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Advance Financial Accounting (FIN-611)
VU
LESSON #12
BRANCH ACCOUNTING
Pro-forma Invoice Price
Head office may send goods to branch either at "cost" or at "pro-forma invoice price".
In previous section of this chapter we have discussed accounting treatment for a
dependent branch to which the goods are sent to branch at cost price. In the
forthcoming section we will discuss the accounting treatment for the dependent
branch to which goods are sent at pro-forma invoice price. The treatment is slightly
different but before discussing the accounting treatment we must know what pro-
forma invoice price is and why head office prefers to send goods at pro-forma invoice
price.
Pro-forma invoice price is higher than the cost price. Adding a reasonable profit in the
cost makes the price equal to the pro-forma invoice price. Here we must know what is
selling price? Selling price is the price at which goods are sold to the customers. So the
selling price will be higher than the pro-forma invoice price in normal circumstances.
Difference between cost and pro-forma invoice price is known as loading and the
difference between cost and the selling price is the profit in real terms.
Head office usually sends goods to its branches at the pro-forma invoice price to keep
its profit margin secret from the branch managers. Had the cost been known to the
branch manager he would have been in a position to determine the exact profits
enjoyed by the head office, which may induce the branch manager to confront the
business as a competitor. Moreover by sending goods to the branches at pro-forma
invoice price, the head office can dictate pricing policy to its branches, as well as save
work at the branch because prices have already been decided. Sending goods at pro-
forma invoice price is generally done where goods are of standard type, pre-packed
and unlikely to fluctuate in price.
Here it is worth mentioning that "pro-forma invoice" is name of the document which
is sent to branches along with the goods sent; in this document description and
quantity of the goods sent is written along with the price. Therefore the price
appearing on the pro-forma invoice is named as pro-forma invoice price.
The document which is sent to the customers to evident the sales of goods to them is
known as "invoice"; this document discloses the quantity, description and selling
price of the goods sold, along with the settlement terms. Technically speaking "selling
price" may also be termed as "invoice price", but "invoice price" and "pro-forma
invoice price" are different. It is a common error that often people do not care while
using the terminology and confuse "invoice price" with the "pro-forma invoice price".
The method of preparing Branch a/c while goods are sent at pro-forma invoice price is
the same with the exception that the accounting entries relating to the goods sent to
and goods returned from the branch are recorded at pro-forma invoice price and a
reverse adjustment is required with the amount of loading (difference between cost
and pro-forma invoice price).
Remember; the accounting entries for opening and closing stocks are recorded at cost
price. Do not record stocks at pro-forma invoice price.
Rationale; an accountant is supposed to record accounting entries evidenced by a
source document. Goods sent to branch are evidenced through "pro-forma invoice"
therefore price mentioned on the document cannot me ignored while recording this
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Advance Financial Accounting (FIN-611)
VU
transaction. Whereas, valuation of opening and closing stocks is not reported through
pro-forma invoice therefore to make it simple stocks are accounted for at cost.
Accounting Entries in the Books of Head Office
11. For opening balances of assets at the branch
Branch a/c
Branch assets a/c (individual accounts)
12. For opening balances of liabilities at the branch
Branch liabilities a/c (individual accounts)
Branch a/c
13. For goods sent to the branch (at pro-forma invoice price)
Branch a/c
Goods sent to branch a/c
14. For return of goods by the branch (at pro-forma invoice price)
Goods sent to branch a/c
Branch a/c
15. For reversal of loading on (net) goods set to branch (with the amount of loading)
Goods sent to branch a/c
Branch a/c
16. For remittance of cash or cheque to the branch
Branch a/c
Cash/Bank a/c
17. For cash or cheque received from the branch
Cash/Bank a/c
Branch a/c
18. For closing balances of assets at the branch
Branch asset a/c (individual accounts)
Branch a/c
19. For closing balances of liabilities at the branch
Branch a/c
Branch liabilities a/c (individual accounts)
20. For closing goods sent to branch account.
Goods sent to branch a/c
Purchases a/c
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Advance Financial Accounting (FIN-611)
VU
21. For closing branch account into the profit and loss account
Incase of profit
Branch a/c
Profit & loss a/c
Incase of loss
Profit & loss a/c
Branch a/c
22. For abnormal loss (should always be accounted for at cost)
Abnormal loss a/c
(at cost)
Branch a/c
Insurance claim a/c (claim admitted)
Profit & loss a/c
(balance if not admitted by the insurance company)
Abnormal loss a/c (cost of the abnormal loss)
Note: No accounting entry is required for normal losses.
Solved Problem # 1
Excellent Garments of Multan has a branch at Lahore. Goods are supplied to the
branch at cost. The expenses of the branch are paid from Multan and the branch keeps
a sales journal and the debtors' ledger only. From the following information supplied
by the branch, prepare a Branch Account in the books of the head office. Goods are
sent to branch at pro-forma invoice price which is cost plus 20%. (All figures in
rupees)
Opening Stock (at Pro-forma invoice)  28,800 Closing Debtors
9,150
Closing Stock (at Pro-forma invoice)
21,600 Opening Debtors
?
Goods received from HO (at Pro-forma invoice)
40,320
Bad Debt
140
Credit Sales
41,000
Expenses paid by Head office
10,400
Cash Sales
17,500
Cash received from Debtors
37,900
Pilferage of goods by the employees (Normal Loss) 2,000
Solution: (Debtors System)
In the books of Head Office (Multan)
Lahore Branch Account
Particulars
Rs.
Particulars
Rs.
Opening Stock
24,000
Cash Received from Branch
17,500
Opening Debtors
6,200
Cash Received from Debtors
37,900
Cash sent to Branch
10,400
Goods  sent  to  Branch
6,720
Goods sent to Branch a/c  40,320
(loading)
18,000
General Profit & Loss a/c 8,360
Closing Stock
9,160
(Profit)
Closing Debtors
89,280
89,280
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Advance Financial Accounting (FIN-611)
VU
Working:
Debtors Account
Particulars
Rs.
Particulars
Rs.
Op. Debtors (Balancing 6,200
Cash Received from Debtors
37,900
fig)
41,000
Bad Debts
140
Sales (credit)
Cl. Debtors c/f
9,160
47,200
47,200
Opening stock at cost
28,800 x 100/120 = 24,000 (pro-forma invoice x % of cost by % of pro-forma invoice)
Closing stock at cost
21,600 x 100/120 = 18,000 (pro-forma invoice x % of cost by % of pro-forma invoice)
Loading on goods sent to branch (net)
Rupees
Goods sent to branch (at pro-forma invoice)
40,320
Less Goods returned by branch (at pro-forma invoice)
0
Net goods sent
(at pro-forma invoice)
40,320
40,320 x 20/120 = 6,720 (pro-forma invoice x % of loading by % of pro-forma invoice)
Income Statement System
The head office may also prepare an Income Statement to find out the profits of
branch. Such Income Statement is merely a memorandum; the only reason for
preparing the statement is to have full information of all transactions which are
ignored in Debtor System (already discussed in the previous section). While preparing
the Income Statement of the branch we shall be using all those skills which we have
learned in the single entry system of accounting during conversion of single entry into
double entry.
We know very well that in Income Statement incomes and expenses are measured on
the basis of accrual concept and the profits are measured according to the matching
concept. So the cost of goods sold will be determined keeping in view that the goods
sent to branch are equivalent to purchases of the branch and should be included at
cost. Obviously the opening and closing stocks can not be measured at a value that is
above its cost.
Above problem can be solved through Income Statement System as well. Following is
the solution.
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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