit: When goods are dispatched by the head office to branch and the branch does not receive it even upto the end of the year, it is known as goods in transit. In the same way when goods are returned by branch to head office and the head office does not receive it upto the end of the year it is also known as goods in transit.
It is quite understandable that a difference should arise in the balances of two accounts due to these transactions. Therefore, to reconcile, the following journal entry will be passed in head office books in both the circumstances:
Goods in Transit a/c Dr.

To Branch a/c
(Goods in transit taken into books)
In the Balance Sheet of Head office both the above items will be shown as an asset.
(iii) Depreciation on Fixed Assets: Often, the accounts of fixed assets of a branch are maintained in the head office books.  In such a case,
Entry for depreciation in H.O. Books:
Branch A/c                             Dr                        
     To Branch Fixed Assets A/c

The branch passes the following entry in its own books for Depreciation:
Depreciation A/c                         Dr                    
     To Head Office A/c

Any purchase of fixed assets by the branch, in such a case, should be debited to head office account and credited to bank (or Supplier’s A/c) in the branch books.  Similarly, in head office books the same should be debited to branch fixed assets account and credited to Branch A/c.
(iv) Inter-Branch Transactions: Where there are number of branches, inter-branch transactions are likely to take place, e.g., cash or goods sent by one branch to another or expenses incurred by one branch on behalf of another.  Such transactions are usually adjusted assuming that they were entered into under the instructions from the H.O.  Suppose Kolkata branch transfers some goods to Mumbai branch under the directions of the H.O.  The entries will be as follows:
In the books of Kolkata Branch:
Head Office A/c                        Dr                       
        To Goods Supplied to Branch A/c

In the books of Mumbai Branch:
Goods received from Branches A/c        Dr          
        To Head Office A/c

In the books of Head Office:
Mumbai Branch A/c                      Dr                 
        To Kolkata Branch a/c

Note:    Inter-branch transactions without the knowledge of head office may be passed as between the branches only in the usual manner.
c) Foreign Branches: Foreign branch usually maintains a complete set of books under double entry principles. So, the accounting principles of a Foreign Branch will be the same as those applying to an Inland Branch. Before a Trial Balance of the Foreign Branch is incorporated in the H.O. books, it has to be converted into home currency.
Rules for conversion: In case of fluctuating rates of exchange, the following rules for conversion are applied:
Nature of Account
Exchange Rate Applicable
Fixed Assets
Fixed Liabilities
Current Assets & Liabilities
Remittances sent by the branch
Goods received from H.O. as well as goods returned to H.O.
The Nominal A/c’s (except next two)
Depreciation on Fixed Assets

Opening and Closing stocks

Balance in H.O. A/c
Rates ruling at the time they were acquired.
Rates ruling as on the date of the Trial Balance.
Rates ruling as on the date of the Trial Balance.
At the actual rates at which they were made.
At the rates ruling on the date of dispatch or the date of receipt.
Average rate ruling during the accounting period.
Rate of conversion applicable in case of the particular asset concerned [as indicated in (a) above].
Rates ruling of on the opening and closing dates respectively.
Value at which the Branch A/c appears in H.O. books on the date.
Difference in Exchange: As a result of conversion of branch trial balance in home currency, a difference in the trial balance is will often arise. If a loss (Dr.) results, it should be debited to Profit & Loss A/c, if a profit (Cr.) results, the prudent course is to credit it to an exchange Reserve A/c so as to provide for future losses on exchange.

