Branch Accounting – Key Vocabulary

Definition and Purpose of a Branch

• A branch is any segment/component of a business located in the same town, country or a foreign country relative to the Head Office (H/O).
• No share or contributed capital; ownership rests wholly with the parent entity.
• Branch accounts allow the H/O to:
  • Monitor performance & profitability.
  • Control inventory, debtors, cash.
  • Measure investment in separate geographic/market units.

Classification of Branches

• Dependent Branches
  • Do not keep their own set of books.
  • Act mainly as selling agents for H/O goods.
  • All accounting is performed in H/O ledgers.
• Independent Branches
  • Maintain full accounting records like autonomous entities except share capital is replaced by a “Head-Office Current A/c”.
  • Can purchase locally, sell on credit, incur expenses.
• Foreign Branches
  • Operate outside the country of the H/O.
  • May be dependent or independent.
  • Additional issues: foreign currency translation, taxation, exchange controls.

Invoicing of Goods to Dependent Branches

1. At Cost (no built-in profit).
2. Cost + Mark-up (also called “invoice price” or “cost + loading”).
3. At Selling Price (SP) (full market price).
   Choice of method dictates:

• Ledger structure.
• Treatment of unrealised profit.
• Calculation of gross profit.

Key Ledger Accounts (Goods Sent at COST)

• Branch Stock/Inventory A/c – records:
  • Goods sent, sales, returns (in & out), losses, closing stock.
  • Functions as a Trading A/c; balancing figure = Gross Profit (GP).
• Goods Sent to Branch A/c – captures cost of shipments & returns.
• Branch Debtors A/c – when credit sales permitted.
• Branch Creditors A/c – when local purchases allowed.
• Branch Expenses A/c – expenses paid by H/O or branch.
• Branch Trading & P/L A/c – final profit after expenses.

Typical Journal Entries (Cost Method)

• Goods sent:
  • Dr Branch Stock A/c • Cr Goods Sent A/c
• Returns to H/O:
  • Dr Goods Sent A/c • Cr Branch Stock A/c
• Sales:
  • Dr Cash/Bank or Debtors • Cr Branch Stock A/c
• Goods stolen:
  • Dr Abnormal Loss (Goods Stolen) • Cr Branch Stock A/c
• Returns-in by customers:
  • Dr Branch Stock A/c • Cr Branch Debtors A/c
• Cash stolen:
  • Dr Cash Stolen A/c • Cr Branch Stock A/c
• Price reduction/mark-down (if still ≥ cost):
  • Dr P&L • Cr Branch Stock A/c
• Inter-branch transfer (Receiving branch example):
  • Dr Branch Stock (Receiving) • Cr Branch Stock (Sending)

Closing Transfers

• Balance in Goods Sent A/c → Purchases:
  • Dr Goods Sent A/c • Cr Purchases A/c
• Closing stock appears on credit of Branch Stock A/c; residual balance = GP.

Illustration 1 (Goods Invoiced at Cost)

• Entity: Nair Matt Ltd, Mombasa branch; year ended 31\,Dec\,2010.
• Key figures (Sh): Opening stock 550{,}000, Goods sent 6\,000\,000, Cash sales 2\,500\,000, Credit sales 7\,000\,000, etc.
• Calculated Branch GP = 3\,550\,000; Net profit after expenses = 2\,490\,000.

Ledger Structure (Goods Sent at Cost + Mark-Up / Selling Price)

• Additional account required: Branch Mark-Up / Adjustment / Provision for Unrealised Profit A/c.
  • Separates loading (profit element) from cost.
  • Allows computation of realised GP and provision for unrealised profit in closing stock.

Fundamental Relationships

• \text{Invoice Price (IP)} = \text{Cost} + \text{Mark-up}
• Mark-up on Cost: \text{MU} = \text{Cost} \times \text{MU \%}
• Margin on Selling Price: \text{Margin} = \text{SP} \times \text{Margin \%}
• If Mark-up = 25\% of cost ⇒ IP = 1.25 \times \text{Cost} and \text{Loading} = 0.25 \times \text{Cost} = \dfrac{1}{5} \times \text{IP}.

Key Ledger Accounts (Invoice-Price Method)

• Branch Stock A/c (at IP).
• Goods Sent to Branch A/c (Cost component only).
• Branch Mark-up A/c (Loading component).
• Other accounts similar to cost method.

