CMA Intermediate · Financial Accounting

Branch (including Foreign Branch) and Departmental Accounts: formula sheet

Full chapter guide

Key formulas

Dependent branch: Head office keeps all books; branch has no separate books; Main systems: debtors system, stock and debtors system, final accounts system.
Independent branch: Branch keeps full books; head office keeps Branch Account; branch keeps Head Office Account; The two accounts are reciprocal. Their balances should agree after reconciliation.
Foreign branch: Branch books in foreign currency, translated into rupees for merging; It may be dependent or independent in nature. Translation is covered in the foreign branch topic.
Branch vs department: Branch = separate location; Department = division within one location; Branch accounts show results by place; departmental accounts show results by product line.
Reciprocal balance rule: Branch Account in head office books and Head Office Account in branch books are mirror (reciprocal) accounts: balances are equal and opposite after adjusting items in transit; Do not treat the debit or credit side as a fixed rule. Differences arise from items in transit, such as goods or cash, and are reconciled.
Branch Account (debtors system) balancing figure: Profit or loss = Credit side (cash remitted + goods returned + closing stock + closing debtors + closing petty cash) − Debit side (opening stock + opening debtors + opening petty cash + goods sent + expenses paid by HO); If credits exceed debits, it is profit. If debits exceed credits, it is loss. Transfer it to HO's Profit and Loss Account.
Closing debtors: Closing debtors = Opening debtors + Credit sales − Cash received − Discount allowed − Bad debts − Sales returns; Use the Branch Debtors Account to find any one missing figure, such as credit sales or cash received.
Cash remitted by branch: Cash remitted = Cash sales + Cash collected from debtors − Expenses paid by branch out of collections − Increase in petty cash (or + decrease in petty cash); Expenses paid directly by HO are not deducted here. Remittance is one lump sum on the credit side of the Branch Account in the debtors system.
Branch Stock Account (at cost): Debit: Opening stock + Goods sent + Sales returns. Credit: Cash sales + Credit sales + Goods returned to HO + Closing stock + Shortage. Balancing figure = Gross profit; Sales returns from customers come back into stock, so they go on the debit side. If the credit side is larger, the balance is gross profit.
Branch Profit and Loss Account: Net profit = Gross profit − Branch expenses − Bad debts − Discount allowed; Bad debts and discount from the Branch Debtors Account are branch expenses.
Net result rule: Net profit by debtors system = Net profit by stock and debtors system; Use this as a check when a question asks for both.
Loading on cost: Loading = Invoice price − Cost; Loading % on cost = (Invoice − Cost) ÷ Cost × 100.
Cost from invoice price (loading on cost): Cost = Invoice price × 100 ÷ (100 + loading % on cost); Loading portion of invoice price = Invoice price × loading% ÷ (100 + loading%).
Cost from invoice price (loading on invoice price): Loading = Invoice price × loading % on invoice price; Example: invoice price is cost plus 25% on cost, which means loading is 20% of invoice price. Check which base is stated.
Stock Reserve: Stock Reserve = Loading in closing stock at invoice price; Opening stock reserve is credited, closing stock reserve is debited in the Branch Account.
Goods Sent to Branch adjustment: Net goods sent at cost = Goods sent at invoice price − Loading on goods sent (less returns at invoice price and their loading); Loading on goods sent: debit Goods Sent to Branch, credit Branch Account. Loading on goods returned: debit Branch Account, credit Goods Sent to Branch, so the net adjustment is the loading on net goods sent. Transfer the balance of Goods Sent to Branch (cost) to the Trading Account or Purchases.
Abnormal loss: Abnormal loss charged to P&L = Invoice price of loss − Loading on it = Cost of loss; Deduct insurance claim admitted; the balance is the loss.
Invoice price when loading is on cost: Invoice price = Cost × (100 + loading %) ÷ 100; Use when goods are sent at cost plus a percentage.
Loading in stock when loading is on cost: Loading = Stock at invoice price × loading % ÷ (100 + loading %); For 25% on cost, the fraction is 25/125 = 1/5.
Loading in stock when loading is on invoice price: Loading = Stock at invoice price × loading % ÷ 100; For 20% on invoice price, the fraction is 1/5.
Branch Trading Account gross profit: Gross profit = Sales + Closing stock − Opening stock − Goods from head office − Branch purchases − Direct expenses; Add goods returns to the right sides first. Goods sent are net of returns to head office.
Branch net profit: Net profit = Gross profit − Branch expenses (+ other income); This is at invoice price when stock and goods sent are at invoice price.
