Tag: Reconstruction Accounting

Limited Liability Partnership (LLP)

Limited Liability Partnership (LLP) is a hybrid business structure in India that combines the flexibility of a partnership with the limited liability protection of a company. Introduced under the Limited Liability Partnership Act, 2008, LLPs provide partners with the advantage of restricted personal liability, shielding their assets from business debts. Each partner is liable only for their agreed contribution, and the actions of one partner do not bind others. LLPs are widely preferred for professional services and small businesses due to their minimal compliance requirements, tax benefits, and operational ease. They must be registered with the Ministry of Corporate Affairs (MCA).

Features of a Limited Liability Partnership (LLP)

• Separate Legal Entity

An LLP is a distinct legal entity, separate from its partners. It can own assets, incur liabilities, enter contracts, and sue or be sued in its own name, ensuring continuity even if partners change.

• Limited Liability of Partners

The liability of each partner is limited to their agreed contribution, protecting personal assets from being used to settle business debts or obligations. Partners are not responsible for the misconduct or negligence of others.

• Flexible Management Structure

LLPs do not follow a rigid hierarchy. Partners can define their roles and responsibilities in the LLP agreement, providing operational flexibility and decision-making freedom.

• Perpetual Succession

An LLP has perpetual succession, meaning its existence is not affected by the death, retirement, or insolvency of partners. It continues to operate until formally dissolved.

• No Minimum Capital Requirement

There is no mandatory minimum capital contribution to start an LLP, making it an accessible business structure for startups and small businesses. Contributions can be in cash, property, or intangible assets.

• Tax Efficiency

LLPs enjoy tax benefits under Indian law. They are exempt from Dividend Distribution Tax (DDT) and Alternate Minimum Tax (AMT) does not apply to them. Additionally, profits are taxed only once, unlike companies where dividend taxation applies.

• Low Compliance Requirements

LLPs require less compliance compared to companies. For instance, there are no mandatory board meetings, and annual compliance involves filing just two forms: the Annual Return (Form 11) and Statement of Accounts and Solvency (Form 8).

• Partner and Entity Separation

Partners act as agents of the LLP, not of each other. This separation ensures that the LLP is liable for obligations arising from authorized business activities, not individual partners, unless specified otherwise in the agreement.

Company

Company is a legal entity formed by individuals, associations, or other entities to conduct business activities, governed by the Companies Act, 2013 in India. It possesses a separate legal identity, meaning it is distinct from its members, and enjoys perpetual succession, ensuring continuity regardless of ownership changes. Companies can enter contracts, own assets, and sue or be sued in their name. They are categorized as private, public, or one-person companies. Shareholders’ liability is limited to their shareholding, offering legal protection, scalability, and opportunities to raise capital through equity or debt.

Features of a Company

• Separate Legal Entity

Company is a distinct legal entity, separate from its owners (shareholders). It can own property, enter into contracts, sue or be sued in its own name. This ensures that the company is independent of the individuals managing or owning it.

• Limited Liability

Shareholders’ liability in a company is limited to the amount unpaid on their shares. This protects personal assets from being used to settle the company’s debts, offering financial security to investors and owners.

• Perpetual Succession

Company enjoys perpetual succession, meaning its existence is unaffected by changes in membership, such as death, insolvency, or withdrawal of shareholders or directors. It continues to operate until legally dissolved.

• Separate Ownership and Management

In a company, ownership lies with the shareholders, while management is entrusted to a board of directors. This separation ensures professional management and allows shareholders to focus on returns rather than day-to-day operations.

• Transferability of Shares

Shares of a company can be freely transferred in public companies, subject to certain restrictions in private companies. This feature provides liquidity to shareholders, enabling easy entry and exit.

• Artificial Legal Person

Company is an artificial person created by law. It has rights and obligations, such as owning assets, incurring liabilities, and entering contracts, similar to a natural person, but it acts through its authorized representatives.

• Common Seal (Optional)

Company traditionally uses a common seal as its official signature for authenticating documents. Although optional under the Companies Act, 2013, it symbolizes the company’s approval on agreements.

