Accounting for Branches including Foreign Branches: formula sheet

Key formulas

Dependent branch: books

Head office keeps the branch accounts in its own books

The branch keeps only basic records, such as a petty cash book. The methods, all kept in the head office books, are the Debtors System, Stock and Debtors System, Final Accounts System, and Wholesale Branch System.

Independent branch: books

Branch keeps full books, and the head office incorporates the branch trial balance

Mutual dealings go through a Branch Account in head office books and a Head Office Account in branch books.

Reciprocal accounts

Branch Account (in HO books) balance = Head Office Account (in branch books) balance, after adjusting for items in transit

If they differ, find the cause: goods in transit, cash in transit, or an unrecorded entry. Adjust before combining.

Foreign branch: integral operation (often a dependent branch)

Monetary items at closing rate; non-monetary items at historical cost at transaction-date rate; non-monetary items at fair value at the rate when fair value was determined

A foreign branch is a location category, not a third type. Translate under AS 11. The AS 11 test for an integral operation is that it carries on business as an extension of the reporting enterprise. Use this split only for an integral foreign operation.

Foreign branch: non-integral operation (often an independent branch)

Assets and liabilities at closing rate; income and expenses at transaction-date (or average) rates; exchange difference to Foreign Currency Translation Reserve

The AS 11 test for a non-integral operation is a significant degree of autonomy. Full books alone do not prove it. Here monetary and non-monetary assets and liabilities are not split. All use the closing rate.

Departmental vs branch

Departmental = different departments, same place; Branch = different places

Use this to answer difference questions.

Branch Debtors Account (to find any missing item)

Opening debtors + Credit sales = Cash received from debtors + Discount allowed + Bad debts + Sales returns + Closing debtors

Use it to find closing debtors, credit sales or cash received. If returns are given, include them on the right side.

Cash remitted by branch

Cash sales + Cash received from debtors − Branch expenses paid from cash, − Cash retained at branch

If the question says all cash was remitted, remittance equals cash sales plus collections from debtors.

Branch profit (balancing figure)

Credit side total − Debit side total (before profit)

Credit side: remittances, goods returned, abnormal losses, closing stock, closing debtors, closing petty cash. A positive balance is profit. A negative balance is loss.

Petty cash at the branch

Opening petty cash + Cash sent by head office − Petty expenses paid = Closing petty cash

Use it to find missing expenses or closing balances.

Key journal entries in head office books

Goods sent: Branch A/c Dr, To Goods Sent to Branch A/c. Expenses paid by HO: Branch A/c Dr, To Bank. Remittance: Bank Dr, To Branch A/c. Goods returned: Goods Sent to Branch A/c Dr, To Branch A/c. Profit: Branch A/c Dr, To General P&L A/c

At year end, Goods Sent to Branch A/c is transferred to the Purchases or Trading Account, or deducted from it.

Loading as a fraction of invoice price

Cost + x% on cost: loading = x ÷ (100 + x) of invoice price. Cost + y% on invoice price: loading = y% of invoice price.

Cost + 25% on cost gives loading of 1/5 of invoice price. Cost + 20% on cost gives 1/6. Read whether the markup is on cost or on invoice price.

Cost from invoice price

Cost = Invoice price × 100 ÷ (100 + x), when markup is x% on cost

Use this to value an abnormal loss at cost.

Missing figure (shortage) in Branch Stock

Shortage = Opening stock + Goods sent − Goods returned − Sales (cash + credit) − Closing stock, all at invoice price

If the question gives a normal loss, the rest of the shortage is abnormal.

Stock reserve (loading in stock)

Stock reserve = Stock at invoice price × loading fraction

Opening reserve is credited to the Adjustment Account. Closing reserve is debited. Show it as a deduction from stock in the HO balance sheet.

Loading on goods sent

Dr Goods Sent to Branch A/c, Cr Branch Adjustment A/c (with net loading on goods sent less returns)

Goods Sent to Branch A/c is then closed. Its remaining balance, the cost of goods, goes to HO's Trading Account.

