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Advance Financial Accounting (FIN-611)
VU
LESSON # 16
BRANCH ACCOUNTING
(Incorporation of branch)
Question
The following is the Trial Balance of Murree Branch as on 31st December, 2007.
Dr.
Cr.
Dr.
Cr.
(Rs.)
(Rs.)
(Rs.)
(Rs.)
Lahore head office
Debtors
3,700
3,240
Stock 1st Jan. 2007
Creditors
6,000
1,850
Purchases
97,800
Rent
1,960
19,000
Sundry office
1,470
Goods received from H
138,000 expenses
1,780
O
6,000 Cash at bank
6,000
Sales
Goods supplied to
Furniture
400
Depreciation on
4,500
head office / Sales to H
Furniture
O
145,850
145,850
Salaries
Other Information:
Stock at branch on 31st December 2007 was valued at Rs. 7,700.
Murree Branch Account in the head office books on 31st December, 2007 stood at Rs.
460 (debit balance). On 28th December, 2007 the head office forwarded goods of the
value of Rs. 3,700 to the branch where they were on 3rd January, 2007.
Solution
Murree
Income Statement
For the year ended 31st December, 2007
Sales
138,000
Goods supplied to H O
6,000
144,000
Less CGS
Opening Stock
6,000
Add Purchases
97,800
Goods received from H O 19,000
Less Closing Stock
7,700
115,100
Gross Profit
28,900
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Advance Financial Accounting (FIN-611)
VU
Less operating Expenses
Salaries
4,500
Rent
1,960
Sundry Office Expenses
1,470
Depreciation on Furniture
400
8,330
Net Profit
20,570
Murree
Income Statement
For the year ended 31st December, 2007
Sales
138,000
Goods supplied to H O
6,000
144,000
Less CGS
Opening Stock
6,000
Add Purchases
97,800
Goods received from H O 19,000
Less Closing Stock
7,700
115,100
Gross Profit
28,900
Less operating Expenses
Salaries
4,500
Rent
1,960
Sundry Office Expenses
1,470
Depreciation on Furniture
400
Advertisement on Equipment 1,000
Depreciation on Furniture
500
9,830
Net Profit
19,070
Incorporation of Branch Trial Balance in the Head Office Books
It has already been stated that an independent branch prepares its own Trial Balance
and Final Accounts and remits the copies of these statements to the head office.
After receiving Branch Trial Balance, head office proceeds to incorporate it in its own
books. This is absolutely necessary because the branch belongs to the head office, and
if the branch Trial Balance is not incorporated in the head office books, the latter will
not show correct position.
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Advance Financial Accounting (FIN-611)
VU
The incorporation of Branch Trial Balance can be divided into two parts:
a. Incorporation of Branch Profit and Loss
b. Incorporation of Branch Assets and Liabilities
Incorporation of Branch Profit and Loss
For the purpose of incorporation of branch profit and loss, the head office may follow
any of the following two methods:
i.
Detailed Incorporation
ii.
Abridged Incorporation
Detailed Incorporation
Under this method, incorporation is done with a view to prepare Branch Trading
and Profit and Loss Account in the books of the head office. Head office opens a
separate Branch Trading and Profit and Loss Account to incorporate all revenue
transactions of the branch. This account is temporary in nature and is prepared to
ascertain the real profit or loss of the branch after making all adjustments.
In this connection, we must remember that head office maintains only the Branch
Account and the statements received from the branch do not form a part of the
double entry system. Therefore, all the Journal Entries should be passed through
the Branch Account maintained in the head office. The required Journal Entries are
as follows:
Journal Entries
1. For items on the debit side of the Branch Trading Account
Branch Trading Account
To Branch Account
[The above entry is passed for the total amount of items like opening stock, purchases, carriage
inwards, wages, processing cost, goods received from head office, sales returns, etc.]
2. For items on the credit side of the Branch Trading Account
Branch Account
To Branch Trading Account
[The above entry is passed for the total amount of items like sales, goods sent to head office,
closing stock, purchases returns, abnormal loss of stock, etc.]
3. For items on the debit side of the Branch Profit and Loss Account
Branch Profit and Loss Account
To Branch Account
[The above entry is passed for the total amount of items like salaries, rent, depreciation, bad
debts, repairs, discount allowed, etc.]
4. For items on the credit side of the Branch Profit and Loss Account
Branch Account
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Advance Financial Accounting (FIN-611)
VU
To Branch Profit and Loss Account
[The above entry is passed for the total amount of items like discount received, miscellaneous
income, etc.]
