Methods of ascertainment of Profit or Loss of Branch under Debtors System

29/03/2021 1 By indiafreenotes

Under this system the Head Office opens one Branch Account to record various transactions with the Branch. Branch Account is maintained in the form of a Debtor Account. In the books of the Head Office, Branch Account is debited with the goods supplied and all expenses met by Head Office and credited with all remittances and returns, similar to Customers Account.

Therefore, the system can be called Debtors System or One Account System. The excess of the credit over its debit represents a profit or vice-versa, and is transferred to General Profit and Loss Account of Head Office. Branch Account is prepared in the books of Head Office and is a Nominal Account.

From the accounting point of view, the following are the further classifications:

(a) Branches receive goods from Head Office at cost price and are authorised to sell them for cash only.

(b) Branches receive goods from Head Office at cost price and are authorised to sell them for cash as well as on credit.

(c) Branches receive goods from Head Office at cost plus certain percentage.

(A) Branches Received Goods from Head Office at Cost Price and are Authorized to Sell them for Cash only:

The following journal entries are passed in the books of the Head Office for recording different Branch transactions:

 

1 Goods supplied to Branch Branch Account

 To goods sent to Branch Account

Dr.
2 Goods returned by Branch Goods sent to Branch Account

 To Branch Account

Dr.
3 Sales of goods for cash by the branch No entry Dr.
4 Remittance of cash by Branch Bank Account

  To Branch Account

Dr.
5 Cash sent to branch by head office for expenses Branch Account

  To Bank Account

Dr.
6 Unsold stock lying with branch Closing Stock Account

 To branch Account

Dr.
7 Closing balance of petty cash Branch Petty Cash Account

 To Branch Account

Dr.
8 For profit or Loss of the Branch

(A)  if Profit

 

 

 

(B)  If loss

 

Branch Account

 To general profit or loss, A/c

Dr.
General profit or loss A/c

 To Branch Account

 

The above journal entries are posted in the Branch Account. The Branch Account appears as follows:

Dr.                                                                                                  Branch Account

(In the books of the Head office)

Cr.
To Stock (Opening Balance)

To Petty Cash (Opening Balance)

To Goods sent to Branch

To Bank Account

 Salary

 Rent

 Petty expenses

Rs.   By Bank (Cash received)

By Goods sent to Branch (Returns)

By Balance c/d:

 Closing stock

 Petty Cash

Rs.
To profit transferred to Profit and Loss account

 

    By Loss transferred to Profit and Loss account  

A simple branch Account in the books of the Head Office appears as given above.

The following entries may also be considered when there is opening balance and closing balance of stocks furni­ture, Outstanding expenses, Pre-paid expenses etc.

(C) Branches Receive Goods from Head Office at Cost plus Certain Percentage:

Under the above two methods – (A) and (B) – the Head Office send the goods at cost price. In certain cases, while sending the goods to Branches, the Head Office invoices the goods at cost plus certain percentage i.e. at selling price or market price or loaded price.

The main purpose of sending the goods at invoice price is that the Head Office does not want to reveal the real profit to the manage­ment of the Branch.

Here, the Opening stock, Goods sent to Branch, Goods returned by Branch and Closing stock will appear at invoice price only. To find out the real profit, adjustment entries are to be made to remove the excess price or the difference between the invoice price and the cost price.

The accounting entries are given below:

1 To adjust the difference in the opening stock at Branch Stock Reserve Account

  To Branch Account

Dr.
2 To adjust the difference in goods supplied to Branch Goods Sent to Branch Account

  To Branch Account

Dr.
3 To adjust the difference in the goods returned by Branch Branch Account

  To Goods Sent to Branch Account

Dr.
4 To adjust the difference in the Closing stock Branch Account

  To Stock Reserve Account

Dr.

*When we prepare Branch Account through Single Column Method the above adjustment entries are needed.

Alternatively, Branch Account can be prepared through Double Column Method and if so, an adjustment entry is needed. This we prove by solving a problem under both the methods.