Unit – 3: Departmental Accounting
Meaning of Department and Departmental Accounting:
Department refers to activity centre (profit or cost centre) usually located in the same roof but carrying distinct type of activities.
Departmental Accounting:
Department accounting or departmental accounting is a system of financial accounting which is used in the organizations whose all works are done through their different departments or departmental stores.  Departmental accounts are prepared separately for each department and trial balance will also be prepared. Departmental P&l account is prepared to ascertain the profit or loss of each department separately and at the end of the year it is transferred to General profit and loss account of the whole organisation.
Objectives of departmental accounting
The main objects of preparing such accounts are:
a)      To have comparison of the results of a particular department with previous year and also with the other departments of the same concern;
b)      To help the proprietor in formulating policy to expand the business on proper lines so as to optimize the profits of the concern;
c)       To allow departmental managers’ commission on the basis of the profits of their departments; and
d)      To generate information, which may be helpful for planning, control, and evolution of performance of each department and for taking various managerial decisions?
Advantages of Department Accounts
The main advantages of Departmental accounting are as follows:
a)      It provides an idea about the affairs of each department.
b)      It helps to evaluate the performance of each department.
c)       It helps to reward the Departmental mangers and staff on the basis of performance.
d)      It facilitates control over the working of each department.
e)      It helps to compare the result of one department with those of other departments.
f)       It helps the management to formulate the right business policies for the various departments.
g)      It will help in the preparation of departmental budgets.
h)      It helps to calculate stock turnover ratio of each department.
Types of Department
There are two types of department
a)      Dependent Department
b)      Independent Department
Dependent department are those which transfer goods from one department to another department for further processing. Here, the output of one department becomes the input for the other department. These transfers may be done at cost or pre-decided market price. The price at which this is done is known as transfer price. In these departments unloading is required if the transfer price is having profit element. This is done by the passing the following entry:
Profit and Loss A/c                                          Dr.
                To Stock Reserve A/c
Independent Department is those departments which work independently of each other and have negligible inter departmental transfer.
Accounting Procedure
A departmental organization can record its transactions in two ways:
a)      Unitary method: - Under this method, the accounts of each department are kept separately. The results of the various departments are finally combined together in one general P & L account.
b)      Tabular or columnar method: - Under this method, the accounts of each department are kept in columnar form with a separate column for each department and also with a separate column for the total. The tabular method is more popular and is adopted by almost all the departmental undertaking.
Under this method, at the end of the accounting year, Trading and P & L account (columnar) is prepared with separate amount column for each of the department and also for the total. The trading and P & L of a departmental organization kept in the columnar basis is called Departmental Trading and P & L account. In trading account, opening stock, purchases, direct expenses and Gross profit are debited and sales and closing stock credited. Indirect expenses have to be apportioned between the departments and debited to the P&L account.
Allocation of Expenses and Incomes
Departmental Expenses: The expenses of a business can be broadly divided into following two categories:
1. Direct expenses: Expense relating to a particular department are called direct expenses. They are charged to respective department. For example wages, staff salaries, material etc.
2. Indirect Expenses: Expenses relating to more than one department are called indirect expenses. They are further divided into:
(a) Expenses which can be allocated
(b) Expenses which cannot be allocated
Allocation and Apportionment of Departmental Expenses
(1) There are certain expenses which can be specially incurred for a particular department. Such expenses are charged directly to the department.
(2) There are certain expenses which are indirect in nature and incurred for the whole department. Such expenses are distributed amongst various departments on some suitable basis. The following table will help to know the proper basis for apportionment of some important expenses among various departments.
a)   Sales expenses as traveling salesman, salary and commission, selling expenses after sales service, discount allowed, bad debts, freight outwards, provision for discount on debtors, sales manager’s salary and other benefits etc.
b)   All expenses relating to building as rent, rates, taxes, air conditioning expenses, heating, insurance building etc.
c)    Lighting
d)   Insurance on stock
e)   Insurance on plant & machinery
f)    Group insurance premium
g)   Power
h)   Depreciation, Renewals & Repairs
i)     Canteen expenses, Labour welfare expenses
j)     Works manager’s salary
k)   Carriage inwards
a) Sales of each department

