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Advanced Accounting · Accounting for Branches including Foreign Branches

Dependent Branches: Stock and Debtors System

Updated 4 October 2026 · Fact-checked

In the stock and debtors system, the head office sends goods to a dependent branch at invoice price (cost plus loading). You keep Branch Stock, Branch Debtors, Branch Adjustment and Goods Sent to Branch accounts. Branch Stock shows shortages at invoice price, and the Adjustment account removes loading to find true branch profit.

Understand Dependent Branches: Stock and Debtors System

A dependent branch does not keep full books. The head office (HO) keeps all the records. In the stock and debtors system, HO sends goods to the branch at invoice price, which is cost plus a loading. The loading is a notional profit added to control the branch and hide the true cost from branch staff.

Because goods are recorded at invoice price, the Branch Stock Account works like a stock control account kept at selling (invoice) value. It is debited with opening stock and goods sent. It is credited with sales, goods returned, losses and closing stock. Any shortage shows up as a gap, so you can see pilferage or wastage straight away.

The invoice price includes loading, so the stock account does not give profit. The Branch Adjustment Account does that. It starts with the loading on goods sent (a credit) and adjusts for loading on opening and closing stock and loading on lost goods. After branch expenses, the balance is the real profit or loss, which goes to HO's Profit and Loss Account.

The Branch Debtors Account is kept as usual: opening balance plus credit sales, less cash received, returns, discounts and bad debts, gives the closing balance. Cash sales go straight to Branch Stock as a credit.

Losses are of two kinds. A normal loss (natural wastage, an expected shortage) is charged to the Adjustment Account in full at invoice price. An abnormal loss (theft, pilferage, fire) is moved out at cost to an Abnormal Loss Account. The loading on it is taken off the Adjustment Account, because that profit was never earned.

Key rules to remember

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.

How to solve Dependent Branches: Stock and Debtors System questions

Follow the same order for every question. It keeps the working tidy and earns step marks.

  1. 1Find the loading fraction of invoice price. Check whether the markup is on cost or on invoice price.
  2. 2Prepare the Branch Stock Account at invoice price. Put in opening stock, goods sent, returns, cash sales, credit sales and closing stock. Find the shortage as the balancing figure.
  3. 3Split the shortage into normal and abnormal loss using the question. Value the abnormal loss at cost and at loading.
  4. 4Prepare the Branch Debtors Account to find the missing credit sales, cash received or closing debtors.
  5. 5Prepare the Goods Sent to Branch Account. Transfer the loading to the Branch Adjustment Account and the cost to HO's Trading Account.
  6. 6Prepare the Branch Adjustment Account. Credit opening stock reserve and loading on goods sent. Debit closing stock reserve, normal loss, loading on abnormal loss and branch expenses. The balance is net profit or loss.
  7. 7Prepare the Abnormal Loss Account, set off insurance claims, and transfer the net loss to Profit and Loss Account.
  8. 8Cross-check the profit through the cost method: Sales − cost of goods sold − expenses.

Quickest way: Fast route: one stock account, then one adjustment account

When to use it: Use this when the question asks for the Branch Stock and Adjustment Accounts together with a missing figure. It works for both MCQs and written answers.

  1. Convert everything to invoice price first. Write the loading fraction (1/5, 1/6 and so on) at the top of your page.
  2. Draw the Branch Stock Account and fill in everything except the shortage. The balancing figure is the shortage.
  3. For MCQs, multiply or divide the shortage by the loading fraction. Abnormal loss at cost is invoice price × (1 − loading fraction).
  4. In the Adjustment Account, write the five standard items first: opening reserve, loading on goods sent, closing reserve, loss items and expenses. Then balance the account.
  5. Quick check: profit = sales − cost of goods sold − expenses. If it does not match, your loading or stock reserve is wrong.
  6. In the written answer, write each account with a heading and show workings as notes. Marks are given for each correct account, so do not skip one if you are stuck.

Common mistakes in Dependent Branches: Stock and Debtors System

  • Treating cost + 25% on cost as loading of 25% of invoice price

    Students read '25%' and apply it directly to 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

    The Branch Stock Account is at invoice price, so the same figure gets carried over.