• Statutory Compliance and Governance

Companies must adhere to statutory regulations under the Companies Act, 2013, including regular filings, audits, and annual meetings. This ensures accountability and transparency, promoting trust among stakeholders.

Key differences between LLP and Company

Basis of Comparison	LLP	Company
Legal Status	Separate Entity	Separate Entity
Governing Law	LLP Act, 2008	Companies Act, 2013
Ownership Structure	Partners	Shareholders
Liability	Limited	Limited
Minimum Members	2 Partners	2 (Private), 7 (Public)
Maximum Members	Unlimited	200 (Private), No Limit (Public)
Capital Requirement	No Minimum	Minimum Specified
Management	Partners	Board of Directors
Taxation	Pass-through Tax	Corporate Tax
Fundraising	Limited Options	Equity/Debt
Transferability of Ownership	Restricted	Flexible
Compliance	Low	High
Perpetual Succession	Yes	Yes
Profit Sharing	Flexible	Proportional to Shares
Suitability	Small Businesses	Large Enterprises

Departmental Accounting is the practice of maintaining separate financial records for each department within an organization. It allows businesses to track the performance, profitability, and expenses of individual departments, facilitating better decision-making, cost control, and resource allocation. This system is particularly beneficial for organizations with multiple divisions, helping evaluate their contributions to overall business success.

Methods of Departmental Accounting

1. Columnar Method

In this method, the accounts of all departments are maintained in a single set of books. A separate column is allocated for each department under income, expenses, and assets/liabilities. It simplifies the preparation of the final accounts while showing the performance of each department individually.

2. Separate Books Method

Each department maintains its own set of books for recording transactions. At the end of the accounting period, the head office consolidates all departmental accounts to prepare the overall financial statements. This method provides detailed and independent performance data for each department.

3. Allocation of Common Expenses

In both methods, common expenses like rent, utilities, and salaries are allocated to departments based on a rational basis. For example:

• • Floor Area Basis: For rent or maintenance costs.
  • Sales Basis: For selling expenses.
  • Time Spent Basis: For shared administrative expenses.

4. Inter-Departmental Transfers

Transactions involving the transfer of goods or services between departments are recorded at cost or a mutually agreed price. These entries ensure proper credit and charge allocation, avoiding double counting.

5. Departmental Trading and Profit & Loss Accounts

Separate trading and profit & loss accounts are prepared for each department. These accounts highlight the revenue, expenses, and profits attributable to each department, ensuring clarity and performance evaluation.

6. Consolidated Final Accounts

The consolidated accounts represent the overall performance of the organization. After evaluating individual departmental accounts, they are merged to prepare the balance sheet and profit and loss account for the entire business.

Key Considerations

• Accurate allocation of common expenses is crucial for reliability.
• A consistent method of recording inter-departmental transfers should be followed.

• Regular monitoring ensures alignment with organizational objectives.

The head office (HO) uses various accounting systems to record and maintain financial data for its branches. The choice of system depends on the branch’s size, autonomy, and the nature of its operations. Two commonly used systems are the Debtors System and the Stock and Debtors System.

1. Debtors System

Debtors System is a simplified method of accounting used for branches that do not maintain complete records. It is typically used for dependent branches where all major financial decisions, stock management, and financial record-keeping are controlled by the head office. Under this system, the head office maintains a single account called the Branch Account in its books to record all transactions related to the branch.

This system helps the head office monitor branch performance without requiring complex financial reporting or maintenance of detailed records by the branch.

