by Generally when branches are small their accounts are maintained by the head office. If the branch is big and, specially, if it carries on manufacturing operations also, it usually maintains its own books of account, extracts own trial balance and prepares its own trading and profit and loss account and balance sheet.
The head office must, however, present one consolidated balance sheet for the benefit of the shareholders and the outside world. The head office will maintain, in its books, “Branch Account” to which goods or cash sent will be debited: When cash is received from the branch, the Branch Account will be credited.
The account is maintained more or less like other personal accounts, so that any expenses incurred on behalf of the branch will also be debited to the Branch Account. The balance of this account shows how much money the branch owes to the head office or, in other words, how much money the head office has invested at the branch.
Similarly, in the branch books, there will be Head Office Account. Goods received from head office, expenses incurred by the head office on behalf of the branch, cash received from head office, etc., will be credited. Cash sent to the head office will be debited. The balance in the account shows how much money is owing to the head office. There are a few special points to note.
Accounts of fixed assets. Usually, accounts relating to fixed assets used by the branch are kept in the head office books even if the asset is originally paid for by the branch. If it is so, the entry on purchase of a fixed asset by a branch will be to debit Head Office and credit Cash.
The head office will pass the following entry on receipt of advice from branch:
Branch Machinery (or Furniture or Building A/c) …. Dr.
To Branch Account
If payment for the asset is made by the head office, no entry will be passed by the branch. The head office will debit the particular branch asset (Branch Machinery, Branch Furniture, or Branch Building, etc.) and credit Cash.
Depreciation of Fixed Assets:
There is no specialty if the accounts of branch fixed assets are maintained in the branch books. But if the accounts of such assets are maintained in head office books, the entry in respect of depreciation will be:
Branch Account ….. Dr.
To Branch Fixed Assets
The branch will be debited because the branch uses the asset.
In the branch books, the entry will be:
Depreciation Account …. Dr.
To Hard Office Account
Head Office Expenses:
The head office always does some work on behalf of the branch and it is, therefore, usual to charge the branch at the end of the year with a reasonable amount for service rendered by the head office. The entry is:
Branch Account …… Dr.
To Profit and Loss Account
It may credit the Salaries Account, since it is mostly service rendered by the staff of the head office which has to be accounted for. The student should note not to credit cash since no payment is made specifically on this account. When salaries were paid to the head office staff, cash was credited; now only a proportionate charge is being made to the branch. The entry to be passed in the books of the branch is:
Head Office Expenses Account ….. Dr.
To Head Office Account
Head Office Expenses Account is an expense and will be transferred to its Profit and Loss Account by the branch at the end of the accounting year.
Reconciliation of Transit Items:
Normally, the balance shown in Branch Account (in head office books) and in the Head Office Account (in branch books) should be the same. One will be debit and the other will be credit. But on a particular date, there may be a difference in the balances shown by the two accounts. Suppose, branch remits cash on 30th March.
The branch will immediate debit head office and credit cash. But the head office will not pass the entry for receipt of cash till cash is actually received and that may be a few days later. For a few days, therefore, the two accounts will show different balances. On the date of closing of the accounts, the items in transit have to be brought into books. Adjustment entries have to be passed by the one which originally sent the cash or goods.
If cash is sent by the branch and is still in transit on the day of closing, branch will pass the following entry to make the necessary adjustment:
Cash in Transit Account ….. Dr.
To Head Office Account
Cash in Transit is an asset and will be shown in the balance sheet. If goods have been sent by the head office and are still in transit, the head office will pass the following entry on the date of closing:
Goods in Transit Account ….. Dr.
To Branch Account
The rule as to who will pass the entries in respect of cash or goods in transit is not hard. The head office may pass both the entries. For example, if cash sent by branch is still in transit and the entry for adjustment is to be passed in head office books, the entry will be:
Cash in Transit Account ….. Dr.
To Branch Account
The student must be careful to find whether something is in transit. If the balances shown by the branch account and the head office account are the same, nothing is in transit. If there is a difference, it should be assumed that cash (or goods) is in transit and the necessary entry should be passed.
Inter-Branch Transactions:
Where transactions take place between branches themselves, it will facilitate matters if a branch considers all transactions with other branches as if these are with head office. Suppose, Kanpur Branch sends goods to Agra Branch, the various entries to be passed will be as follows:
In Kanpur books:
Head Office Account ….. Dr.
To Goods Supplied to Head Office
In Agra books:
Goods Received from Head Office Account ….. Dr.
