Wholesale Branch System and Final Account System

Wholesale Branch System

Under this system, the goods are invoiced at the wholesale price to a retail branch. Opening stock and closing stock of branch will be shown at the wholesale price and unrealized profits in closing stock will be debited as stock reserve to profit and loss account of head office. Similarly, the stock reserve of opening stock will be credited to profit and loss account of head office.

There are many producers, now-a-days, who have their own retail shop (Branch). It deals in both retail and wholesale transactions. The profit rates earned by Branches differ between the retail sale and wholesale. Here, it is necessary to account the additional profit made by a Branch through retail trading over the wholesale trading. Wholesale price is always less than retail price.

For instance, the cost of a product is Rs 100, the wholesale price is Rs 140 and the retail price is Rs 160. If the Branch sells the product, the profit will be Rs 60; but the real profit earned by the Branch is Rs 20 (Rs 160 – 140), which is the contribution of Branch. The profit of Rs 40 (Rs 140 – Rs 100) would have been made by the Head Office by selling on wholesale basis to others.

Under this situation, to find out the real profit earned by a Branch, the Head Office charges the Branch with wholesale price. This facili­tates the Head Office to know the retail profit earned by a Branch. In other words, the difference between the wholesale price and selling price is the pure profit on retailing.

The Head Office sends the goods to Branch at wholesale price and in case all the goods have been sold, there is no problem. If not, the unsold goods lying with the Branch will be at invoice price and in such case adjustment for the unrealized profit of the Head Office Trading Account must be made through Branch Stock Reserve Account in order to find out true profit of the concern as a whole.

Ascertain the profit that you consider as having been earned by the Delhi Branch of Jaipur Industries Ltd. from the following:

(a) For Branch Trading:

(i) Branch Trading account is debited with the opening Stock at invoice price (i.e., wholesale price) and is credited with the Closing Stock at invoice price (i.e., wholesale price).

(ii) Branch Trading Account is debited with the goods sent to Branch at invoice price (i.e., wholesale price) and is credited with the retail price of goods sold.

(b) For Head Office Trading:

The Head Office Trading Account will be debited with opening stock, purchase of goods and the same is credited with Goods sent to Branch at invoice price, direct sales (at wholesale price) and along with the Closing Stock (at Cost).

If there is any closing stock in the hand of Branch, a Stock Reserve Account is to be opened by debiting Profit & Loss Account and crediting Stock Reserve Account. In the case of opening stock, the entry will be reversed.

At Cost Price/Invoice Price Basis (i.e.):

Where Branch Trading and Profit and Loss Account are Opened:

Branch Trading and Profit and Loss Account method is an alternative approach for ascertaining Branch Gross Profit and Net Profit. Branch Trading Account is debited by crediting Opening Stock; Goods sent to Branch etc. and is credited by debiting sales and closing stock.

The difference between the two sides represents Gross Profit or Gross Loss which will ultimately be transferred to Branch Profit and Loss Account Similarly, Branch Profit and Loss Account is debited by crediting all branch expenses account and is credited by debiting all branch incomes account, i.e., the principles of closing entries are to be followed.

The difference between the two sides of Branch P & L A/C represents Net Profit or Net Loss which will be transferred to General Profit and Loss Account.