Branch is any company or office located at some distance from the head office of the company. This distant office has the full capacity to store inventories, make the sale and perform the recovery processes from the customers.
The recovery that the branch collects from the customer is deposited into the bank account of the company which is operated from the head office. In order to run the operations and day to day expenses, there is a fund provided to the branch accountant or manager which is called Imprest fund.In order to justify the consumption of this fund, full vouchers and report are provided to the head office and a new request is submitted to replenish the fund.
Purpose of Imprest Fund
The creation of imprest fund ensures better control from the head office as it has full eyes over the expenses being incurred in the branch office. However, if the branch is a larger one, the head office may allow opening of the separate bank account solely for the branch operation. Branch deposits all the recovery into this bank account and withdraw money from Imprest Fund upon receiving the check from the head office. This is quite common in companies where the branch offices are found in other cities or states.
Branch Accoutning Examination Style Question Answer
London head office has a branch at Bristol. The company is involved in using decentralized accounting. The head office charges 20 % profit while supplying goods to Bristol Branch. Further information regarding the branch for 2014 are as follows:
- goods provided to the branch at a bill price of $ 120,000.
- head office sent cash amounting to $ 15,000 to the branch.
- Bristol branch has been allowed to do local purchasing and as such, the branch bought goods from the local market on credit amounting to $ 30,000.
- there are operating expenses at branch amounting to $ 4,200. This is paid by the branch itself.
- head office also paid some operating expenses of the branch amounting to $ 200.
- bristol branch sent remittance to head office amounting to $ 45,000.
- branch sold some merchandise on cash basis amounting to $ 146,000.
Additional information:
accrued operating expenses $ 600.
prepaid operating expenses $ 450.
Opening inventory 25,000 (this includes 40 % purchases made from local market).
Closing inventory 37,500 (received from head office) and 4,000 (purchased from local market).
Requirement
1. record journal entries along with adjusting and closing entries in the books of the Bristol branch.
2. record journal entries in the books of the head office to record Branch net income or loss.
3. Also compute necessary adjustment for over-valuation.
Solution
Allowance for Over Valuation = Bill amount x above / (100 + above
| Allowance for Over Valuation | |
| March – opening inventory 25,000 x 60%= 15000×20/120 | 2,500 |
| Add: goods supplied to branch 120,000 x 20/120 | 20,000 |
| Less: March Closing inventory 37,500 x 20/120 | (6,250) |
| Amount of adjustment | 16,250 |
ABC Company
Books of Branch
| Date | Particulars | Debit | Credit |
Merchandise Head office (goods received from London head office) | 120,000 | 120,000 | |
Cash Head office (cash received from London head office) | 15,000 | 15,000 | |
Purchases Accounts Payable (purchase of goods on credit) | 30,000 | 30,000 | |
Operating expenses Cash (payment of operating expenses) | 4,200 | 4,200 | |
Operating expenses Head office (payment of operating expenses by head office) | 200 | 200 | |
Head office Cash (cash remitted to head office) | 45,000 | 45,000 | |
Cash Sales (sales made on cash basis) | 146,000 | 146,000 |
Adjusting & Closing Journal Entries
| Date | Particulars | Debit | Credit |
| Operating expenses Accrued operating expenses (to record adjustment for accrued operating expenses) | 600 | 600 | |
| Prepaid operating expenses Operating expenses (to adjust operating expense) | 450 | 450 | |
Income summary Merchandise inventory opening Merchandise Purchases Operating expenses (to close all expense accounts) | 179,550 | 25,000 120,000 30,000 4,550 | |
Sales Merchandise inventory closing Income summary (to close all revenue account) | 146,000 41,500 | 187,500 | |
Income summary Head office (to close income summary account) | 7,950 | 7,950 |
Heads office Book
Journal Entries
| Date | Particulars | Debit | Credit |
Branch Branch Profit & Loss (to record profit earned by the Bristol branch) | 7,950 | 7,950 | |
Allowance for over valuation Branch Profit & Loss (to record adjustment for over valuation) | 16,250 | 16,250 | |
Branch Profit & Loss Retained earnings (to close the Bristol profit & loss) | 24,200 | 24,200 |
Branch Accounting – B COM Exam Style Question
Z Plc is engaged in trading of electronic items and is regarded as the top tier company in the industry. Its success largely depends upon the management philosophy of conducting the business via its branch located in South east region of Amsterdam. It runs its business using one of its branch to which it sends goods at 20% above cost. Decentralized accounting is maintained in the head office and branch. That is why, there is a need to calculate over valuation while doing consolidation accounting. Following is the data available for the head office and branch as on 31st December, 2015.
| Head Office | Branch | |
| Cash | 800,000 | 500,000 |
| Furniture & fixture (bought on Oct1, 2015) | 160,000 | – |
| Property, plant & equipment | – | 40,000 |
| Land | 200,000 | – |
| Inventory – Opening | 500,000 | 240,000 |
| Sales | 1,440,000 | 700,000 |
| Purchases | 600,000 | 240,000 |
| Freight in | 144,000 | – |
| Goods delivered to branch | 267,500 | – |
| Goods received from head office | – | ? |
| Rent expenses | 32,000 | 34,000 |
| Other operating expenses | 240,000 | – |
Additional information:
Inventory/ stock o n December 31, 2015 at Head office $ 150,000 and at branch 54,000 (includes 18,000 from local market)
Accrued rent for head office $ 4,000.