Features of Debtors System

1. Centralized Accounting
   • The branch does not maintain separate books of accounts.
   • All transactions related to the branch are recorded in a single Branch Account maintained at the head office.
2. Simplified Record-Keeping
   • The branch is only responsible for maintaining basic records, such as sales and cash receipts, and submitting periodic reports to the head office.
3. Recording Transactions
   • The head office records transactions like goods sent to the branch, cash received, expenses incurred, and stock adjustments in the Branch Account.
   • The balance of the Branch Account reflects the branch’s financial position.
4. Profit or Loss Determination
   • The head office determines the branch’s profit or loss by reconciling the Branch Account at the end of the accounting period.
   • For example, if the total credit (incomes) exceeds the total debit (expenses), the branch is profitable.
5. Control by Head Office
   • Since the branch does not maintain complete records, the head office exercises strict control over its operations.
6. Suitable for Dependent Branches
   • This system is ideal for smaller branches where financial independence is not practical.
7. Ease of Consolidation
   • Consolidating branch accounts with the head office accounts is straightforward as all data is already centralized.
8. Examples of Transactions

Goods sent to the branch, cash collected from branch sales, branch expenses paid by the HO, and closing stock at the branch.

Advantages of Debtors System

• Simple to implement and maintain.
• Suitable for small operations with low transaction volumes.
• Ensures centralized control by the head office.

2. Stock and Debtors System

Stock and Debtors System is a more detailed approach to accounting, suitable for branches that maintain some records but do not maintain a full set of financial accounts. Under this system, the head office maintains separate ledger accounts for stock, branch debtors, branch expenses, and branch incomes.

This method provides greater insight into the branch’s financial activities, making it particularly useful for larger branches with significant transactions but partial autonomy.

Features of Stock and Debtors System

1. Detailed Record-Keeping

   • Unlike the Debtors System, the head office maintains several accounts for a branch, such as:
     • Branch Stock Account: To track goods sent and received.
     • Branch Debtors Account: To record credit sales and collections.
     • Branch Expenses Account: For expenses incurred at the branch.
     • Branch Adjustment Account: To reconcile profit or loss.

2. Stock Valuation

   • Stock is tracked separately, and the valuation is adjusted for opening stock, closing stock, goods sent, and goods returned.

3. Credit Sales Monitoring

   • The system tracks branch debtors to monitor outstanding receivables and ensure timely collections.

4. Profit or Loss Calculation

   • The head office determines profit or loss for the branch by reconciling the stock account, debtor account, and expense account with branch incomes.

5. Separate Accounts for Each Branch

   • For organizations with multiple branches, separate accounts are maintained for each branch under this system.

6. Control Over Inventory

   • This system provides greater control over branch stock by monitoring stock levels, movement, and shrinkage.

7. Focus on Accountability

   • The branch is accountable for maintaining accurate records of sales, debtors, and stock movement.

8. Examples of Transactions

Recording goods sent to branch at cost or invoice price, credit sales at the branch, expenses paid locally, and closing stock adjustments.

Advantages of Stock and Debtors System

• Provides a detailed picture of branch operations.
• Tracks stock movement and debtor balances effectively.
• Helps in monitoring branch performance more accurately.

Limited Liability Partnership (LLP) is a hybrid business structure in India that combines the flexibility of a partnership with the limited liability protection of a company. Introduced under the Limited Liability Partnership Act, 2008, LLPs provide partners with the advantage of restricted personal liability, shielding their assets from business debts. Each partner is liable only for their agreed contribution, and the actions of one partner do not bind others. LLPs are widely preferred for professional services and small businesses due to their minimal compliance requirements, tax benefits, and operational ease. They must be registered with the Ministry of Corporate Affairs (MCA).

Features of LLP:

• Separate Legal Entity

An LLP is a distinct legal entity, separate from its partners. It can own assets, incur liabilities, enter contracts, and sue or be sued in its own name, ensuring continuity even if partners change.

• Limited Liability of Partners

The liability of each partner is limited to their agreed contribution, protecting personal assets from being used to settle business debts or obligations. Partners are not responsible for the misconduct or negligence of others.

• Flexible Management Structure

LLPs do not follow a rigid hierarchy. Partners can define their roles and responsibilities in the LLP agreement, providing operational flexibility and decision-making freedom.

• Perpetual Succession

An LLP has perpetual succession, meaning its existence is not affected by the death, retirement, or insolvency of partners. It continues to operate until formally dissolved.

• No Minimum Capital Requirement

There is no mandatory minimum capital contribution to start an LLP, making it an accessible business structure for startups and small businesses. Contributions can be in cash, property, or intangible assets.

