illustrations on Preparation of Dependent Branch A/c- (Debtor System)

Debtors System is commonly used for maintaining accounts of dependent branches. Under this system, the branch does not maintain a separate set of books. Instead, the head office records all branch transactions. The head office maintains a Branch Account to record branch-related activities, including goods sent to the branch, cash sent for expenses, sales proceeds, and outstanding balances.

Features of the Debtors System:

1. Centralized Accounting: All branch transactions are recorded by the head office.
2. Focus on Debtors: Emphasis is on recording branch credit sales and managing branch debtors.
3. One Account: A single Branch Account is prepared to capture all transactions.
4. Profit Determination: The profit or loss of the branch is determined through this account.

Steps to Prepare a Branch Account:

The Branch Account is prepared to capture:

1. Opening Balances: Stock, debtors, petty cash, and liabilities.
2. Goods Sent to Branch: At cost or invoice price.
3. Branch Expenses: Cash sent for rent, salaries, etc.
4. Branch Revenues: Sales (cash and credit).
5. Closing Balances: Stock, debtors, and petty cash.

illustration

The following data is available for a dependent branch:

• Opening Balances:
  • Stock: ₹20,000
  • Debtors: ₹15,000
  • Petty Cash: ₹5,000
• Transactions during the Year:
  • Goods sent to Branch: ₹60,000
  • Cash sent for Expenses: ₹10,000
  • Credit Sales: ₹50,000
  • Cash Sales: ₹30,000
  • Cash Collected from Debtors: ₹45,000
  • Cash Sent to Head Office: ₹80,000
• Closing Balances:
  • Stock: ₹10,000
  • Debtors: ₹20,000
  • Petty Cash: ₹5,000

Prepare the Branch Account in the books of the Head Office.

Solution:

Branch Account (in the Books of Head Office)

Profit/Loss Calculation:

• Opening Stock: ₹20,000
• Goods Sent to Branch: ₹60,000
• Total Goods Available: ₹80,000
• Less: Closing Stock: ₹10,000
• Cost of Goods Sold: ₹70,000
• Sales Revenue: ₹80,000 (Cash Sales ₹30,000 + Credit Sales ₹50,000)
• Branch Expenses: ₹10,000

Profit = Sales Revenue – (Cost of Goods Sold + Branch Expenses)

Profit = ₹80,000 – (₹70,000 + ₹10,000) = ₹0 (Break-even scenario)

Analysis of the Debtors System:

1. Efficiency: It ensures that all branch activities are centrally monitored, promoting control and uniformity.
2. Debtor Management: The focus on debtors ensures timely collection and better cash flow.
3. Simplified Transactions: The system reduces the complexity of maintaining multiple accounts for branch operations.