Back to: FINANCIAL ACCOUNTING SS3
Welcome to class!
In today’s class, we will be talking about the branch account. Enjoy the class!
Branch Account
A branch Account is a system of accounting adopted to record the transactions of a small part of a business organization which has or has not some degree of independence.
Divisions of branch accounting
The divisions can be:
1. Where the head office keeps all the accounts: This happens where the branch is fully dependent on the head office. In this case, the following accounts are kept.
- Branch stock A/C
- Goods sent to branch A/C
- Branch stock adjustment A/C
- Branch debtors A/C (where credit sales are allowed)
- Branch bank A/C
- Branch profit & loss A/C
2. Where the branches keep separate accounts: This happens where a branch is semi-autonomous. In this situation the following accounts are kept to show the relationships:
-
- Branch current A/C in head office books
- Head office current A/C in branch books
Pricing methods
Three different pricing methods are available for charging goods to branches. They are:
- At cost price: This is used when the goods concerned are perishable so that branch managers can use their discretions to avoid losses.
- At cost plus a percentage: This helps the head office to exercise control over the branch by stating the required percentage profit.
- At selling price: This is a measure of control also where the branch has no choice but to sell the goods at the selling price given.
Note: Where the cost plus a percentage method of pricing is used, two methods of accounting can be used also:
- Double column or a memorandum column method
- Branch adjustment method.
A memorandum or double column method
This method combines two accounts:
- Branch Stock Account which appears in the invoice price column and
- Branch Stock Adjustment Account which appears in the “cost price” column However the use of this method requires some items or transactions to be shown at the same price in the two separate columns. These items are:
- Cash sales
- Credits sales
- Cash remitted to head office
- Cash in transit
- Sundry expenses from takings (ie sales)
- Sundry expenses paid out of cash
- Cash taken/stolen.
Thus, the adoption of the memorandum or double column method, in cost plus percentage pricing system, requires the following accounts:
- Branch stock A/C with double column i.e. memorandum branch A/C
- Goods sent to branch A/C (entries in this A/C are made at cost price only)
- Branch P & L A/C/
Formats of the three account above:
Memorandum Branch Stock A/C
Invoice cost invoice cost
Price Price Price Price
N N N N
Stock at start X X Rent to head office X X
Goods sent to Branch x x credit sales x x
Gross profit C/D x cash sales x x
Allowance of selling price x x
Goods stolen x x
Cash stolen x x
Expenses paid
Out of takings x x
Normal loss x x stock at close x x
X x x x
Goods sent to branch A/C (at cost)
N N
Returns to branch x branch stock A/C x
Transport to head Office
Trading A/C x
X x
Branch profit & Loss A/C
N N
Branch stock A/C Gross profit x
Sundry expenses x (from a memo.
Branch Stock A/C)
Stock stolen at cost price x
Cash stolen X
Net profit x
X x
Evaluation
- What is a branch accounts
- State the pricing methods in branch accounts
Illustration
Suzi Ltd operates a head office in Lokoja and branch office in Lagos. All goods are purchased by Lokoja and sent to Lagos at cost plus 25%. The following information was given for the year ended 31/12/04.
N
Credit sales 3,500
Goods sent to branch at cost 50,000
Returns to head office at cost 500
Cash takings remitted to H.O. 10,000
Stock at close at cost price 12,500
Cash takings/stolen 150
Sundry expenses paid out of takings 950
Goods stolen at cost 40
Allowances off selling price 100
You are required to prepare
- Branch A/C in the head office books including the necessary A/Cs
- The P & L A/C for the ended 31/12/04
The system of accounting the head office uses is the memorandum column method.
Solution
Step 1: Calculate the selling price (or invoice price) using the mark-up of 25% on cost
- Selling price of goods sent to branch
Profit = mark-up x cost price
= 25/100 x 50,000 = N12500
- Selling price = cost + profit
= 50,000 + 12500
= N623,500
- Selling price of returns to Head office
= cost + mark-up
= N500 + (25/100 x 500)
- P = N500 + 125 = N625
- Selling price of stock at close
= cost + mark-up
= N12500 + (25/100 x 12500
- P = N12500 + 3,125 = N15,625
- Selling price of goods stolen
= cost + mark-up
= N40 + (25/100 x N40)
- P. = N40 + 10 = N50
step II: Preparation of branch stock A/C using memorandum column
Memorandum branch stock A/C
Invoice cost Invoice cost
Price Price Price Price
N N N N
Goods sent to branch 62,500 50,000 Rent to head office 625 500
Gross profit C/D – 9140 credit sales 3500 3500
x cash remitted to H. Office10,000 10,000
cash takings/stolen 150 150
sundry expenses 950 950
goods stolen 50 40
Allowance off selling price100 – stock at close 15624 12500
62500 59140 62500 59140
Profit & loss A/C
N N
Sundry expenses 950 Gross profit B/D 9140
Cash stolen 150
Goods stolen at cost 40
Net profit 8000
- 9150
Evaluation
- State four objectives of Branch Accounting.
- State five reasons why branches may decide to keep their accounts rather than the Head office doing so.
General evaluation
- State five characteristics of depreciable assets
- Explain three reasons why an accountant will consider end- of- year adjustments
- Differentiate between bad debts and provision for bad debts
- Differentiate between the bank statement and bank reconciliation statement
- State four reasons for making provision for depreciation
Reading assignment
Simplified and Amplified Financial Accounting – page 466-487
Essential financial Accounting by O.A. Longe and other pages 375-379
Weekend assignment
- If the cost of goods is N10,000 and there is a 25% mark-up on it, then the selling price is ———-(a)N10,000 (b)N10,200 (c)N12,500 (d)N13,500
- If the cost of an article is N500 the company’s profit margin is 20% then the selling price is ———-(a)N6250 (b)5000 (c)72250 (d)6000
- If the margin allowed by a business is 25% then the business mark-up is ———-(a)20% (b)30% (c)311% (d)50%
- If the profit on cost price is 1/5 then the profit on selling price is ———-(a)1/2 (b)1/3 (c)5% (d)1/4 (e)1/6
- The margin on sales of a trader is 15%, therefore, the trader’s mark-up is ———-(a)12/7 (b)15/17 (c)3/20 (d)3/17
In our next class, we will be talking more about Branch Account. We hope you enjoyed the class.
Should you have any further question, feel free to ask in the comment section below and trust us to respond as soon as possible.
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