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Advance Financial Accounting (FIN-611)
VU
LESSON # 14
STOCK AND DEBTORS SYSTEM
Question
On 1st January, 2008 goods costing Rs. 132,000 were invoiced by Multan head office to
its new branch at Lahore and charged at selling price to produce a gross profit of 25%
on the selling price. At the end of the year, the return from Lahore Branch showed that
the credit sales were Rs. 150,000. Goods invoiced at Rs. 2,000 to Lahore branch have
been returned to Multan head office. The closing stock at Lahore branch was Rs. 24,000
at selling price. Record the above transactions in the books of
(i) Lahore Branch Stock Account; (ii) Goods Sent to Lahore Branch Account; (iii)
Lahore Branch Adjustment Account; and (iv) Lahore Branch Debtors Account in the
head office book and close the said accounts on 31st December 2008.
Solution
In the Books of the Head Office, Multan
Dr.
Lahore Branch Stock Account
Date
Particulars
Rs.
Date
Particulars
Rs.
2008
To Goods Sent to
176,000 2008
By Goods Sent to LHR
2,000
Dec.1
LHR Br. A/c
Dec.31
Br. A/c (Returns)
150,000
By Branch Debtor A/c
24,000
(Credit Sales)
176,000
176,000
By Balance c/d
Dr.
Goods Sent to Lahore Branch Account
Date
Particulars
Rs.
Date
Particulars
Rs.
2008
To Lahore Branch Stock A/c
2,000 2008
By Lahore
176,000
Dec.31
(Returns)
Dec.31
Branch
43,500
To Lahore Branch Adjustment A/c
Stock A/c
To Purchases A/c (Transferred)
130,500
176,000
176,000
Dr.
Lahore Branch Debtors Account
Date
Particulars
Rs.
Date
Particulars
Rs.
2008
To Lahore Brach
150,000 2008
By Balance c/d
150,000
Dec.31
Stock A/c
Dec.31
150,000
150,000
Dr.
Lahore Branch Adjustment Account
Cr.
Date
Particulars
Rs.
Date
Particulars
Rs.
2008
To Stock Reserve A/c
6,000 2008
By Goods Sent
43,500
Dec.31
To General Profit & Loss
37,500 Dec.31
to Delhi Branch
A/c
A/c
43,500
43,500
64
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Advance Financial Accounting (FIN-611)
VU
Question
X Ltd. of Karachi has a branch at Lahore. Goods are invoiced to the branches at cost
plus 331/3%. The branch remits all cash received to the head office and all expenses are
paid by the head office. From the following particulars, prepare Branch Stock Account,
Branch Adjustment Account, Branch Debtors Account and Branch Profit & Loss
Account in the books of the head office. (All figures in Rs.)
Branch Debtors on 1.1.2008
6,000
Branch Stock on 1.1.2008 (invoice price)
2,400
Sales Cash
3,000
Credit
60,000
Goods from head office (invoice price)
72,000
Cash received from Debtors
57,600
Discount allowed to Debtors
1,400
Bad debts
300
Branch expenses paid by Head Office
5,000
Branch stock on 31.12.2008 (invoice price)
12,000
Solution
In the Books of the Head Office, Karachi
Dr.
Branch Stock Account
Date
Particulars
Rs.
Date
Particulars
Rs.
2008
To Balance b/d
2,400 2008
Jan.1
To Goods Sent to
Dec.31
By Bank A/c (Cash
3,000
Dec.31
Branch A/c
sales)
72,000
60,000
Branch
By Branch Debtors A/c
12,000
Adjustment
By Balance c/d
(Surplus)
600
75,000
75,000
Dr.
Branch Adjustment Account
Date
Particulars
Rs.
Date
Particulars
Rs.
2008
To Stock Reserve A/c
3,000 2008
By Stock Reserve
600
Dec.31
(12,000 x ¼)
Dec.31
A/c (2,400 x
To Gross c/d
33.33/133.33)
16,200
(Transferred to Branch
By Goods sent to
18,000
PLS A/c)
Branch A/c
Branch Stock
(Surplus)
600
19,200
19,200
65
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Advance Financial Accounting (FIN-611)
VU
Dr.
Branch Profit & Loss Accountr.
Date
Particulars
Rs.
Date
Particulars
Rs.
2008
To Branch Expenses A/c
2008
By Gross Profit b/d
16,200
Dec.3
Discount Allowed
1,400 Dec.31
By General Profit &
500
300
1
Bad debts
Loss A/c (Loss)
15,000
Cash Expenses
16,700
16,700
Dr.
Branch Debtors Account
Date
Particulars
Rs.
Date
Particulars
Rs.
Jan.1
To Balance b/d
6,000 2008
By Bank A/c
57,600
2008
Dec.31
By Branch Expenses A/c
1,400
Discount Allowed
Bad debts
300
To B
Dec31
60,000
By Balance c/d
6,700
ranch Stock A/c
66,000
66,000
Branch Account
Rupees
Rupees
6,000 Cash Received
60,600
Opening Debtors
1,800 Goods Returned
0
Opening Stock (at cost)
72,000 Goods sent to branch (loading)
18,000
Goods sent to branch (at
15,000 Closing Debtors
6,700
Inv.)
9,000
Cash sent to branch
Closing Stock (at cost)
500
Income Statement (loss)
94,800
94,800
Branch
Income Statement
Rupees
Sales
63,000
Cost of goods sold
Opening stock (at cost)
1,800
Goods received from head office (at cost)
54,000
(46,800)
Closing stock (at cost)
9,000
Gross profit
16,200
Operating expenses
Cash expenses
15,000
Bad debts
300
Discount allowed
1,400
(16,700)
Loss transferred to head office Income Statement
(500)
Whole Sale Branch
66
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Advance Financial Accounting (FIN-611)
VU
Sometimes, the head office (specifically dealing the manufacturing activities) sells
goods to actual consumers through its retail shops. In this case, the head office sends
goods to the branches at wholesale prices which cost plus a percentage of profit. The
branch is likely to sell those goods at retail prices which is more than the wholesale
prices. The real profit earned by the branch is the difference between the retail selling
price and the wholesale price. For example the cost price of an article is Rs. 100, the
wholesale price, Rs. 160 and the retail selling price, Rs. 180. Where an article is sold by
the branch, the actual profit is Rs. 180 ­ 100 = Rs. 80 but the branch's profit is Rs. 180 ­
160 = Rs. 20.
This system of accounting is followed for dependent branches where these are treated
as profit centre only. The real cost of the branch is the whole sale price of the goods
sent. But, we must remember that wholesale prices are fixed above cost. Therefore, if
all the goods that have been sent to branch are sold no problem arises. The real
problem arises when a part of stock remains unsold at the branch, which includes an
element of profit that could not be realized by the head office. Such unrealized profit is
reversed in the books of head office by recording this accounting entry:
Income Statement a/c
Dr.
(Wholesale price less cost price)
Stock Reserve a/c Cr.
In the balance sheet the branch stock is shown at cost i.e. after deducting stock
reserves.
67
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. IASB’S 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