Adjusted (true) branch profit: True profit = Branch net profit at invoice price + Loading in goods sent (net of returns) − Loading in closing stock + Loading in opening stock; Goods sent at invoice price overstate branch cost, so the loading on goods sent is added back. Closing stock loading is deducted and opening stock loading is added. The loading on goods sent is credited to head office profit through the Goods Sent to Branch Account.
Agreement of mirror accounts: Branch A/c balance (HO books) = Head Office A/c balance (Branch books); Debit balance in one set, credit balance in the other, equal in amount after adjustments.
Goods in transit: Dr Goods in Transit (Branch books) ; Cr Head Office A/c; Entry in branch books. Raised when head office has billed the goods but the branch has not recorded them. Include in closing stock.
Cash in transit: Dr Cash in Transit (HO books) ; Cr Branch A/c; Entry in head office books when the branch has remitted cash that head office has not yet received. The branch has already debited its Head Office A/c on sending the cash, so only head office needs adjusting. Reverse the position if head office sent the cash.
Reconciliation approach: Unadjusted balance ± items recorded on one side only = Adjusted balance; Adjust only the side that has not recorded the item.
Incorporation rule: Combined figure = HO figure + Branch figure (after reconciliation); Eliminate Branch A/c and Head Office A/c. Goods in transit and cash in transit are shown as current assets.
Non-integral operation (AS 11): Assets and liabilities × closing rate; income and expenses × transaction-date or average rate; Exchange difference goes to foreign currency translation reserve, not to profit or loss, until disposal of the net investment.
Integral operation (AS 11): Monetary items × closing rate; non-monetary items at historical cost × rate on acquisition date; income and expenses × transaction-date or average rate; Exchange difference is a balancing figure charged or credited to profit and loss.
Exchange difference as balancing figure: Exchange difference = Total of translated debits − Total of translated credits (or the reverse); When translated debits exceed credits, the balancing figure is a credit. For an integral branch it is a gain credited to profit and loss. For a non-integral branch it is a credit to the foreign currency translation reserve, not a gain in profit or loss. When credits exceed debits, the balancing figure is a debit: a loss for an integral branch, or a debit to the translation reserve for a non-integral branch.
Head office account in branch books: Head office / branch current account is translated at the amount shown in the head office books; Do not retranslate it at the closing rate. It should agree with the branch account in the head office books.
Ind AS 21 presentation currency translation: Assets and liabilities × closing rate; income and expenses × transaction-date or average rate; difference to OCI; Use when the branch's functional currency differs from the presentation currency.
Departmental gross profit: Gross profit = Sales + Closing stock − Opening stock − Purchases − Direct expenses; Compute for each department separately. Use net figures (after returns).
Share of a common expense: Department's share = Total expense × Department's basis figure ÷ Total of basis figures; The basis figure is sales, area, purchases, workers and so on, depending on the expense.
Common bases of allocation: Rent, repairs of building, lighting, heating → floor area or light points | Carriage inwards, purchase discount → purchases | Selling expenses, discount allowed, bad debts, carriage outwards → sales | Salaries, canteen, staff welfare → number of workers or actual wages | Depreciation, insurance of assets → value of assets | Insurance of stock → value of stock; Use a basis given in the question. If none is given, choose the logical one and state it.
Total column check: Total column = Sum of department columns; Use this to verify arithmetic before you finish.
Profit loading when transfer is at cost plus a percentage on cost: Unrealised profit = Closing transferred stock × (Markup % ÷ (100 + Markup %)); For cost plus 25%, the fraction is 25/125 = 1/5.
Profit loading when transfer price is cost plus a percentage on transfer price: Unrealised profit = Closing transferred stock × (Profit % on transfer price ÷ 100); For a transfer at a profit of 20% on transfer price, the fraction is 1/5.
Stock reserve required: Stock reserve = Unrealised profit in closing stock at transfer price; Apply it only to the portion of closing stock that came from another department at above cost.
Effect on profit for the year: Charge to profit = Closing reserve − Opening reserve; If opening reserve is larger, the difference increases profit.
Closing stock at cost: Cost of transferred stock = Transfer price − Unrealised profit; Used when stock is shown at cost in the balance sheet.