    Fix: Credit Branch Stock at invoice price, but debit Abnormal Loss at cost and Branch Adjustment with the loading.

  • Forgetting to reverse the opening stock reserve

    Students remember the closing reserve but not that last year's reserve is now earned profit.

    Fix: Credit the opening reserve and debit the closing reserve in the Adjustment Account every time.

  • Putting credit sales and cash sales both as credits in Branch Stock but also showing them again as cash in the Debtors Account

    Confusion about which account shows which cash.

    Fix: Branch Stock takes cash sales and credit sales. The Debtors Account takes only credit sales and the cash received from debtors.

  • Charging normal loss only at cost to the Adjustment Account

    Students want to remove only the loading, as in abnormal loss.

    Fix: Charge normal loss at the full invoice price to the Adjustment Account. The loading part is cancelled, and the cost part reduces profit.

  • Ignoring goods returned by the branch

    Returns appear in a small note and are missed.

    Fix: Credit Branch Stock at invoice price for returns. Reduce the loading on goods sent by the loading on returns.

Worked examples

Example 1

A head office invoices goods to its dependent branch at cost + 25%. Data for the year: opening stock at invoice price ₹60,000; goods sent at invoice price ₹3,00,000; cash sales ₹1,50,000; credit sales ₹1,20,000; closing stock at invoice price ₹75,000; normal loss at invoice price ₹6,000; branch expenses paid by HO ₹18,000; opening debtors ₹20,000; cash received from debtors ₹1,00,000. Prepare the Branch Stock Account, Branch Debtors Account and Branch Adjustment Account, and find the net profit. No insurance claim.

Show the solution
  1. Loading: 25 ÷ 125 = 1/5 of invoice price.
  2. Branch Stock Account (invoice price). Debit: opening stock ₹60,000, goods sent ₹3,00,000 = ₹3,60,000. Credit: cash sales ₹1,50,000, credit sales ₹1,20,000, closing stock ₹75,000 = ₹3,45,000. Balancing credit (total loss) = ₹15,000.
  3. Normal loss given as ₹6,000. Abnormal loss = ₹15,000 − ₹6,000 = ₹9,000 at invoice price. Cost = ₹9,000 × 100/125 = ₹7,200. Loading = ₹1,800.
  4. Branch Debtors Account. Debit: opening ₹20,000, credit sales ₹1,20,000 = ₹1,40,000. Credit: cash received ₹1,00,000. Closing debtors = ₹40,000.
  5. Stock reserve: opening ₹60,000 × 1/5 = ₹12,000. Closing ₹75,000 × 1/5 = ₹15,000. Loading on goods sent ₹3,00,000 × 1/5 = ₹60,000.
  6. Branch Adjustment Account. Credit: stock reserve on opening stock ₹12,000, loading on goods sent ₹60,000 = ₹72,000. Debit: stock reserve on closing stock ₹15,000, normal loss ₹6,000, abnormal loss (loading) ₹1,800, branch expenses ₹18,000 = ₹40,800. Balance = ₹31,200 profit.
  7. Abnormal Loss Account: debit ₹7,200 (cost), transferred to Profit and Loss Account as a loss. Net result for HO = ₹31,200 − ₹7,200 = ₹24,000.
  8. Check: sales ₹2,70,000. Cost of goods sold = opening cost ₹48,000 + cost of goods sent ₹2,40,000 − closing cost ₹60,000 − abnormal loss ₹7,200 = ₹2,20,800. Profit = ₹2,70,000 − ₹2,20,800 − ₹18,000 = ₹31,200. Matches.

Answer: Total shortage ₹15,000: normal ₹6,000 and abnormal ₹9,000 (cost ₹7,200). Closing debtors ₹40,000. Branch profit from the Adjustment Account ₹31,200. After the abnormal loss of ₹7,200, net result is ₹24,000 profit.

Example 2

Goods are invoiced to a branch at cost + 25%. Opening stock at invoice price ₹36,000; goods sent ₹2,40,000 (invoice price); goods returned by branch to HO ₹12,000 (invoice price); cash sales ₹1,10,000; credit sales ₹90,000; closing stock at invoice price ₹49,000; branch expenses ₹10,000. The stock shortage is due to pilferage, and the insurance company admits a claim of ₹8,000. Find the shortage, the loss on it, and the branch profit.