Prepaid rent in respect of branch $ 10,000.
Depreciation is to be charged @ 15% per annum on fixed assets.
Requirements:
Prepare consolidated income statement/ profit & loss of Head office and Branch for the year ended Dec 31, 2012.
Record adjusting entry for Allowance for overvaluation in the head office book.
Solution
| Over valuation in opening inventory | 240,000 x 20 /120 = 40,000 |
| Bill price | 267,500 x 120/100 = 321,000 |
| Closing stock | 54,000 – 18000 = 36,000 x 20/120 = 6,000 |
Head Office Book
Allowance for overvaluation Schedule
| Selling Price | Cost | Allowance for overvaluation | |
| Opening inventory | 240,000 | 200,000 | 40,000 |
| Shipment | 321,000 | 267,500 | 53,500 |
| Closing inventory | 36,000 | (30,000) | (6,000) |
| Adjustment | 87,500 |
Opening stock = 500,000 + 200,000 = 700,000
Closing inventory = 150,000 + 18,000 + 30,000 = 198,000
Z Plc
Consolidated Profit & Loss
For the Period Ended December 31, 2015
| Sales revenue | 2,140,000 | |
| Less: Cost of goods sold | ||
| Opening inventory | 700,000 | |
| Add: purchases | 840,000 | |
| Add: freight in charges | 144,000 | |
| Goods available for sale | 1,684,000 | |
| Less: closing inventory | (198,000) | |
| Cost of goods sold | (1,486,000) | |
| Gross profit | 654,000 | |
| Less: operating expenses | ||
| Rent expense(32,000+4,000=36,000)34,000 – 10,000 = 24,000 | ||
| Depreciation expense160,000 x 15% = 24,000 x 3/12 = 6,000 40,000 x 15 = 6,000 | 6,0006,000 | |
| Other operating expense | 240,000 | |
| Total operating expense | (312,000) | |
| Net profit | 342,000 |
Head Office Book
Adjusting Entries
| Date | Particulars | Debit | Credit |
Allowance for over valuation Branch Profit & Loss (to record adjustment for overvaluation) | 87,500 | 87,500 |
Question Answer
William Co. is a reputable name in selling computer items. It has opened a branch in another city Mumbai to expand its business operations. During the year, it shipped merchandise to the branch billed at 120,000. Further additional shipments of 48,000 were done to the branch to meet the customer’s demand. During the year, branch returned the merchandise amounting to $ 1500 due to defective items. At the year end, physical count shows the ending inventory at branch at $ 37,000, the detail of this ending inventory are as follows:
| Inventory received from outside parties | 4,000 |
| Inventory received from head office at billed price | 33,000 |
| Total | 37,000 |
| Branch Loss | 7,200 |
Head office always charges 25 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} above cost while billing to branch. All the sales and sales returns are recorded at billed price in the books of head office.
Required
You are required to pass on necessary journal entries in the books of head office to record the operations of the branch. Also make necessary computations of allowance for overvaluation.
Solution
Allowance for Overvaluation
Allowance for overvaluation = bill price x {above {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} / (100 + above {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}) }
Shipment = 120,000 x 25 /125 = 24,000
Additional shipment = 48,000 x 25 /125 = 9,600
Sales return = 1500 x 25 / 125 = 300
Ending inventory = 33,000 x 25/ 125 = 6,600
Schedule for Allowance for Overvaluation
| Bill price | Cost price | Allowance for overvaluation | |
| Shipment | 120,000 | 96,000 | 24,000 |
| Additional shipment | 48,000 | 38,400 | 9,600 |
| Sales return | (1500) | (1200) | (300) |
| Less: ending inventory | (33,000) | (26,400) | (6,600) |
| Amount to be adjusted | 133,500 | 26,700 | 6,675 |
William Co.