Quick revision

A dependent branch has no full books of its own; the head office records its transactions.
An independent branch keeps full books and is linked to head office through inter-office accounts.
In the debtors system, the Branch Account is a single account that finds profit or loss.
In the stock and debtors system, you also keep Branch Stock, Debtors, Cash and Expense accounts.
Loading is the excess of invoice price over cost; Loading = Invoice price − Cost.
Stock reserve is the loading contained in unsold stock; it is not yet earned profit. Stock reserve = Closing stock at invoice price × Loading ÷ Invoice price.
Opening stock reserve is credited to the Branch Adjustment (or profit and loss) account because the loading in opening stock is treated as realised in the current year. Closing stock reserve is debited to it because it is carried forward as unrealised. Closing stock at invoice price less stock reserve gives stock at cost.
When reconciling head office and branch accounts, adjust for goods in transit and cash in transit. Also check other items such as goods sent at invoice price versus cost, remittances and expenses paid directly.
For a foreign branch under AS 11, first classify it as integral or non-integral. Integral: monetary items at the closing rate, non-monetary items (fixed assets, stock) at the historical rate, income and expenses at the actual or average rate, and the exchange difference goes to profit and loss. Non-integral: all assets and liabilities at the closing rate, income and expenses at the average rate, and the difference goes to the foreign currency translation reserve. This reserve is held until the net investment is disposed of, when it is recognised as income or expense.
Departmental expenses are shared on a logical basis; common costs with no clear basis are often kept undivided.
On inter-departmental transfers, remove the profit in unsold closing stock at the receiving department.
Always show workings, as step marks are given even if the final answer is wrong.

Common mistakes

Treating a branch as a separate legal entity. Fix: Remember that all branches are part of the same business and the same legal person. Separate books do not create a separate entity.
Saying a dependent branch is one that depends on the head office for goods only. Fix: The real test is the books. A dependent branch has no separate books of its own, and the head office records its transactions.
Deducting bad debts and discount in arriving at closing debtors and also debiting them again in the debtors-system Branch Account (double counting) Fix: In the debtors system, bad debts and discount allowed are debited in the Branch Account if they are not already deducted in arriving at closing debtors. If closing debtors is derived net of them, do not debit them again. Use only one treatment so the effect is counted once.
Forgetting opening debtors or petty cash on the debit side Fix: Use a checklist: stock, debtors, petty cash, prepaid and outstanding expenses. Tick each one before closing.
Applying 25% on invoice price when the question says 25% on cost. Fix: Write the base first. For loading on cost, loading = invoice price × loading% ÷ (100 + loading%).
Forgetting the opening stock reserve. Fix: Always credit the opening reserve in the Branch Account and debit the closing reserve.
Using the wrong fraction for loading, such as 25/100 when loading is 25% on cost. Fix: Loading on cost: percentage ÷ (100 + percentage). Loading on invoice price: percentage ÷ 100. Write the fraction before calculating.
Showing closing stock at cost in a trading account where goods sent are at invoice price. Fix: Keep all trading account items on the same basis, either all invoice price or all cost. Convert closing stock if needed.
Adjusting the wrong set of books Fix: Ask which unit has not recorded the item. Pass the entry only there.
Leaving goods in transit out of closing stock Fix: Once the branch records them, they belong to the branch stock. Add them at the correct value.

Exam tips

Short notes on types of branches are common, so learn the own books test and one example for each type.
In MCQs, check the location as well as the books. A branch outside India is a foreign branch, and the own books test still decides whether it is dependent or independent in nature.
For a comparison answer, write a two-column style list in bullets with at least four points and finish with the key difference.
Never call a branch a separate legal entity in any answer. Examiners treat it as a conceptual error.
MCQs carry no negative marking, so attempt every question.
Read the question once to spot the system. If it says Branch Account only, use the debtors system. If it asks for Branch Stock or Branch Debtors Account, use the stock and debtors system.
Always show working notes for cash remitted and closing debtors. Step marks are given for them even if the final profit is wrong.
In the 15 MCQs, one-line questions often ask where an item goes, such as goods returned by the branch, or ask for the balancing figure. Know the debit and credit sides cold. There is no negative marking, so attempt every MCQ.