Show the solution
  1. Loading = 1/5 of invoice price.
  2. Shortage: ₹36,000 + ₹2,40,000 − ₹12,000 = ₹2,64,000. Less sales ₹2,00,000 = ₹64,000. Less closing stock ₹49,000 = ₹15,000 shortage at invoice price. There is no normal loss, so it is all abnormal.
  3. Abnormal loss at cost = ₹15,000 × 4/5 = ₹12,000. Loading = ₹3,000.
  4. Stock reserve: opening ₹36,000 × 1/5 = ₹7,200. Closing ₹49,000 × 1/5 = ₹9,800.
  5. Net loading on goods sent: (₹2,40,000 − ₹12,000) × 1/5 = ₹45,600.
  6. Branch Adjustment Account. Credit: opening reserve ₹7,200, net loading on goods sent ₹45,600 = ₹52,800. Debit: closing reserve ₹9,800, abnormal loss (loading) ₹3,000, expenses ₹10,000 = ₹22,800. Profit = ₹30,000.
  7. Abnormal Loss Account: debit ₹12,000 (cost). Credit insurance claim ₹8,000. Net loss ₹4,000 to Profit and Loss Account.
  8. Net result = ₹30,000 − ₹4,000 = ₹26,000.
  9. Check: sales ₹2,00,000. Cost of goods sold = opening cost ₹28,800 + net cost of goods sent ₹1,82,400 − closing cost ₹39,200 − abnormal loss ₹12,000 = ₹1,60,000. Gross profit ₹40,000 − expenses ₹10,000 = ₹30,000. Matches.

Answer: Shortage ₹15,000 at invoice price (cost ₹12,000). Branch profit per Adjustment Account ₹30,000. Net loss after insurance claim on the shortage is ₹4,000. Net result ₹26,000 profit.

Exam tips

  • Write the loading fraction before anything else. Most wrong answers in this topic start with a wrong fraction.
  • The shortage is almost always the balancing figure in the Branch Stock Account. Do that account first, even if the question asks for the Adjustment Account.
  • Read the wording on the loss: 'normal', 'pilferage', 'theft' or 'fire' decides which treatment you apply. If the loss is not labelled, treat the whole shortage as abnormal and state your assumption.
  • In MCQs, abnormal loss at cost is a quick calculation: invoice price loss × 100 ÷ (100 + markup on cost). Do it before looking at the options.
  • In the written answer, show each account in a separate box with a clear heading. Even if your final profit is wrong, correct accounts earn marks.

Practice questions from Accounting for Branches including Foreign Branches

Dependent Branches: Stock and Debtors 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: Stock and Debtors System: frequently asked questions

What is the difference between the stock and debtors system and the debtors system?

In the debtors system, goods go to the branch at cost and one Branch Account shows profit. In the stock and debtors system, goods go at invoice price and you keep separate Stock, Debtors and Adjustment accounts. This gives better control over stock and shows shortages directly.

How do I calculate abnormal loss when goods are invoiced at a price above cost?

First find the shortage in the Branch Stock Account at invoice price, and take out any normal loss. Then convert the abnormal part to cost by removing the loading. For cost + 25%, cost is invoice price × 100 ÷ 125, which is 4/5 of invoice price.

Why is normal loss charged to the Adjustment Account at invoice price?

Normal loss is an expected part of the branch's business. Charging it at full invoice price removes the loading on the lost goods and also charges the cost as a loss against branch profit. This gives the correct profit.

What is the stock reserve and how is it treated?

The stock reserve is the loading included in the closing stock at invoice price. That profit is not yet earned because the goods are unsold. You debit it in the Adjustment Account and deduct it from stock in HO's balance sheet. Next year, the opening reserve is credited back.

Does cash sales go through the Branch Debtors Account?

No. Cash sales are credited directly in the Branch Stock Account. The Branch Debtors Account only shows credit sales, cash received from debtors, returns, discounts and bad debts.