Important Journal Patterns (Invoice-Price Method)

1. Goods sent:
   • Dr Branch Stock (IP)
   • Cr Goods Sent (Cost)
   • Cr Branch Mark-up (Loading).
2. Returns to H/O: reverse of (1).
3. Returns direct to H/O from debtors: split between cost & loading.
4. Goods stolen:
   • Dr Abnormal Loss (Cost)
   • Dr Branch Mark-up (Loading eliminated)
   • Cr Branch Stock (IP).
5. Mark-down while still ≥ cost:
   • Dr Branch Mark-up • Cr Branch Stock.
6. Mark-down below cost (two-stage):
   • Eliminate loading as above.
   • Record extra loss: Dr P&L • Cr Branch Stock.
7. Balancing Branch Stock A/c:
   • Closing stock at IP on credit side.
   • Any residual difference on debit side → Dr Branch Stock / Cr Branch Mark-up (normal surplus).
   • Residual difference on credit side → split between normal loss (Dr Mark-up) or abnormal loss (Dr Mark-up & Dr Abnormal Loss).
8. Branch Mark-up A/c balancing:
   • Provision for unrealised profit on closing stock appears as Bal c/d (debit).
   • Balancing figure transferred to Branch GP.

Illustration 2 – Tamim Gowns (Invoice-Price, Complex Mark-ups)

• Fashion chain; figures at selling price.
• Opening IP stock 5\,280k, goods from H/O 116\,728k, inter-branch transfers, thefts, variable mark-ups (additional 10% or 15%).
• Key computations:
  • Must decompose every figure into normal SP and additional MU.
  • Example: Additional 10% on goods with normal SP 800k ⇒ extra MU 80k.
  • Returns by debtor to Voi: given final SP 322k; normal SP = \dfrac{322}{1.15} = 280k; MU split 42k (normal) + ? etc.
• Results:
  • Mark-up on closing stock 2\,220k.
  • Realised GP 42\,674k.
  • Branch net profit 11\,960k after expenses & losses.
• Cash stolen and goods stolen shown separately in management P&L.

Illustration 3 – X Ltd (Mark-up 25 % of Cost)

• Voi branch; IP = Cost + 25% (loading = \tfrac{1}{5} \times \text{IP}).
• Opening IP stock 300k (loading 60k).
• Goods sent IP 2\,500k (loading 500k).
• Returns IP 200k (loading 40k).
• Losses: Goods stolen IP 30k (loading 6k).
• Closing IP stock 250k (loading 50k).

Key Ledger Results

• Goods Sent A/c (Cost) balances: Dr Purchases 1\,840k.
• Branch Stock A/c balances with credit closing stock; residual debit of 1\,095k posted to Branch Mark-up (realised GP component).
• Branch Mark-up A/c:
  • Opening loading 60k; loading on shipments 500k; etc.
  • Closing provision 50k.
  • Realised GP transferred 1\,559k.
• Branch Debtors A/c: Closing debtors 550k after cash, discounts, bad debts.
• Branch P&L:
  • Sales 3\,515k.
  • Cost of sales 1\,856k.
  • GP 1\,559k.
  • Expenses & losses 589k.
  • Net profit 970k.

Practical & Conceptual Notes

• Inventory control: Branch Stock A/c (invoice-price method) provides perpetual inventory; shortages quickly identified.
• Unrealised Profit: GP must be deferred on goods still in branch inventory to avoid overstating consolidated profit.
• Inter-branch Transfers: Always recorded at the same invoice basis; receiving branch debits its stock at IP, sending branch credits stock and eliminates loading via Mark-up A/c.
• Losses:
  • Normal loss → adjust via Mark-up only (no P&L hit).
  • Abnormal loss → cost portion to Abnormal Loss A/c (hits P&L), loading portion to Mark-up A/c.
• Foreign branches (independent or dependent): Additional steps—translate trial balance using appropriate exchange rates; treat unrealised exchange gains/losses per IAS 21.
• Ethical angle: Transparent treatment of loading ensures profits are not intentionally inflated; accurate recording of thefts upholds integrity of statements.

Formula & Quick Reference

• Loading fraction when MU % is based on cost:
  \text{Loading on IP} = \frac{\text{MU \%}}{100 + \text{MU \%}} \times \text{IP}
• Cost extraction from IP:
  \text{Cost} = \frac{\text{IP}}{1 + \text{MU \%}/100}
• Margin vs Mark-up relationship (when margin is % of SP):
  \text{Margin \%} = \frac{\text{MU \%}}{100 + \text{MU \%}} \times 100
• Conversion examples:
  • MU 25 % of cost ⇒ margin = \dfrac{25}{125} \times 100 = 20\% of SP.
  • MU 60 % of cost ⇒ SP = 1.6 \times \text{Cost}.

Examination Tips

• Always isolate loading whenever IP ≠ cost.
• For any stock figure at IP, compute:
  • Cost = IP × \dfrac{100}{100+MU\%}
  • Loading = IP − Cost.
• Reconcile Branch Stock A/c first; it feeds Mark-up & later P&L.
• Show separate disclosure of abnormal losses (goods & cash) to align with audit/trust principles.
• Memorise journal templates; adapt quickly for returns, inter-branch moves, mark-downs.