Abridged Incorporation
Under this method, a Memorandum Trading and Profit and Loss Account is
prepared for ascertaining branch profit. Only one entry is passed for incorporating
branch net profit/loss.
Branch Account
To General Profit and Loss Account
[In case of loss the above entry shall be reversed.]
Incorporation of Branch Assets and Liabilities
This part of the incorporation is done with a view to include branch assets and
liabilities in the annual Balance Sheet of the whole business. At the beginning of the
new financial year, assets and liabilities are sent back to the books of the branch by
means of reverse entries.
For the purpose of incorporation, the following entries are passed:
Journal Entries
1. For Branch Assets
Branch Assets Accounts
Dr. [Individually]
To Branch Account
2. For Branch Liabilities
Branch Account
Dr. [Individually]
To Branch Liabilities Account
Question
Babar Co. Ltd. of Islamabad had a branch in Sahiwal which maintained its accounts
independently. Accounts relating to fixed assets in the Sahiwal branch were, however,
kept in the books of accounts of the head office. On 31st December, 2006 the Sahiwal
branch extracted the following Trial Balance from its own books of accounts and
forwarded the same to the head office.
Particulars
Dr. (Rs)
Cr. (Rs)
Stock in Trade (01.01.2006)
20,000
Purchases
50,000
Carriage and Freight Inward
2,500
Goods Received from head office
15,000
Transit insurance on goods received
1,000
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Advance Financial Accounting (FIN-611)
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Salaries
10,000
Rents rates and taxes
3,800
General office expenses
9,000
Sundry debtors
7,200
Cash in hand and at bank
2,500
Sales
75,900
Sundry creditors
5,000
Miscellaneous receipts
500
Purchases returns
800
Sales returns
500
Bills receivable
1,500
Discount allowed
200
Head office account
41,000
Total
1,23,200
1,23,200
The closing stock (as at 31.12.2006) at Sahiwal branch was Rs. 16,000. Depreciation was
to be allowed @ 15% p.a. on Branch Plant and Machinery of Rs. 25,000 and @ 20% p.a.
on Branch Furniture and Fittings of Rs. 6,000. Outstanding rent in respect of the year
2006 amounted to Rs. 500. Sahiwal Branch account, in the head office books, showed a
debit balance of Rs. 46,000 and it was revealed that the difference in the balances
shown by Head Office Account and Sahiwal Branch Account was on the account of
cash-in-transit.
You are to show Journal Entries required to incorporate the above Trial Balance and
other particulars in the books of the head office and also the Sahiwal Branch Account.
In the books of Babar Co. Ltd. (H.O.)
Journal
Dr.
Cr.
Date
Particulars
L.F.
Rs.
Rs.
89,000
2006
Sahiwal Branch Trading A/c
Dec,
To Sahiwal Branch A/c (Note 1)
89,000
[Being the incorporation of opening stock, purchases,
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carriage and freight inward, goods received from head office,
transit insurance, sales returns etc]
92,700
Sahiwal Branch A/c
To Sahiwal Branch Trading A/c (Note 2)
92,700
[Being the incorporation of closing stock, sales and purchase
returns]
Sahiwal Branch Trading A/c
3,700
To Sahiwal Branch Profit & Loss A/c
3,700
[Being the gross profit transferred to Branch Profit & Loss
Account]
Sahiwal Branch Profit & Loss A/c
28,450
To Sahiwal Branch A/c (Note 3)
28,450
[Being the incorporation of branch expenses]
Sahiwal Branch A/c
500
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Advance Financial Accounting (FIN-611)
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To Sahiwal Branch Profit & Loss A/c
500
[Being the incorporation of branch miscellaneous income]
General Profit and Loss A/c
24,250
Dr.
24,250
To Sahiwal Branch Profit & Loss A/c
[Being the incorporation of branch net loss]
5,000
Cash in Transit
To Sahiwal Branch A/c
5,000
[Being cash remitted by Sahiwal Branch not yet received by
the H.O.]
4,950
Sahiwal Branch A/c
To Branch Plant & Machinery A/c
3,750
1,200
To Branch Furniture & Fittings A/c
[Being the depreciation charges on branch assets]
Sahiwal Branch Closing Stock A/c
16,000
Sahiwal Branch Debtors A/c
Dr.
