Tag: cost price

In branch accounting, businesses often maintain centralized records at the Head Office (H.O.) for dependent branches. One common system used is the Debtors System, where the H.O. keeps a single comprehensive account for each branch. Under this method, goods are supplied by the H.O. to the branch either at cost price or invoice price. When goods are sent at cost price, accounting becomes more straightforward and transparent, as no internal profit loading is involved.

This system allows the organization to calculate the branch’s profit or loss accurately without needing to adjust for markup. Understanding how this system works when goods are sent at cost price is essential for proper financial management.

Sending Goods at Cost Price

When the Head Office sends goods to its branch at cost price, it means that the branch receives goods at the same value the H.O. paid for them. There is no markup or loading added to the value of the goods. This approach is typically adopted when:

• There is no need to conceal cost information from the branch.

• The company wants simple and transparent accounting.

• The internal control concern is minimal.

For example, if the H.O. buys goods for ₹1,00,000 and sends them to the branch at cost, the branch receives goods worth ₹1,00,000, and no internal profit is recorded in the books.

Debtors System in Branch Accounting

The Debtors System is suitable for small, dependent branches that do not maintain full books of accounts. In this system:

• A single Branch Account is maintained by the H.O.

• This account is nominal in nature.

• It records all branch-related transactions: opening balances, goods sent, expenses, sales, collections, and closing balances.

This account helps ascertain profit or loss made by the branch during an accounting period.

Features When Goods Are Sent at Cost Price:

When goods are sent at cost under the Debtors System, the following features are observed:

• No need for adjustments for internal loading or markup.

• The Branch Account reflects actual cost figures, simplifying the profit calculation process.

• Stock at the branch is valued at cost—both opening and closing stock.

• No stock reserve or separate adjustment accounts are needed.

• Ideal for small businesses or where trust and simplicity are prioritized.

Entries in the Head Office Books:

The Head Office records the following entries when goods are sent at cost:

1. For Goods Sent to Branch:

   Branch Account Dr.
To Goods Sent to Branch A/c

2. For Cash Sent to Branch for Expenses:

   Branch Account Dr.
To Bank/Cash A/c


3. For Sales Made by Branch:

   • Cash sales:

     Cash/Bank A/c Dr.
To Branch Account

   • Credit sales:

     • No immediate entry unless collections are made.

4. For Collections from Debtors:

   Cash/Bank A/c Dr.
To Branch Account

5. For Closing Stock, Debtors, Petty Cash, etc.:

   Branch Stock/Assets A/c Dr.
To Branch Account


6. For Profit or Loss:

   • If the credit side > debit side → profit:

     Branch Account Dr.
To Profit and Loss A/c


   • If debit > credit → loss:

     Profit and Loss A/c Dr.
To Branch Account

Profit or Loss Determination:

Under this system, profit or loss of the branch is calculated simply as the difference between credit and debit totals in the Branch Account.

Formula:

Branch Profit = Total Credits – Total Debits

iIllustration

Let’s understand with a basic example:

Data:

• Opening Stock at Branch: ₹20,000

• Goods Sent to Branch: ₹1,00,000 (at cost)

• Cash Sales: ₹50,000

• Credit Sales: ₹80,000

• Cash Received from Debtors: ₹60,000

• Expenses Paid by H.O.: ₹10,000

• Closing Stock: ₹30,000

• Closing Debtors: ₹20,000

Branch Account (Abridged):

Advantages of Sending Goods at Cost:

• Simple Accounting: No loading or adjustments needed.

• Transparency: Branch receives and sells goods at actual cost.

• Accurate Profit Calculation: Reflects true cost and sales without markup distortions.

• Easy for Small Businesses: Especially where branches are closely managed by H.O.

• No Need for Adjustment Entries: Saves time and reduces errors.

Disadvantages:

• No Internal Control: Branch staff knows the actual cost, which could be misused.

• Unsuitable for Large Organizations: Where better control through invoice pricing is preferred.

• Cannot Conceal Cost or Margin: May not be desirable in competitive environments.

When to Use This Method:

• When branches are small and fully dependent on H.O.

• Where simplicity is more important than control.

• When the H.O. wants easy profit determination.

• When cost transparency is not a concern.