Normal loss

Dr Branch Adjustment A/c (invoice price), Cr Branch Stock A/c (invoice price)

Both cost and loading are charged to the Adjustment Account.

Abnormal loss

Dr Abnormal Loss A/c (cost) and Dr Branch Adjustment A/c (loading), Cr Branch Stock A/c (invoice price)

Net of any insurance claim, the Abnormal Loss Account is transferred to Profit and Loss Account.

Branch Debtors Account

Closing debtors = Opening debtors + Credit sales − Cash received − Returns − Discounts − Bad debts

Credit sales are taken from Branch Stock, not cash sales.

Sales at a price different from invoice price

Sales above invoice price: excess credited to Branch Adjustment A/c. Sales below invoice price: shortfall debited to Branch Adjustment A/c.

Branch Stock is kept at invoice price. The difference is routed through Adjustment.

Branch Trading Account (gross profit)

Gross profit = Net sales + Closing stock − Opening stock − Net goods from HO − Purchases − Direct expenses

Net sales means sales less returns by customers. Net goods from HO means goods received from HO less goods returned to HO. Prepare it like a normal Trading Account. Customer returns reduce sales and returns to HO reduce goods from HO. In the wholesale system, the account runs at invoice price: opening stock, goods from HO and closing stock of HO goods are all at invoice price.

Branch net profit

Net profit = Gross profit + Other income − Branch expenses (salaries, rent, depreciation, bad debts, etc.)

When goods are sent at cost, this is transferred to HO General Profit and Loss Account. In the wholesale system it is the profit at invoice price and goes to the Branch Adjustment Account. Show depreciation on branch assets here.

Branch Account balance (final accounts system)

Closing net assets = Opening net assets + Net profit transferred from Branch P&L − Cash remitted to HO

It carries stock, debtors, cash, fixed assets and so on, less liabilities. The profit is first found in the Branch P&L and then transferred to the Branch Account, so the balance reflects it. Goods sent to the branch and cash sent by HO are already reflected in the branch assets and in the remittances, so do not add them again.

Loading when given on cost

Loading as fraction of invoice price = x ÷ (100 + x), where goods are invoiced at cost + x% on cost

Example: cost + 25% gives invoice price 125% of cost, so loading is 25 ÷ 125 = 20% of invoice price.

Loading when given on invoice price

Loading = y% × Invoice price

If the profit loading is y% of invoice price (a margin on invoice price, not a markup on cost), loading = y% × invoice price and cost = (100 − y)% of invoice price.

Stock reserve

Closing stock reserve = Closing stock at invoice price (of HO goods) × Loading ÷ Invoice price

Apply only to the portion of stock that came from HO at invoice price. Branch purchases from outside are already at cost.

Real profit of the branch in the wholesale system

Real profit = Branch profit at invoice price + Loading on net goods sent + Opening reserve − Closing reserve

Branch profit at invoice price is the net profit from the Branch Trading and P&L Account. Net goods sent means goods sent less goods returned to HO, both at invoice price. Loading on net goods sent and the opening reserve are credits to the Adjustment Account. The closing reserve is a debit. If the branch shows a loss at invoice price, the loss is also a debit to the Adjustment Account, so use it with a minus sign in the formula. In the worked example, credits of ₹81,000 less the debit of ₹9,000 give a balance of ₹72,000. Use the formula as a quick cross-check of the Adjustment Account balance.

Reciprocal accounts rule

Branch Account (in HO books) = Head Office Account (in branch books)

Balances must be equal after adjusting items in transit. Debit balance in one side means credit balance in the other.

Goods in transit (HO sent, branch not received)

Branch books: Dr Goods in Transit (Purchases/Stock), Cr Head Office A/c

The branch records the receipt. The head office has already debited Branch A/c at invoice price.

Cash in transit (branch remitted, HO not received)

HO books: Dr Cash in Transit, Cr Branch A/c

The head office records the receipt. The branch has already credited Cash and debited Head Office A/c.

