Lesson Notes By Weeks and Term - Senior Secondary School 3

SUBJECT: FINANCIAL ACCOUNTING

CLASS:  SS 3

DATE:

TERM: 2nd TERM

 

WEEK EIGHT AND NINE

TOPIC: PREPARATION OF BRANCH ACCOUNT

CONTENT

• Branch Adjustment Method
• Accounting Entries
• Formats and Illustration
• Where branches keep separate Accounts

Branch Adjustment Method of Branch Accounting

Unlike the memorandum or double column method, under this method, the profit loading will be taken to a separate A/C called “Branch adjustment A/C”. Under this method the following are the main A/C that will be prepared:-

1. Branch stock A/C – at invoice price
2. Branch stock adjustment A/C showing profit loading 
3. Goods sent to branch A/C – based on cost price
4. Debtors A/C (where goods are sold or credit)
5. Branch P & L A/C

Accounting Entries

1. When goods are sent to branch Dr. Branch stock A/C at invoice price Cr. Goods sent to branch A/C (at cost)
2. When there are sales – cash or credit Dr. Cash A/C with cash sales Dr. Debtors A/C with credit sales Cr branch stock A/C with cash or credit sales.
3. Stock at start. 

Dr. branch stock A/C – (with invoice price) Cr. Branch stock adjust A/C (profit loading)

1. Stock at close 

Dr. Branch stock adjust A/C (profit loading)

Cr. Branch stock A/C with invoice price 

1. Returns to head office.

Cr. Branch stock A/C at invoice price

Dr. Goods sent to branch A/C at cost price

Dr. Branch stock adjustment A/C with profit loading

1. Transfer to other branch

Cr. Branch stock A/C at invoice price

Dr. Goods sent to branch A/C at cost price

Dr. branch stock adjustment A/C with profit loading

1. Allowances of selling price or reduction in selling price

Dr. branch stock adjustment A/C (total allowance )

Cr. Branch stock A/C (total allowance)

1. Goods in transit

Dr. branch stock adjustment A/C (with profit loading)

Cr. Branch stock A/C (with invoice price)

1. Goods lost in transit

Dr. Branch stock adjustment A/C (with profit loading)

Dr. Goods lost in transit A/C (at cost price and write it off to P & L A/C)

Cr. Branch stock A/C (at invoice price)

1. Goods stolen or deficiencies

Cr. Branch stock A/C (invoice price)

Dr. Branch stock adjustment A/C (profit loading)

Dr. Goods stolen A/C (with cost price)

1. Cash Stolen

Cr. Branch stock A/C (Total amount)

Dr. Defalcation A/C (total amount) to be written off to P & L A/C

1. Goods returned by customers to head office

Cr. Debtors A/C (invoice price)

Dr. goods sent to branch A/C (cost price)

Dr. Branch stock adjustment A/C (profit loading)

1. Balance of adjustment A/C will be transferred to branch profit and loss A/C
2. The goods sent branch A/C will be closed by transferring the balance to H.O. trading A/C. Formats

Branch Stock Account (invoice price)

                N                            N

Stock at start            x    goods transferred to another branch    x

Goods sent to branch    x    cash sales                    x

                    Credit sales                    x

                    Expenses paid out of takings        x

                    Reducting in selling price            x

                    Goods in transit                x

                    Returns to H.O.                x

                    Cash stolen (pilterage)            x

                    Normal loss                    x

                    Cash in hand                 x

                    Bal c/d stock at close            x

                xx                            xx

Goods sent to Branch A/C (cost price)

Return to H.O        x    Branch stock A/C                x

Transfer to other branch    x   

Bal C/D transp. To H.O   

Trading A/C            x

                x                            x

Branch stock adj. or branch mark-up Account profit loading

                N                            N

Profit on return to H. O    x        Profit on opening stock        x

Profit on stock at close    x        profit on goods sent to branch    x

Profit on goods returned 

By customers to H.O    x       

Profit on goods in transit    x

Normal loss (selling price)    x

Profit on goods stolen    x

Profit on return to other 

Branch            x

Reduction in selling price    x

GP to branch & P&L A/C 

c/d                x

                xx                            xx

Branch P & L A/C

                    N                            N

Cost of goods stolen            x        Branch stock Adj A/C b/d        x

Sundry expenses            x       

Cost of goods lost in transit    x

Cost stolen                x

Net profit c/d                x

                    xx                            xx

EVALUATION QUESTIONS

1. What are the entries involved in selling goods on credit by a branch?
2. What is the purpose of preparing branch stock accounts?

