Illustration of Head office records

In order to provide a check that branch managers and staff deal properly with goods and cash passing through their hands, goods are normally charged to branches at the actual prices at which branches sell them. Consider the following set of figures relating to a branch:

In the above example, it was assumed that there was no wastage of goods, no breakages, and no pilfering by customers, and that all sales were made at the predetermined selling price.  A check can be made by staff from the HO, E.G from the internal audit department, to ensure that the stock of Shs 3,180,000 is really present at 31st 20X2.  Usually an allowance will be made for wastage and breakages, e.g. if an allowance of 1% of goods sent to a Brach is given as a “normal loss”, a closing stock figure of Shs 3.18m – Shs 34,600 = Shs 3,145,400 would be accepted; if the stock level is less than this, an investigation as to why this is the case would be made.

In the HO books, the following accounts are kept in respect of each branch:

a)    Branch Stock Account
b)    Branch Mark-up  (or Adjustment) Account
c)    Goods Sent To Branch Account
d)    Branch Total Debtors Account (if the branch is permitted to sell goods on credit) and
e)    Branch Expense Accounts

a) Branch Stock Account

1. It sis maintained at estimated selling price (invoice price).
2. It controls branch stocks.
3. The balance should represent the selling price of branch stock in hand.
4. Any difference between physical stock and the balance on the account must be investigated (unless this difference is a normal loss)

b) Branch Mark-up Account

1. The opening balance represents the provision for unrealized profit on stock brought forward.
2. This account records anticipated profits on goods sent to branch.
3. The balance carried forward, representing unrealized profit on closing stock, is deducted from the branch stock account balance in the balance sheet thus reducing stock to cost.
4. The gross profit of the branch will be the balancing figure in the account.

c) Goods Sent To Branch Account

1. The amount on this account at the year-end represents the cost of goods sent to branch.
2. This figure is credited to the HO Trading account to reduce goods available for sale by head office (or if the head office is not a selling organization, the stocks held on behalf of the branches at the year end).
3. This account has neither an opening nor a closing balance.

d)Branch Total Debtors Account – This is used to control branch debtors.

e) Profit and loss account – The expenses incurred by each branch (posted to separate branch expense accounts) are charged against the branch gross profit to give the net profit or loss of the ranch. These profit and loss accounts are normally prepared in a columnar format, so that the profit and loss account for the enterprise as a whole can be arrived at.  As s the gross profit is shown in the mark up account, it is not necessary to prepare the trading account unless the examiner specifically requires this. In practice, however, the trading account is required so that the total turnover of the enterprise can be obtained.

f) Balance Sheet – This is not normally required by the examiner under this system. However, if it is required, stock is shown at cost, which is arrived at by deducting the balance carried down on the mark up account from that on branch stock account.