Mada za sehemu hiiBranch AccountMada 4
Debtors method (under selling price approach)
The debtors method is a system used when goods are sent to a branch at the selling price. Under this method, the branch is treated as a selling outlet or as a debtor to the head office. This approach is generally applied to small branches that:
- Primarily make cash sales, or
- Make credit sales where customers pay directly at the branch.
- Selling price is used for recording transactions.
- The head office keeps all accounting records.
- The branch does not maintain independent books.
- A separate set of accounts is maintained for each branch.
- Branch Stock Account – For goods received and sold at selling price.
- Goods Sent to Branch Account – Records goods transferred from head office at selling price.
- Stock Reserve Account – Adjusts for unrealized profits on closing stock.
When goods are sent to the branch at selling price:
Dr. Branch Stock Account xxx Cr. Goods Sent to Branch Account xxx
Example
Kwetusafi Ltd is a retailing company whose headquarter is in Dar es salaam and a branch in Mtwara. The company policy is to sell its products to customers at a 25% profit margin and the same price is used to transfer goods to the branch. The following information relates to the branch operations for March, 2022
| Particulars | TZS |
|---|---|
| Opening Stock | 8,000,000 |
| Cash sales remitted to Head Office | 34,000,000 |
| Goods invoiced to Branch | 31,000,000 |
| Closing Stock | 5,000,000 |
Required
Prepare branch stock account and goods sent to branch account by using debtors method
| Dr. | Particulars | TZS | Cr. | Particulars | TZS |
|---|---|---|---|---|---|
| Balance b/d (opening stock) | 8,000,000 | Cash sales remitted | 34,000,000 | ||
| Goods sent to branch | 31,000,000 | Balance c/d | 5,000,000 | ||
| 39,000,000 | 39,000,000 | ||||
| Balance b/d | 5,000,000 |
| Dr. | Particulars | TZS | Cr. | Particulars | TZS |
|---|---|---|---|---|---|
| To Head Office - trading account | 31,000,000 | Branch stock account | 31,000,000 | ||
| 31,000,000 | 31,000,000 |
-
Physical stock verification is important to detect losses due to:
- Wastage (e.g., breakage, expiry)
- Theft (by customers or staff)
-
To manage this, the head office may allow a certain percentage of closing stock as provision for expected loss.
-
Regular stock checks help ensure losses remain within acceptable limits.
Companies using computerised systems may apply a columnar format for branch accounts:
-
Two columns are maintained on the debit side:
- One for goods sent and opening stock at selling price (invoice price).
- One for the same items at cost price (for internal use, not part of double entry).
-
On the credit side, entries are usually made at selling price.
Example
Msasa Ltd is a retailing company whose headquarter is in Dar es salaam and a branch in Mwanza. The company policy is to sell its products to customers at a 25% profit margin and to allow a deficiency of 4 % of the sales. The same retailing price is used to transfer goods to the branch. The following information relates to the branch operations for January 2022
| Particulars | TZS |
|---|---|
| Opening stock | 5,000,000 |
| Cash sales remitted to head office | 37,000,000 |
| Goods invoiced to branch | 40,000,000 |
| Closing stock | 6,000,000 |
The branch stock account in the books of the head office and the amount of deficiency would be worked as follows:
| Dr. | Particulars | At selling price "TZS" | At cost "TZS" | Cr. | Particulars | At selling price "TZS" | At cost "TZS" |
|---|---|---|---|---|---|---|---|
| Balance b/d | 5,000,000 | 3,750,000 | Cash sales remitted | 37,000,000 | 37,000,000 | ||
| Goods invoiced to Branch | 40,000,000 | 30,000,000 | Stock loss/deficiency | 2,000,000 | 2,000,000 | ||
| Gross profit | 9,750,000 | Closing stock (Balance c/d) | 6,000,000 | 4,500,000 | |||
| 45,000,000 | 43,500,000 | 45,000,000 | 43,500,000 |
The following are the basic steps used to establishing whether there is deficiency within the tolerance rate:
- Determine the allowed deficiency = 4% x 37,000,000 = 1,480,000
- Identify the amount of the actual deficiency i.e., TZS 2,000,000
- Compare the two i.e., (1) and (2) above, you will see that, the actual deficiency is higher than the allowable deficiency by TZS 520,000. Thus, the company will initiate an investigation to establish the reasons.
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