b) Area or value of floor space

c)  Light points
d) Average stock carried
e) Value of plant & machinery
f)  Direct wages
g) H.P or H.P x Hours worked
h) Value of assets in each department
i)   No. of employees
j)   Time spent in each department
k) Purchases of each department
(3) There are certain expenses which cannot be allocated on some equitable basis such as debenture interest, dividend, share transfer fees, general office expenses, income tax etc. and thus should not be apportioned. Profits of all departments should be brought down in one total and such expenses should be debited and non-departmental profits credited to this without making any effort for its apportionment amount different departments in Combined income account.
Allocation of incomes
Common incomes should be allocated among different departments on the following basis:
a)      Discount received and reserve for discount on creditors: - They should be allocated on the Basis of net purchases of each department.
b)      Commission earned on sales: - It should be allocated on the basis of net sales of each department.
c)       Other incomes: - Such as dividend received, transfer fees etc can be allocated equally. Alternatively, they can be credited to General P & L account.
Inter departmental transfers
Transfer of goods or services by one department to another department are called inter departmental transfers. When one department transfers goods to another department, the transaction should be considered as a sale for the supplying department and a purchase for the receiving department. As such, the supplying department should be credited and the receiving department should be debited with the value of goods supplied.
Similarly, when one department renders service to another department, the department rendering the service should be credited and the department receiving the service should be debited with the value of service rendered.
Goods may be transferred either at cost price or at selling price. If goods are transferred at selling price by the transferor department and such goods are unsold at the end of the accounting year by the transferee department, then profit charged on such unsold goods by the transferor department is treated as unrealized profit and it should be debited to the general profit and loss account as stock reserve. In the balance sheet stock reserve should be deducted from closing stock. If unrealized profit is contained in the opening stock, such reserve should be credited to the general profit and loss account.
Calculation and Treatment of Unrealized Profit
To calculate Stock Reserve, the following steps must be followed:
Step 1: Calculate the value of IDT (inter Department transfer) by using the following formula:
Closing Stock of Transferor dept x IDT / Total Direct expenses excluding op stock
Step 2: The value of step 1 denotes the Value of IDT stock included in Transferee dept. Now calculate the GP (Gross Profit) ratio at which transferor dept sells goods to transferee. i.e. this amount is at selling price. GP ratio is to be calculated on SP to eliminate Unrealized Profit i.e. St. reserve with the help of following formula:
GP ratio on sales = (GP of Transferor Dept / Total sales) /100
Where Total sales = Normal sales + IDT sales
Step 3: Result of Step 1 x Result of Step 2
Treatment: The following journal entry is to be passed to eliminate the amount of unrealized profit:
General P & L                                     A/c
                To Stock Reserve A/c
Note: In next year the stock reserve of current year will become realised and to be credited to P & L a/c
Distinction between Departmental Accounts and Branch Accounts
The main distinctions between Departmental Accounts and Branch Accounts are given below:

Basis of Distinction
Departmental Accounts
Branch Accounts
Maintenance of Accounts
All accounts are maintained at one place & departmental trading and profit and loss account is prepared accordingly.

In case of branch, all branch accounts are kept at Head Office except cash, customers and stock registers are maintained at branch. But in case of independent branch all accounts are kept at branch and a branch prepares its own trading and Profit & Loss Account.
Allocation of Common Expenses
Departments are not geographically separated from each other, so problem of allocation of common expenses among different departments arises.
As branches are geographically separated from each other so the problem of allocation of common expenses among different branches does not arises.
Adjustments &  Reconciliation of Accounts
The question of adjustments and reconciliation of accounts does not arise in departmental accounts.
In case of independent branch some adjustments and reconciliation of head office and the branch accounts are required to be done at the end of the year.
Problem of foreign currency
The problem of conversion of foreign currency into home currency does not arise.
The problem of conversion of foreign branch figures may arise at the time of finalization of accounts of head office.
Reason for creation
Departments are the result of fast human life.
Branches are the outcome of tough competition and expansion of business.
Functional Division of accounts
Functional division is possible in case of departmental trading which is a must for the existence of a department.
It is not possible in case of a branch trading.

Segmentation and Condensation
Departmental Accounting is practically a segment of accounts.
Branch Accounting is a condensa­tion of accounts.

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