Expense paid by one side for the other

Payer: Dr Other party's A/c, Cr Cash. Other party: Dr Expense, Cr Payer's A/c

Record in the books that missed it.

Unrealised profit in closing stock

Unrealised profit = Closing stock at invoice price × (Invoice price − Cost) ÷ Invoice price

Used when goods are sent at above cost. Include goods in transit at invoice price. If markup is x% on cost, the fraction is x ÷ (100 + x). If loading is y% on invoice price, the fraction is y ÷ 100. In the combined statements, remove the closing amount from closing stock and profit. Also adjust the unrealised profit in opening stock (the stock reserve brought forward): the opening reserve is credited to profit and the closing reserve is debited to profit.

Combined statements

Combined figure = HO figure + adjusted branch figure (reciprocal accounts excluded)

Applies to each revenue item, asset and liability.

Integral foreign operation: monetary items

Cash, debtors, creditors, loans and other monetary items → closing rate

Closing rate is the rate on the balance sheet date.

Integral foreign operation: non-monetary items

Fixed assets, inventories, investments carried at cost → rate on the date of the transaction (historical rate)

If inventory is carried at NRV or fair value, use the rate on the date that value was determined.

Integral foreign operation: income and expenses

Transaction-date rate (average rate may be used as an approximation)

Depreciation and cost of goods sold follow the rate of the related asset or inventory. Opening stock is a non-monetary item, so it is translated at the historical rate (the rate when it was acquired, or the rate given in the question).

Non-integral foreign operation: assets and liabilities

All assets and liabilities, monetary and non-monetary → closing rate

Fixed assets are also at closing rate in this method.

Non-integral foreign operation: income and expenses

Transaction-date rate; average rate for the period is usually used as an approximation

The opening net investment is carried at the opening rate (the previous year's closing rate). In the closing balance sheet, all assets and liabilities, including closing stock, are at the closing rate.

Exchange difference: integral

Balancing figure in the translated trial balance → Statement of Profit and Loss

Treated as gain or loss of the reporting enterprise.

Exchange difference: non-integral

Balancing figure in the translated trial balance → Foreign Currency Translation Reserve

Carried in the balance sheet until disposal of the net investment, then recognised as income or expense.

Opening net investment (non-integral)

Opening net investment → opening rate (the previous year's closing rate)

Only the net investment as a whole is carried at the opening rate. Individual assets and liabilities are not translated at it. Questions usually give the opening rate separately.

Integral operation: monetary items

Rupee amount = foreign currency amount × closing rate

Applies to cash, debtors, creditors and other monetary items.

Integral operation: non-monetary items

Rupee amount = foreign currency amount × rate on the date of acquisition

Fixed assets and their depreciation use the rate of the asset's acquisition date. Opening stock uses the rate when it was acquired, or the rate given in the question. Closing stock uses the rate given in the question.

Income and expenses (both types)

Rupee amount = foreign currency amount × rate on the transaction date (average rate as an approximation)

Use the average rate when the question gives it and the transactions are spread evenly through the year.

Non-integral operation: assets and liabilities

Rupee amount = foreign currency amount × closing rate

Applies to all assets and liabilities, monetary or not, including fixed assets and stock.

Exchange difference from the trial balance

Exchange difference = total of translated debits − total of translated credits

If the debit side is short, the balancing figure is a debit (loss). If the credit side is short, it is a credit (gain). For an integral branch it goes to profit and loss; for a non-integral branch it goes to FCTR.

Head office account

Use the rupee balance of the branch account in the head office books

Do not retranslate it at the closing rate.