7,200
Sahiwal Branch Bills Receivable A/c
1,500
Sahiwal Branch Cash in hand A/c
2,500
To Sahiwal Branch A/c
27,200
[Being the incorporation of branch assets]
Sahiwal Branch A/c
5,500
To Sahiwal Branch Creditors A/c
5,000
To Outstanding Rent A/c
500
[Being the incorporation of branch liabilities]
In the books of the Babar Co. Ltd. (H.O.)
Sahiwal Branch Account
Date
Particulars
Rs.
Date
Particulars
Rs.
46,000
89,000
31.12.06
To Balance b/d
31.12.06
By Sahiwal Branch Trading A/c
To Sahiwal Branch Trading A/c
(Note 1)
92,700
(Note 2)
By Sahiwal Branch Profit & Loss
28,450
To Sahiwal Branch Trading A/c
A/c
500
To Branch Plant & Machinery A/c
By Cash in Transit A/c
3,750
5,000
To Branch Furniture & Fittings A/c
By Sahiwal Branch Assets A/c
1,200
27,200
To Sahiwal Branch Creditors A/c
5,000
To Outstanding Rent A/c
500
1,49,650
1,49,650
Working Notes:
1. Opening stock Rs. 20,000 + Purchases Rs. 50,000 + Carriage and Freight Rs.
2,500 + Goods from head office Rs. 15,000 + Transit insurance Rs. 1,000 + Sales
Return Rs. 500 = Rs. 89,000.
2. Sales Rs. 75,900 + Closing Stock Rs. 16,000 + Purchase Returns Rs. 800 = Rs.
92,700.
3. Salaries Rs. 10,000 + Rent rates (including outstanding) Rs. 4,300 + General
office expenses Rs. 9,000 + Discount allowed Rs. 200 + Depreciation on Plant
and Machinery Rs. 3,750 + Depreciation on Furniture and Fittings Rs. 1,200 =
Rs. 28,450.
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Table of Contents:
  1. ACCOUNTING FOR INCOMPLETE RECORDS
  2. PRACTICING ACCOUNTING FOR INCOMPLETE RECORDS
  3. CONVERSION OF SINGLE ENTRY IN DOUBLE ENTRY ACCOUNTING SYSTEM
  4. SINGLE ENTRY CALCULATION OF MISSING INFORMATION
  5. SINGLE ENTRY CALCULATION OF MARKUP AND MARGIN
  6. ACCOUNTING SYSTEM IN NON-PROFIT ORGANIZATIONS
  7. NON-PROFIT ORGANIZATIONS
  8. PREPARATION OF FINANCIAL STATEMENTS OF NON-PROFIT ORGANIZATIONS FROM INCOMPLETE RECORDS
  9. DEPARTMENTAL ACCOUNTS 1
  10. DEPARTMENTAL ACCOUNTS 2
  11. BRANCH ACCOUNTING SYSTEMS
  12. BRANCH ACCOUNTING
  13. BRANCH ACCOUNTING - STOCK AND DEBTOR SYSTEM
  14. STOCK AND DEBTORS SYSTEM
  15. INDEPENDENT BRANCH
  16. BRANCH ACCOUNTING 1
  17. BRANCH ACCOUNTING 2
  18. ESSENTIALS OF PARTNERSHIP
  19. Partnership Accounts Changes in partnership firm
  20. COMPANY ACCOUNTS 1
  21. COMPANY ACCOUNTS 2
  22. Problems Solving
  23. COMPANY ACCOUNTS
  24. RETURNS ON FINANCIAL SOURCES
  25. IASBíS FRAMEWORK
  26. ELEMENTS OF FINANCIAL STATEMENTS
  27. EVENTS AFTER THE BALANCE SHEET DATE
  28. PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
  29. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 1
  30. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 2
  31. BORROWING COST
  32. EXCESS OF THE CARRYING AMOUNT OF THE QUALIFYING ASSET OVER RECOVERABLE AMOUNT
  33. EARNINGS PER SHARE
  34. Earnings per Share
  35. DILUTED EARNINGS PER SHARE
  36. GROUP ACCOUNTS
  37. Pre-acquisition Reserves
  38. GROUP ACCOUNTS: Minority Interest
  39. GROUP ACCOUNTS: Inter Company Trading (P to S)
  40. GROUP ACCOUNTS: Fair Value Adjustments
  41. GROUP ACCOUNTS: Pre-acquistion Profits, Dividends
  42. GROUP ACCOUNTS: Profit & Loss
  43. GROUP ACCOUNTS: Minority Interest, Inter Co.
  44. GROUP ACCOUNTS: Inter Co. Trading (when there is unrealized profit)
  45. Comprehensive Workings in Group Accounts Consolidated Balance Sheet