• Tax Efficiency

LLPs enjoy tax benefits under Indian law. They are exempt from Dividend Distribution Tax (DDT) and Alternate Minimum Tax (AMT) does not apply to them. Additionally, profits are taxed only once, unlike companies where dividend taxation applies.

• Low Compliance Requirements

LLPs require less compliance compared to companies. For instance, there are no mandatory board meetings, and annual compliance involves filing just two forms: the Annual Return (Form 11) and Statement of Accounts and Solvency (Form 8).

• Partner and Entity Separation

Partners act as agents of the LLP, not of each other. This separation ensures that the LLP is liable for obligations arising from authorized business activities, not individual partners, unless specified otherwise in the agreement.

Merits of LLP:

• Limited Liability Protection

One of the most significant advantages of an LLP is the limited liability it offers to its partners. Each partner’s liability is restricted to their agreed contribution, safeguarding personal assets from business debts and liabilities. This provides a secure environment for entrepreneurs and investors.

• Separate Legal Entity

An LLP is recognized as a separate legal entity under the Limited Liability Partnership Act, 2008, meaning it can own property, enter into contracts, and sue or be sued independently of its partners. This ensures continuity and stability, even if partners change.

• Operational Flexibility

LLPs enjoy greater operational flexibility. Partners can define their roles, responsibilities, and profit-sharing ratios in the LLP agreement, tailoring the business structure to their specific needs.

• Tax Advantages

LLPs benefit from tax efficiency compared to companies. They are exempt from Dividend Distribution Tax (DDT) and have no corporate tax on distributed profits. Additionally, the profits of an LLP are taxed only once, eliminating double taxation.

• No Minimum Capital Requirement

Starting an LLP is financially accessible as there is no mandatory minimum capital requirement. Contributions can be in the form of tangible, intangible, or monetary assets, making it a preferred choice for startups and small businesses.

• Low Compliance Burden

LLPs require less regulatory compliance compared to companies. Annual filings are simpler, involving the Annual Return (Form 11) and the Statement of Accounts and Solvency (Form 8). There are no requirements for regular board meetings or extensive record-keeping.

• Perpetual Succession

LLPs have perpetual succession, meaning the business continues to exist regardless of changes in the partnership, such as death, insolvency, or withdrawal of a partner. This makes LLPs more stable and enduring than traditional partnerships.

• Ease of Ownership Transfer

The ownership of an LLP can be easily transferred by admitting or retiring partners as per the terms of the LLP agreement. This flexibility in ownership transfer simplifies succession planning and attracts potential investors.

Demerits of LLP:

• Limited Recognition in Fundraising

LLPs face challenges in raising capital compared to companies. They cannot issue equity shares, making it difficult to attract venture capitalists or private equity investors. This limitation may restrict the growth potential of an LLP, especially for businesses requiring significant funding.

• Tax Disadvantages for Certain Entities

While LLPs enjoy several tax benefits, they may be less tax-efficient for certain businesses compared to private limited companies. For example, LLPs are not eligible for the startup tax exemptions offered to companies under specific government schemes. Additionally, high-profit LLPs may face higher effective tax rates.

• Limited Legal and Regulatory Recognition

Globally, LLPs are less recognized than companies, which could pose issues for businesses dealing with international clients or partners. This lack of universal acceptance might affect the credibility and operational ease of an LLP in cross-border transactions.

• Restrictions on Certain Businesses

LLPs are not suitable for businesses intending to expand into public markets or require substantial public investments. Certain regulated industries, such as banking and finance, also do not permit LLP structures, limiting their applicability to specific sectors.

• Mandatory Compliance Costs

Although LLPs have lower compliance requirements than companies, they still need to maintain books of accounts, undergo audits (if turnover exceeds ₹40 lakh or contribution exceeds ₹25 lakh), and file annual returns. These requirements may seem burdensome for very small businesses or sole proprietors.

• Dependence on Partner Agreement

The flexibility of an LLP depends significantly on the quality and clarity of the LLP agreement. Poorly drafted agreements can lead to disputes among partners, operational inefficiencies, and legal complications, especially when no clear guidelines exist for resolving conflicts.

