Advanced Accounting · Accounting for Branches including Foreign Branches

Dependent Branches: Final Accounts and Wholesale Branch System

Updated 5 October 2026 · Fact-checked

Under the final accounts system, head office prepares a separate Trading and Profit and Loss Account for a dependent branch and shows its net assets in the Branch Account. In the wholesale branch system, goods go to the branch at wholesale price, so you create a stock reserve for the unrealised profit in closing stock.

Understand Dependent Branches: Final Accounts and Wholesale Branch System

A dependent branch depends on head office (HO) for its supply of goods and has no separate legal existence. HO keeps the branch accounts. The branch sells goods supplied by HO, for cash or on credit, and sends the cash to HO. In the debtors system, HO keeps one Branch Account and learns only a single profit figure. That is not enough when management wants gross profit, expenses and net profit of each branch separately.

The final accounts system solves this. HO prepares a Branch Trading Account and a Branch Profit and Loss Account, just as for any business. The profit is found in the Branch Profit and Loss Account, not in the Branch Account. When goods are sent at cost, the net profit is then transferred to the Branch Account (Dr Branch Account, Cr General Profit and Loss Account of HO). In the wholesale system, the profit at invoice price is instead transferred to the Branch Adjustment Account (Dr Branch Account, Cr Branch Adjustment Account). The Branch Account holds the branch assets and liabilities (stock, debtors, cash, petty cash, furniture, creditors, outstanding expenses). So it shows opening net assets + net profit (less remittances) = closing net assets.

Goods sent to the branch are recorded in HO books by debiting the Branch Account and crediting Goods Sent to Branch Account, at the price at which they are invoiced. At the year end the Goods Sent to Branch Account is closed to HO Trading Account (or deducted from HO purchases). If goods go at cost, no further adjustment is needed.

A wholesale branch sells in bulk to traders. HO usually invoices goods to such a branch at wholesale price, which is cost plus a small margin. Because that margin is not yet earned until the goods are sold to outsiders, the part of it sitting in unsold branch stock is unrealised profit. You remove it with a Branch Stock Reserve (also called Stock Reserve). The reserve is based on the loading-to-invoice-price relationship, so closing stock appears in the balance sheet at cost.

In the wholesale system, the loading on goods sent is taken out of Goods Sent to Branch Account by the entry: Dr Goods Sent to Branch Account, Cr Branch Adjustment Account (for the loading on net goods sent, that is, goods sent less goods returned by the branch, at invoice price). The balance left in Goods Sent to Branch Account is then goods at cost, and that balance is closed to HO Trading Account (or deducted from HO purchases).

The branch profit at invoice price is not taken straight to the General Profit and Loss Account. It goes to the Branch Adjustment Account. This account is credited with the loading on net goods sent, the opening reserve and the branch profit at invoice price, and it is debited with the closing reserve. If the branch shows a loss at invoice price, that loss is debited to the Adjustment Account instead. The balance of that account is the real profit, and that is what goes to the General Profit and Loss Account.

So the wholesale system is the final accounts system plus one extra layer: the invoice-price loading. You must handle loading on goods sent, opening reserve and closing reserve every time.

Key rules to remember

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.

How to solve Dependent Branches: Final Accounts and Wholesale Branch System questions

Use this order for any final accounts or wholesale branch question. It keeps loading, reserve and branch figures separate.

