FAC1601 1 CHAPTER 6

CHAPTER 6
BRANCH ACCOUNTING

A business can diversify or expand by way of branches which are geographically separated from
the main enterprise. Branches are divided into two types according to the way in which their
accounting is done, namely:
 Dependent branches and
 Independent branches

Dependent branches

These branches are required to submit periodic returns – daily, weekly or monthly according to
circumstances – in the following matters:

 Daily receipts,
 Expenses incurred
 Commissions paid or due
 Particulars of accounts of accounts receivable
 Discounts allowed
 Goods returned by clients
 Credit sales
 Doubtful debts
 Any other information which the main enterprise may request

The accounting system for dependent branches will be dictated by the value at which goods are
transferred to the branch. They can either be transferred at cost price or at selling price. In
this course we will be concentrating on branches where goods are transferred at selling price;

Goods delivered to the branch at selling price

To keep track of these transactions the following ledger accounts will be used:

 Branch inventory
 Goods to branch
 Branch adjustment

Branch inventory account

This account reflects the movement of inventory to and from the branch. It is classified as a
current asset and therefore all goods sent to the branch will be debited to this account (increasing
the asset). Similarly all goods returned, sold, stolen or damaged will be entered on the credit
side (decreasing the asset). It is always stated at selling price and thus becomes an inventory
control account. Should the balance of the account fail to correspond with the actual inventory
count at the end of a period, the difference will be the result of some mistake or irregularity.

Goods to branch account

This account reflects the cost price of the goods sent to the branch as well as the cost price of the
goods returned by the branch. It is offset against purchases in the trading account in order to
calculate the gross profit of the main enterprise.

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FAC1601 2 CHAPTER 6

Branch adjustment account

This account reflects the anticipated profit that the sale of the goods at the branch will produce.
It becomes the trading account of the branch in which the gross profit is calculated. It will reflect
the anticipated profit on goods sent to the branch (credited to the account) and the reduction of
this profit (debits to the account) as a result of goods returned, stolen or sold at a discount.

It is important to calculate the unrealised profit caught up in the opening and closing inventory as
opening and closing balances. At the end of the trading period the gross profit will be the
difference between the two sides of the account.

Discounts

There are two types of discount which will be encountered in this section, namely:
 Cash discounts, and
 Discount allowed to accounts receivable for timeous payment of their accounts

It is important to correctly identify the type of discount as only cash discounts will affect the
branch inventory and branch adjustment accounts.

Profit mark up

The profit mark up can be based on either:
 cost price, or
 selling price.

Mark up on cost price

To calculate the profit when mark up is 20% on cost price and cost price is R200, the following
formula must be used:
% R
Cost price 100 200
Mark up 20 ?
Selling price 120

Mark up = R200 x 20
100
= R 40

To calculate the profit when the mark up is 20% on selling price and the cost price is R200 the
formula is adjusted as follows:
% R
Selling price 100
Mark up 20
Cost price 80 200

Mark up = R200 x 20
80
= R50

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FAC1601 3 CHAPTER 6

Comment

The base 100% depends on whether the mark up is based on cost price or selling price. It is
important to remember that if a profit is made the cost price will always be less than the selling
price.

EXAMPLE

The following information relates to the head office and branch of Crown (Pty) Ltd:

Transactions during the year ended 31 December 2002

R
Goods sent to branch at cost price 4,800.00
Goods returned to head office by the branch at cost price 80.00

Sales by the branch for the year: cash 2,000.00
credit 3,290.00

Cash received from branch accounts receivable and paid into

2,890.00

the head office bank account
Sundry expenses paid by head office 600.00

Additional information

a) the branch commenced business on 2 January 2002 and goods are invoiced to the branch at
selling price, which is cost plus 25%.
b) Inventory at 31 December 2002 (cost price) amounted to R480.
c) Discount on selling prices allowed to clients in respect of cash sales amounted to R30.
d) After consulting the branch manager, it was decided to write off an amount of R50 as bad
debts.

REQUIRED

The following accounts in the books of head office:

1) Branch inventory account
2) Goods to branch account
3) Branch adjustment account
4) Branch accounts receivable control account
5) Branch expense account

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2002
31-Dec

2003
1-Jan
Goods to branch
Branch adjustment
Branch adjustment(surplus)

Balance b/d
4,800.00
1,200.00
20.00 2002
31-Dec
Goods to branch
Branch adjustment
Branch adjustment (discount)
Bank: sales
Accounts Receivable: sales
Balance c/d
80.00
20.00
30.00
2,000.00
3,290.00
600.00
6,020.00 6,020.00

2002
31-Dec
Branch inventory (returns)
Branch inventory (discount)
Balance (mark up on closing
inventory) c/d
Branch expense (gross profit)
20.00
30.00

120.00
1,050.00 2002
31-Dec

2003
1-Jan
Branch inventory
Branch inventory (surplus)

Balance b/d
1,200.00
20.00
1,220.00 1,220.00

120.00
2002
31-Dec
Branch inventory
Head office trading account
80
4720 2002
31-Dec
Branch inventory
4,800.00
4800 4,800.00

FAC1601 4 CHAPTER 6

SOLUTION

CROWN (PTY) LTD

Head office books
1)

2)

3)

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2002
31-Dec
Bank (sundry expenses)

Branch accounts receivable
(bad debts)
Head office profit and loss
(branch net profit)
600.00

50.00

400.00 2002
31-Dec
Branch adjustment ( gross
profit)
1 050.00
1 050.00 1 050.00

2002
31-Dec

2003
1-Jan
Branch inventory (sales)

Balance b/d 3,290.00 2002
31-Dec
Bank
Branch expense (bad debts)
Balance c/d
2,890.00
50.00
350.00
3,290.00 3,290.00

350.00
FAC1601 5 CHAPTER 6

4)
Dr Accounts

Cr

5)

Independent branches

An independent branch operates as a separate entity and keeps its own set of books. The head
office only keeps a record of transactions between it (the head office) and the branch. All other
transactions which the branch enters into are recorded in the books of the branch only.

In the books of the head office, the transactions between it and the branch will be recorded in an
account called the Branch account. Whereas in the books of the branch all transactions with
the head office will be recorded in an account called the Head office. These transactions will
include the net profit which the branch makes as the head office owns the branch i.e. the branch
owes the profit to the head office.

At the end of a financial period there may be goods in transit between the head office and the
branch and vice versa, as well as cash in transit to the head office. These transactions must be
brought into account in order that the balance of the Branch in the books of the head office
reflects the same balance as that of the Head office in the books of the branch.