• Conversion Challenges

Converting an LLP into another entity, such as a private limited company, involves a complex and lengthy process. This inflexibility might hinder businesses that wish to scale up and adopt a corporate structure to attract investors or comply with sector-specific regulations.

When two or more parties engage in a joint venture, they may decide to maintain separate books of accounts to record the financial transactions of the venture. This method ensures clarity in recording transactions, sharing profits or losses, and tracking contributions made by each party. Separate books are particularly useful for larger ventures involving significant investments, multiple transactions, or a long duration.

Features of Maintaining Separate Books:

• Joint Bank Account:

A joint bank account is opened to record all cash transactions, including contributions by co-venturers, payments for expenses, and receipts from sales or services.

• Joint Venture Account:

This account is used to record all transactions related to the joint venture, such as expenses incurred, revenues earned, and the profit or loss from the venture.

• Co-Venturers’ Accounts:

Separate accounts for each co-venturer are maintained to record their contributions, withdrawals, and share of profit or loss.

Steps in Maintaining Separate Books:

• Opening a Joint Bank Account:

Each co-venturer contributes their share of initial capital, which is deposited in the joint bank account. The account is then used for all cash transactions during the venture.

• Recording Expenses:

All expenses related to the venture, such as purchase of goods, wages, and other overheads, are paid through the joint bank account and recorded in the joint venture account.

• Recording Revenues:

Any income or revenue earned from the joint venture operations is deposited into the joint bank account and recorded in the joint venture account.

• Distribution of Profit or Loss:

After determining the profit or loss of the joint venture, it is transferred to the co-venturers’ accounts in their agreed ratio.

• Settlement:

Upon completion of the joint venture, the remaining cash balance in the joint bank account is distributed to the co-venturers after settling any outstanding liabilities.

Example

A and B enter into a joint venture to sell imported electronic gadgets. They agree to share profits and losses equally. Below are the transactions during the venture:

1. Initial Contribution:
   • A contributes ₹1,00,000.
   • B contributes ₹1,00,000.
2. Expenses Incurred:
   • Goods purchased for ₹1,50,000.
   • Transportation expenses of ₹10,000.
   • Advertising expenses of ₹20,000.
3. Revenue Earned:
   • Total sales amount to ₹2,20,000.
4. Profit Distribution:
   • The profit is shared equally between A and B.

Journal Entries

Date	Particulars	Debit (₹)	Credit (₹)
Jan 1	Joint Bank Account Dr.	2,00,000
	To A’s Account		1,00,000
	To B’s Account		1,00,000
Jan 5	Joint Venture Account Dr.	1,50,000
	To Joint Bank Account		1,50,000
Jan 10	Joint Venture Account Dr.	10,000
	To Joint Bank Account		10,000
Jan 15	Joint Venture Account Dr.	20,000
	To Joint Bank Account		20,000
Jan 31	Joint Bank Account Dr.	2,20,000
	To Joint Venture Account		2,20,000
Jan 31	Joint Venture Account Dr. (Profit)	40,000
	To A’s Account		20,000
	To B’s Account		20,000

Profit Calculation

Particulars	Amount (₹)
Revenue from Sales	2,20,000
Less: Goods Purchased	1,50,000
Less: Transportation	10,000
Less: Advertising	20,000
Profit	40,000

Each co-venturer’s share of profit = ₹40,000 ÷ 2 = ₹20,000

Ledger Accounts

1. Joint Bank Account

Date	Particulars	Debit (₹)	Credit (₹)	Balance (₹)
Jan 1	A’s Contribution	1,00,000		1,00,000
	B’s Contribution	1,00,000		2,00,000
Jan 5	Goods Purchased		1,50,000	50,000
Jan 10	Transportation		10,000	40,000
Jan 15	Advertising		20,000	20,000
Jan 31	Sales Revenue	2,20,000		2,40,000
Jan 31	A’s Withdrawal		1,20,000	1,20,000
	B’s Withdrawal		1,20,000	0

2. Joint Venture Account

Date	Particulars	Debit (₹)	Credit (₹)	Balance (₹)
Jan 5	Goods Purchased	1,50,000		1,50,000
Jan 10	Transportation	10,000		1,60,000
Jan 15	Advertising	20,000		1,80,000
Jan 31	Sales Revenue		2,20,000	40,000 (Profit)

Branch Account is a record kept to track the transactions, income, and expenses of a branch of a business separately from the main office. These accounts help in analyzing the performance and financial position of each branch.