1Read the question and identify the system: goods at cost or at invoice price (wholesale price). Note the pricing basis, cost or invoice.
2Write the Branch Trading Account in columns. Put opening stock, goods from HO, branch purchases, expenses on purchases, then sales and closing stock. Reflect returns on the correct side.
3Compute gross profit as the balancing figure. If stock or sales are missing, derive them from the information given (for example from the debtors or cash data).
4Prepare the Branch Profit and Loss Account. List each expense and income item, adjust for depreciation, bad debts and outstanding or prepaid amounts, and find net profit at invoice price.
5If goods were invoiced above cost, work out the loading percentage and the stock reserve. Compute opening reserve (on opening stock) and closing reserve (on closing stock from HO).
6Prepare the Branch Adjustment Account in HO books. Credit it with the loading on net goods sent (goods sent less returns to HO, at invoice price), the opening reserve (it is written back) and the branch profit at invoice price. Debit it with the closing reserve. The balance is the real profit, and you transfer it to the General Profit and Loss Account. If the branch shows a loss at invoice price, debit it instead of crediting.
7Prepare the Branch Account with balances of assets and liabilities. Goods Sent to Branch (at invoice price) is debited in the Branch Account and credited to the Goods Sent to Branch Account. Transfer the loading from Goods Sent to Branch Account to the Branch Adjustment Account, then close the remaining balance (goods at cost) to HO Trading Account or deduct it from HO purchases.
8Cross-check: the real profit should agree with the formula using branch profit, loading on net goods sent and the opening and closing reserves.

Quickest way: Loading shortcut for the wholesale branch

When to use it: Use this when the question asks only for the real net profit or the stock reserve and does not need the full ledger accounts. Also use it to verify a long answer.

MCQs: first spot whether goods are sent at cost or invoice price. If cost, there is no reserve at all, so drop options that show one.
Convert the markup to a fraction of invoice price: cost + 25% on cost means 20% of invoice price. Cost + 20% on invoice price means 20% directly. This avoids the commonest wrong option.
Compute reserve in one line: closing stock at invoice × loading fraction. Then opening reserve the same way.
Find real profit = branch profit at invoice price (sales less goods sold at invoice price, less expenses) + loading on net goods sent + opening reserve − closing reserve.
Written answers: draw the Branch Trading and P&L Account first, write each figure with a label, then show the reserve calculation in a separate neat working note. Step marks are given for the working note.

Common mistakes in Dependent Branches: Final Accounts and Wholesale Branch System

Treating cost plus 25% on cost as 25% of invoice price when computing the reserve.
Students read the 25% and apply it directly to the invoice figure.
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.
Students assume everything in branch stock came from HO.
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.
Forgetting the opening reserve.
Only the closing reserve is calculated because it is new each year.
Fix: Always write opening and closing reserve side by side. In the Adjustment Account the opening reserve is a credit (written back) and the closing reserve is a debit. Together with the loading on net goods sent, which is also a credit, they convert the profit at invoice price into real profit.
Finding the branch profit as the balancing figure of the Branch Account in the final accounts system.
Students mix up the debtors system with the final accounts system.
Fix: In the final accounts system, find profit in the Branch Trading and P&L Account. Then transfer it to the Branch Account (Dr Branch Account, Cr General P&L), so the Branch Account shows opening net assets + net profit (less remittances) = closing net assets. In the wholesale system, the profit at invoice price goes through the Branch Adjustment Account, and only the real profit goes to the General P&L.
Ignoring goods returned by the branch to HO or by customers to the branch.
Returns are listed in the notes and are overlooked.
Fix: Deduct returns to HO from goods sent and reduce loading on them. Deduct customer returns from sales.
Leaving out depreciation or outstanding expenses in the branch P&L.
Students focus on the trading account and treat expenses as a minor step.
Fix: Go through every adjustment note and tick it off. Depreciation and outstanding items also change balances in the Branch Account.

Worked examples

Example 1

A dependent branch is supplied goods by HO at cost. For the year: opening stock ₹40,000; goods received from HO ₹3,00,000; goods purchased locally ₹20,000; closing stock ₹50,000; sales ₹4,10,000; salaries ₹30,000; rent ₹12,000; depreciation ₹5,000. Prepare the Branch Trading and Profit and Loss Account and find the net profit.

Show the solution

Cost of goods available = Opening stock 40,000 + Goods from HO 3,00,000 + Purchases 20,000 = ₹3,60,000.
Cost of goods sold = 3,60,000 − Closing stock 50,000 = ₹3,10,000.
Gross profit = Sales 4,10,000 − 3,10,000 = ₹1,00,000.
Expenses = Salaries 30,000 + Rent 12,000 + Depreciation 5,000 = ₹47,000.
Net profit = 1,00,000 − 47,000 = ₹53,000, transferred to HO General Profit and Loss Account.