ILLUSTRATION

Suzuki Ltd has a head office in Lagos and a branch in Ibadan. All goods are purchased by the head office and sent to Ibadan at cost plus mark-up of 1/3 of the selling price. During the year to 31/12/05 the following transaction took place at Ibadan.

                            N

Goods received from Lagos                360,000

Goods returned to Lagos                3360

Bad debt                        1192

Cash received from debtors            137248

Cash discount given                    3616

Cash sales                        201600

Credit sales                        144,000

The following additional information is relevant

                    1/1/05        31/12/05

                    N            N

Stock in hand at selling price    32160            42000

Debtors                13216            15160

You are required to prepare

1. Branch stock A/C           
2. Goods sent to Branch A/C
3. Branch stock adjustment A/C
4. Branch debtors A/C

Solution:

Suzuki Ltd

Branch stock A/C (invoice price)

                        N                        N

1. balance b/f             32160        cash sales            201600

    Goods sent to branch                branch debtors

    At cost (2/3 x 360,000)        240,000    -credit sales            144,000

    Branch stock adj.                    goods return

    Profit loading (1/3 x 360,000)    120,000    to H.O.

                                Cost – (2/3 x 3360)        2,240

                                Branch stock   

                                Adjust-profit

                                Loading (1/3x3360)        1,120

                                Branch stock

                                (The difference)        1,200

                                bal (c/d stock

                                at close             4,200

                        39216                        39216

1.       Goods sent to branch A/C (cost price)

N                        N

                Branch stock

        Goods returned to H.O            A/C (2/3x360,000)            240,000

        Cost (2/3x3360)        2240

Transferred to 

H.O. trading A/C

(Balancing figure)        237,760       

                240,000                        240,000

1.     Branch stock adjustment A/C (profit loading)

                    N                            N

Branch stock A/C                    bal b/f (1/3x32,160        10,720

Less in stock            1200            branch stock A/C        120,000

Returns to H.O                    (profit on G.S.B

(profit on it 1/3x3360    1120            (1/3x360,000)

Profit on closing

Stock (1/3x42000) c/d    14,000

Branch P&L A/C GP c/d    114,400

                130720                            130720

                            Bal b/d                14000

1.                             Branch debtors A/C

                    N                            N

    Bal b/f                13216        cash received from debtors        137248

    Credit sales            144,000    Discount allowed            3616

                            Bad debt                1192

                            Bal c/d                15,160

                    157216                        157216

    Bal b/d             15160                       

EVALUATION QUESTIONS

1. Explain the following pricing methods used in preparing branch accounts

    (a)   cost price       (b) cost plus a percentage       (c) selling price

2. List any five items that may feature in the Branch stock Adjustment Account.

GENERAL EVALUATION QUESTIONS

1. List five source documents used in preparing the Cash Book
2. State five  factors to be considered in determining the depreciation charge for a fixed asset
3. State five differences between capital expenditure and revenue expenditure
4. State three features of each of the following (a) cash book (b) trading account (c) profit and loss account
5. Differentiate between prime costs and overhead costs

READING ASSIGNMENT

Essential Financial Accounting O. A. Longe, Pages 379-383

WEEKEND ASSIGNMENT

1. Branch stock A/C is prepared to show: 
   1. cost price of goods sent to branch
   2. Gross profit in goods sent to branch
   3. Invoice price of goods sent to branches
   4. None of the above
2. In branch accounting, the entries for bad debt written off are:
   1. Dr. Branch stock A/C Cr. Debtors A/C
   2. Cr. Bank A/C Dr. debtors A/C 
   3. Cr. Debtors A/C, Dr. branch P&L Mc to branch A/C
3. If the margin of a trader is 30% than the mark-up of the trader is 

(a)25% (b)33% (c)40% (d)43%

1. The balancing figure in the goods sent to branch A/C is (a)transfer to branch debtors A/C (b)credit to branch stock A/C (c)transfer to branch P&L A/C (d)transfer to head office trading A/C
2. A branch sold goods on credit for N5000. The accounting entries are debt branch debtors A/C N5000 and credit.

(a) goods sent to branch A/C N5000 (b)branch stock adjustment A/C N5000 (c)branch stock A/C N5000  (d)branch profit & loss A/C N5000

THEORY 

1. What purpose does each of the following serve?
   1. Branch stock A/C
   2. Branch stock adjustment A/C
   3. Goods sent to branch A/C
2. Show a comprehensive format of a branch stock A/C