Quick revision

• A dependent branch has no full books; HO records its transactions and prepares a Branch Account.
• An independent branch keeps complete books and sends a trial balance to HO.
• Debtors system: Branch Account shows opening and closing stock, debtors, goods sent, expenses and cash; the balancing figure is profit or loss.
• Stock and debtors system: goods are usually sent at invoice price, and loading is the excess of invoice price over cost.
• Abnormal loss is credited to Branch Stock at invoice price; the loading is debited to Branch Adjustment Account and only the cost is debited to Abnormal Loss Account, so the loss is charged to P&L at cost.
• Normal loss is credited to Branch Stock Account at invoice price. It is absorbed in the cost of goods sold, with the loading on it transferred to Branch Adjustment Account as part of the loss. It reduces branch profit, and no separate abnormal loss account is used.
• Wholesale branch: goods go at wholesale price, so you need a stock reserve for the unrealised profit in closing stock.
• Independent branch: adjust for goods in transit and cash in transit before matching HO and Branch accounts.
• AS 11 classification: integral foreign operation works as an extension of HO; non-integral operates with a degree of independence.
• Non-integral: translate income and expenses at the rates on the transaction dates (an average rate is usually used as an approximation, or the rate given in the question); translate assets and liabilities, both monetary and non-monetary, at the closing rate.
• Non-integral: the exchange difference is accumulated in a foreign currency translation reserve until the net investment is disposed of.
• Integral: income and expenses and non-monetary items carried at historical cost are translated at transaction date rates; monetary items at the closing rate; non-monetary items carried at fair value at the rate when the fair value was determined. The exchange difference goes to profit and loss.
• The exchange difference is the balancing figure after translating the whole trial balance.

Common mistakes

• Treating a branch as a separate legal entity. Fix: Remember that keeping separate books is an accounting choice. Legally the branch is part of the same business.
• Calling every branch with a petty cash book an independent branch. Fix: Check whether the branch keeps full books with its own ledgers and trial balance. If only basic records exist, it is dependent.
• Debiting discount allowed and bad debts in the Branch Account and also showing closing debtors after deducting them. Fix: Deduct them only in the Branch Debtors Account. Do not debit them again in the Branch Account when closing debtors is on the credit side.
• Leaving out opening debtors or petty cash from the debit side. Fix: Start the debit side with all opening balances: stock, debtors and petty cash. Tick them off against the data list.
• Treating cost + 25% on cost as loading of 25% of invoice price Fix: Convert it. Markup of 25% on cost is 25 ÷ 125 = 1/5 of invoice price. Write the fraction before starting.
• Valuing abnormal loss at invoice price in the Abnormal Loss Account Fix: Credit Branch Stock at invoice price, but debit Abnormal Loss at cost and Branch Adjustment with the loading.
• Treating cost plus 25% on cost as 25% of invoice price when computing the reserve. Fix: Convert first. Loading is x ÷ (100 + x) of invoice price when markup is on cost. For 25% on cost, it is 20% of invoice price.
• Creating a stock reserve on the whole closing stock, including goods bought by the branch from outside. Fix: Apply the reserve only to HO goods held at invoice price. Branch purchases are already at cost. Check the stock split in the question.
• Recording goods in transit in the head office books Fix: The head office has already recorded the sending. The branch has not recorded the receipt, so the branch records it.
• Recording cash in transit in the branch books Fix: The branch has already credited cash. The head office has not recorded the receipt, so the head office debits Cash in Transit and credits Branch A/c.

Exam tips

• Write the definition of a branch in the first line. It is an easy mark and frames your answer.
• For difference questions, give four or five clear points, one line each. Do not write long paragraphs.
• In case-based MCQs, look for keywords: no books means dependent, trial balance sent means independent, outside India means a foreign location (still dependent or independent).
• For foreign branches, first decide integral or non-integral using the AS 11 test: extension of the reporting enterprise, or a significant degree of autonomy. Then pick the translation rules. Do not apply the monetary/non-monetary split to a non-integral foreign operation.
• Do not treat 'keeps full books' as proof that a foreign branch is non-integral. Look for facts about autonomy, or state your assumption.
• Link the type to the method in your answer. This shows the examiner you know where the topic leads.
• Practise MCQs on departmental versus branch accounting, as the difference is easy to test with one line.
• Show the Branch Debtors Account as a separate working note. The closing debtors figure is often the key to the answer.