INCOME STATEMENT(FINAL ACCOUNTS) METHOD

(a) Goods sent at cost price

This method can be used with:

1. Debtors Method
2. Stock and Debtors Method
3. Income Statement Method

i. Debtors method

Only one account is used:

Branch Account. Debited with: Opening stock Opening debtors Opening petty cash Goods sent to branch (at cost) Branch expenses (including those paid by HO)

Credited with: Remittances from branch Goods returned to HO Closing balances of stock, debtors, and petty cash The balance = profit or loss of the branch.

Branch account

Dr.	Date	Particulars	Amount At cost (currency)	Cr.	Particulars	Amount At selling price (currency)
		Balance b/d:			Cash remittance to head office:
		- Cash	xx		- From cash sales	xx
		- Stock	xx		- From debtors' sales	xx
		- Debtors	xx		- Goods returned to head office	xx
		- Petty cash	xx
		- Long term asset	xx		Balance c/d:
		- Prepaid expenses	xx		- Cash	xx
		Goods from head office	xx		- Stock	xx
					- Debtors	xx
		Profit (credit side is larger)			- Petty cash	xx
			xxx		- Long term asset	xx
					- Prepaid expenses	xx
					Loss (debit side is larger)
						xxx

ii. Stock and debtors method

Requires maintaining five accounts at HO:

1. Branch Stock Account
2. Branch Debtors Account
3. Branch Expenses Account
4. Branch Income Statement (Profit or Loss and OCI)
5. Goods Sent to Branch Account

If the branch handles purchases or expenses, also maintain:

• Branch Assets Account
• Branch Cash Account

iii. Income statement (final accounts) method

A full income statement is prepared for each branch. Not part of the double-entry system. Used to evaluate the profitability of the branch.

Example

Satellite Ltd is a retailing company whose headquarter is in Dar es salaam and a branch in Tanga. The company policy requires goods to be transferred to the branch at cost. The branch sells goods to customers consistently at cost plus a 30% mark up. The following information relates to the branch operations for August 2021.

Particulars	TZS
Opening balances:
- Stock	7,200,000
- Debtors	2,000,000
Cash sales remitted to head office	28,284,000
Cash received from debtors and remitted to head office	7,696,000
Goods invoiced to branch	28,800,000
Rent	1,200,000
Salaries	1,800,000
Closing balances:
- Stock	6,400,000
- Debtors	2,500,000

In the books of satellite Ltd

Branch stock account

Dr.	Particulars	Amount in "TZS"	Cr.	Particulars	Amount in "TZS"
	Balance b/d (opening stock)	7,200,000		Cash sales	30,284,000
	Goods sent to branch	28,800,000		Debtors	8,196,000
	Branch gross profit	8,880,000		Balance c/d	6,400,000
		44,880,000			44,880,000
	Balance b/d	6,400,000

Goods sent to branch account

Dr.	Particulars	Amount in TZS	Cr.	Particulars	Amount in TZS
	Transfer to head office- Income statement (trading account)	28,800,000		Branch Stock	28,800,000
		28,800,000			28,800,000

Branch debtors account

Dr.	Particulars	TZS	Cr.	Particulars	TZS
	Balance b/d (opening stock)	2,000,000		Cash	7,696,000
	Branch stock (Sales)	8,196,000		Balance c/d	2,500,000
		10,196,000			10,196,000
	Balance b/d	2,500,000

Branch expenses account

Dr.	Particulars	TZS	Cr.	Particulars	TZS
	Salaries	1,800,000
	Rent	1,200,000		Balance c/d - income statement	3,000,000
		3,000,000			3,000,000
	Balance b/d	3,000,000

Also called

• Wholesale Pricing Method

How it works

HO adds a wholesale profit to the cost and sends goods to branch. Branch sells at retail price.

• Branch profit = Retail price – Wholesale price

Accounting entries

Goods Sent Account reflects profit added (wholesale markup).

Branch Income Statement or Branch Stock Account:

• Debited with:

  • Opening stock (at wholesale price)
  • Goods sent to branch (at wholesale price)

• Credited with:

  • Sales (at retail price)
  • Closing stock (at wholesale price)

Profit = Sales – Cost of Goods Sold = Sales – (Opening Stock + Purchases – Closing Stock) = (Sales + Closing Stock) – (Opening Stock + Purchases)

Two return scenarios

i. Branch returns goods to HO

• Dr. Goods Sent to Branch Account
• Cr. Branch Stock Account

ii. Customers return goods

If returned to the branch:

• Dr. Branch Stock Account
• Cr. Branch Debtors Account

If returned directly to HO (for branch sales):

• Dr. Goods Sent to Branch Account
• Cr. Branch Debtors Account

Branch should also update its own debtors records.