Journal Entries (Head Office Book)
| Date | Particulars | Debit | Credit |
Branch Inventory Allowance for over valuation (to record shipment of merchandise at billed price) | 120,000 | 96,000 24,000 | |
Branch Inventory (to record additional shipment to the branch) | 48,000 | 38,400 9,600 | |
Inventory Allowance for over valuation Branch (to record return of merchandise from branch) | 1200 300 | 1500 | |
Branch profit & loss Branch | 7,200 | 7,200 | |
Allowance for over valuation Branch profit & loss (to record adjustment for over valuation) | 26,700 | 26,700 | |
Branch profit & loss (26,700 – 7,200) Retained earnings (to close the retained earning account) | 19,500 | 19,500 |
M COM, ACCA, CA, CPA, CMA Level Question
This type of question is often examined in above professional level examinations. That is why, we have decided to share with you below question, so that you could prepare and perform very well in the examination results.
Zubi (Pvt) Ltd. is a well known assembler and seller of motor cycles in eastern part of India. Following is the extract from its accounting records as on Dec 31, 2015.
| Cash | 300,000 | Accounts payable | 80,000 |
| Accounts receivable | 160,000 | VAT Payable | 20,000 |
| Inventory | 500,000 | Share capital | 800,000 |
| Furniture & fixture | 140,000 | Accumulated profit | 200,000 |
| 1,100,000 | 1,100,000 |
In order to grow the business, a new branch was opened in Jaipur on 1st January, 2016 and to start the operation in the Jaipur, head office sent cash of $ 100,000 & inventory costing 160,000. Head office sent the inventory to the branch at 20 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} above cost price. Following are the further information regarding the transactions happened in the month of January, 2016 for head office and Jaipur branch:
| Head Office | Jaipur Branch | |
| Purchases on credits (inc. 16 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} VAT) | 1,160,000 | 60,000 |
| Sales on credit (inc. 16{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} VAT) | 1,856,000 | 92,800 |
| Received from customers | 800,000 | 40,000 |
| Paid to creditors | 400,000 | 30,000 |
| Operating expenses paid | 190,000 | 20,000 |
| Furniture purchased for Jaipur | 50,000 | |
| Cash remittances sent to head office | 40,000 | |
| Sales tax paid | 20,000 |
On 31st Jan, 2016 the ending inventory were valued at 360,000 and 90,000 at head office & Jaipur branch respectively. The ending inventory of Jaipur branch w as valued at billed price. Zubi charges depreciation at 10 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} yearly on non-current assets.
Requirement
You are required to pass on journal entries for the month of Jan 2018 in the books of head office.
Zubi (Pvt) Ltd.
General Journal
| Date | Particular | Debit | Credit |
| 1 | Jaipur branch Inventory Allowance for over valuation Cash (to record cash and inventory sent to the Jaipur branch) | 292,000 | 160,000 32,000 100,000 |
| 2 | Purchases Accounts payable (to record credit purchase including VAT) | 1,160,000 | 1,160,000 |
| 3 | Accounts receivable VAT Sales (to record credit sales and VAT) | 1,856,000 | 256,000 1,600,000 |
| 4 | Cash Accounts receivable (to record recovery from customers) | 800,000 | 800,000 |
| 5 | Accounts payable Cash (to record payment to suppliers) | 400,000 | 400,000 |
| 6 | Operating expenses Cash (to record payment against operating expenses) | 190,000 | 190,000 |
| 7 | Jaipur Branch Cash (purchase furniture for the Jaipur branch on cash) | 50,000 | 50,000 |
| 8 | Cash Jaipur Branch (remittances received from Jaipur branch) | 40,000 | 40,000 |
| 9 | VAT Cash (to record payment of VAT to Government) | 20,000 | 20,000 |
| 10 | Allowance for over valuation Branch profit & loss (to adjust the amount of over valuation) | 2,000 | 2,000 |
Expense & Revenue Summary Inventory Opening Purchase sOperating expenses (to close all expense accounts) | 1,850,000 | 500,000 1,160,000 190,000 | |
Inventory Sales Inventory closing Expense & Revenue Summary (to close all revenue accounts) | 160,000 1,600,000 360,000 | 2,120,000 | |
Expense & Revenue Summary Accumulated Profits (to close expense & revenue summary account) | 270,000 | 270,000 | |
Branch profit & loss Jaipur Branch (to record Jaipur branch loss) | 17,000 | 17,000 | |
Accumulated profits Branch profit & loss (to record branch loss) | 15,000 | 15,000 |
Computation
Billing price = cost price x { (100 + above {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}) / 100 } = (160,000 x 120/100) = 192,000
Allowance for over valuation = bill price – cost = 192,000 – 160,000 = 32,000
Allowance for over valuation = bill x { (above {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}) / 100 } = (180,000 x 20/120) = 30,000
Head Office Book
Schedule – Allowance for Over Valuation
| Bill Price | Cost price | Allowance for over valuation | |
| Shipment | 192,000 | 160,000 | 32,000 |
| Less: Closing inventory | (180,000) | (30,000) | |
| Amount of adjustment | (30,000) | 2,000 |