To Head Office Account
If each branch has to maintain accounts of all other branches, the ledger may become unwieldy. The head office will, of course, keep accounts of all the branches and will also record inter branch transactions. If, therefore, goods are supplied by Kanpur Branch to Agra Branch, the head office will pass the following entry:
Agra Branch Account ….. Dr.
To Kanpur Branch Account
Or
Agra Branch Account …… Dr.
Goods Received from Kanpur Branch Account ….. Dr.
To Goods Sent to Agra Branch Account
To Kanpur Branch Account
Incorporation of Branch Trial Balance in Head Office Books:
Since to the outside world, there is no difference between the head office and its branches, there must be a consolidated balance sheet if not a consolidated profit and loss account also. The process by which the consolidated balance sheet will be prepared is known as incorporation of branch trial balance. What it involves is that in the head office books, the Trading and Profit and Loss Account of the branch will have to be prepared and after that the combined balance sheet of the branch and head office. There are two ways of doing this.
First method:
In this method, the head office prepares Branch Trading Account Branch Profit and Loss Account.
The entries to be passed are as follows:
- Debit Branch Trading Account and credit Branch Account with the total of the items (in Branch Trial Balance) usually debited to a Trading Account, such as Opening Stock, Purchases, Wages, Manufacturing Expenses, etc.
- Debit Branch Account and credit Branch Trading Account with the total of items to be credited to the Trading Account Sales and Closing Stock.
- Debit Branch Trading Account and credit Branch Profit and Loss Account with gross profit revealed by the Trading Account. (The entry will be reversed if there is a gross loss.)
- Debit Branch Profit and Loss Account and credit Branch Account with the total of the various expenses and losses, e.g., Salaries, Rent, Depreciation, Discount Allowed, etc.
- Debit Branch Account and credit Branch Profit and Loss Account with the total of gains or incomes such as discount earned.
- Debit Branch Profit and Loss Account and credit (General) Profit and Loss Account with the net profit revealed by the Branch Profit and Loss Account. (The entry will be reversed if there is a loss).
The above six steps will enable the consolidated Branch Trading Account and Branch Profit and Loss Account to be prepared. If it is desired to close the books of the branch completely and to record branch assets and liabilities in the head office books for the purpose of preparing a common balance sheet, the following two further entries should be passed:
- Debit branch assets individually (such as Branch Debtors, Closing Branch Stock, Cash in Hand at Branch, Cash in Transit, etc.) and credit Branch Account with the total of the assets.
- Debit Branch Account and credit branch liabilities, such as Branch Creditors, Branch Expenses Outstanding, etc.
The effect of the eight entries is to balance off the Branch Account. It is not necessary to pass entries Nos. 7 and 8. In that case, the Branch Account will show a balance equal to net assets at the branch i.e., total of branch assets less branch liabilities.
Second method:
Under this method, the Branch Trading and Profit and Loss Account is prepared only as a memorandum account and entry is passed only for net profit or net loss at the branch.
Entries in Branch Books:
The branch books must also the closed. There are two ways of doing this. The first is to transfer all accounts to the head office account-separate entries being passed for revenue items and for assets and liabilities. The second method is to prepare the Trading and Profit and Loss Account and then to transfer the net profit or net loss to the head office account. Head office account will be closed, if assets and liabilities are also transferred if the assets and liabilities are not transferred, the head office account will show a balance equal to the net assets and thus a balance sheet can be prepared.
Under this method, it will be necessary to prepare the Branch Trading and Profit and Loss Account. The first three journal entries given in the first method will also be passed in this case, since they have nothing to do, really, with the closing of books.
If it is desired to close the books completely, assets and liabilities will be transferred to the Head Office Account the entries being exactly the same as the last two given in the first method. The Head Office Account will then balance. In some cases, the branch is not allowed to have full information about the value of goods sent to branch. In such as case, the branch is not informed about it and hence the branch cannot pass any entry in respect of it.
Only the Head Office will pass the appropriate entry in its own books. If such is the policy, the Head Office may not advise the branch about value of anything done by Head Office on behalf of the branch. Branch books will furnish a trial balance, but the information contained therein will be entirely inadequate to prepare the final accounts. In such a case, the branch will close the accounts of revenue items, at least, by merely transferring them to the Head Office Account.
Opening Entries:
Whether an opening entry is required in the books of the head office in the beginning of the year in respect of branch assets and liabilities depends upon what entries were passed at the close of the previous year. If accounts of branch assets and branch liabilities were not transferred to Branch Account, no opening entry will be required. Only the balance in the Branch Account will be carried forward. If the Branch Account was closed by transfer of the branch assets and liabilities, an entry will be required in the beginning of the year to re-transfer the assets and liabilities to the Branch.