Answer: Gross profit ₹1,00,000; net profit ₹53,000.

Example 2

HO invoices goods to a wholesale branch at cost plus 25% on cost. For the year: opening stock at invoice price ₹30,000; goods sent by HO at invoice price ₹2,50,000; closing stock at invoice price ₹45,000 (all HO goods); sales ₹2,80,000; branch expenses ₹20,000. Find the branch profit at invoice price, the stock reserves, and the real net profit.

Show the solution

Loading = 25 ÷ 125 = 20% of invoice price.
Branch trading at invoice price: goods available = 30,000 + 2,50,000 = 2,80,000; goods sold at invoice price = 2,80,000 − 45,000 = 2,35,000.
Gross profit at invoice price = Sales 2,80,000 − 2,35,000 = ₹45,000.
Branch net profit at invoice price = 45,000 − 20,000 = ₹25,000.
Opening reserve = 30,000 × 20% = ₹6,000. Closing reserve = 45,000 × 20% = ₹9,000.
Loading on net goods sent = 2,50,000 × 20% = ₹50,000 (there are no returns to HO). The entry is Dr Goods Sent to Branch Account ₹50,000, Cr Branch Adjustment Account ₹50,000. The balance left in Goods Sent to Branch Account, ₹2,00,000 (goods at cost), is closed to HO Trading Account.
Branch Adjustment Account: credits are loading on goods sent 50,000, opening reserve 6,000 and branch profit at invoice price 25,000, total ₹81,000. The only debit is closing reserve 9,000. Balance = 81,000 − 9,000 = ₹72,000, which is the real profit and goes to the General Profit and Loss Account. (Had the branch shown a loss at invoice price, it would be debited here instead of credited.) Formula check: 25,000 + 50,000 + 6,000 − 9,000 = ₹72,000.
Check: actual cost of goods sold = 2,35,000 × 100 ÷ 125 = 1,88,000. Real gross profit = 2,80,000 − 1,88,000 = 92,000. Less expenses 20,000 = ₹72,000.

Answer: Branch profit at invoice price ₹25,000; opening reserve ₹6,000; closing reserve ₹9,000; real net profit ₹72,000.

Exam tips

Always check how the markup is stated. A cost-based and an invoice-based markup give different loading, and examiners use this to test you.
Show the reserve as a separate working note. Even if you slip on a figure, the method earns step marks.
Write both opening and closing reserve every time, even if one is nil. It shows you understand the adjustment.
In MCQs, look for hidden returns, shortage or goods lost in transit. They change stock and loading figures.
For the difference between the debtors system and the final accounts system, remember: the debtors system gives one profit figure in the Branch Account, while the final accounts system gives gross profit, net profit and a Branch Account of net assets.

Practice questions from Accounting for Branches including Foreign Branches

Dependent Branches: Final Accounts and Wholesale Branch System in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Dependent Branches: Final Accounts and Wholesale Branch System: frequently asked questions

What is the difference between the debtors system and the final accounts system?

In the debtors system, HO keeps a Branch Account that shows the branch profit or loss as one balancing figure. In the final accounts system, HO prepares a separate Trading and Profit and Loss Account for the branch, and the Branch Account shows the net assets. The second gives gross profit, expenses and net profit separately, so it is more informative.

Why is a stock reserve created in the wholesale branch system?

Goods are sent to the branch above cost, so closing stock at invoice price includes a profit that is not yet earned. The stock reserve removes this unrealised profit, so the balance sheet shows stock at cost. Only the unsold portion of HO goods needs a reserve.

How do I find loading when goods are sent at cost plus a percentage?

Convert it to a fraction of invoice price. If the markup is x% on cost, loading is x ÷ (100 + x) of invoice price. For 25% on cost, it is 25 ÷ 125, which is 20% of invoice price.

Where does the net profit of the branch go?

When goods are sent at cost, it goes straight to the General Profit and Loss Account of HO. In the wholesale system, the branch profit at invoice price goes to the Branch Adjustment Account along with the loading on net goods sent and the reserves. The balance of that account is the real profit, and it goes to the General Profit and Loss Account.