Branches may either operate with complete autonomy (independent branches) or under direct control of the head office (dependent branches). The accounting for these branches varies based on their nature. For dependent branches, the head office manages most of the financial activities and maintains their accounts. Independent branches, however, maintain their records independently and send periodic summaries to the head office.

Objectives of Branch Accounts:

• Assessing Branch Performance

The most critical objective is to evaluate the financial performance of each branch. This helps the head office understand the profitability of the branches and take necessary steps to improve their efficiency.

• Ensuring Proper Control

Branch accounts enable the head office to exercise better control over the operations of the branches. It ensures that financial transactions are carried out as per organizational policies and minimizes instances of fraud or mismanagement.

• Facilitating Consolidation

Branch accounts simplify the consolidation of financial statements. The data from branch accounts can be integrated with the head office accounts to provide a complete view of the company’s financial status.

• Promoting Accountability

By maintaining separate accounts, branch managers are held accountable for the financial results of their branches. It encourages them to manage their operations efficiently and responsibly.

• Segregating Revenues and Expenses

Separate branch accounts help segregate the revenues and expenses of each branch, making it easier to analyze branch-wise profitability and financial trends.

• Monitoring Inventory and Assets

Branch accounts provide a systematic record of inventory and other assets held at the branch. This helps in avoiding discrepancies and ensuring proper asset utilization.

• Assisting in Decision-Making

Detailed branch accounts provide the management with valuable insights, aiding in strategic decision-making related to branch expansion, resource allocation, and cost optimization.

• Legal and Tax Compliance

Maintaining proper branch accounts ensures compliance with local legal and tax regulations. This is particularly important for branches operating in different regions or countries with varying tax laws.

Types of Branches and Their Accounting

Branches can generally be classified into two types:

1. Dependent Branches

• These branches operate under the direct supervision of the head office.
• The head office manages most financial activities, including purchasing, pricing, and policy-making.
• Branch accounts for dependent branches are maintained at the head office using the Debtors System or Stock and Debtors System.

2. Independent Branches

• These branches have significant autonomy and maintain their financial records independently.
• They prepare their profit and loss account and balance sheet and periodically send summaries to the head office.
• The Final Accounts System is commonly used for accounting in independent branches.

Methods of Branch Accounting:

Several methods are used to maintain branch accounts, including:

1. Debtors System:
   • Suitable for smaller, dependent branches.
   • The head office records all branch transactions, and only a summary is maintained.
2. Stock and Debtors System:
   • Provides a detailed view of branch activities, including stock, expenses, and income.
   • Helps in effective inventory control.

3. Final Accounts System:

   • Used by independent branches.
   • Branches prepare their trial balance, profit and loss account, and balance sheet.
4. Wholesale Branch System:
   • Used for branches dealing with wholesale trading.
   • Focuses on maintaining separate records for wholesale inventory and accounts receivable.

Advantages of Branch Accounts:

• Improved Financial Control:

Provides better control over branch operations and ensures adherence to organizational policies.

• Performance Evaluation:

Facilitates the analysis of profitability and efficiency of individual branches.

• Transparent Record-Keeping:

Enhances the accuracy and transparency of financial records.

• Strategic Insights:

Assists in identifying underperforming branches and planning future expansion.

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:

1. 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.
2. Debit Branch Account and credit Branch Trading Account with the total of items to be credited to the Trading Account Sales and Closing Stock.
3. 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.)
4. 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.
5. Debit Branch Account and credit Branch Profit and Loss Account with the total of gains or incomes such as discount earned.
6. 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:

7. 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.
8. 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.