Illustration of More Complex Branch Accounts
As an illustration of a somewhat more complex method of keeping the books, a problem is appended illustrating the sending of goods to the branch at a nominal figure or at sales price. Here it is not desired that the branch management be able to determine the profit and loss of its activities; consequently the goods from the head office are not charged to the branch at cost but at some fictitious value. Where this is done it is best to open two accounts, the one to record the merchandising transactions between the branch and the head office, and the other to record all other interactivities.
Problem. The head office sends to the branch during the year $10,000 cash and $77,000 worth of merchandise as billed at a conventional price. The branch makes sales to customers on account, of $60,000, and for cash $25,000. The expenses of the branch are $10,000. Collections from customers amount to $45,000 and remittances to head office amount to $66,000. The inventory of the stock-in-trade at the close of the year is $14,000, this valuation being on the same basis as the original charge, i.e., at the conventional figure.
On the branch books two accounts are opened with the head office, one entitled “Head Office General,” and the other “Head Office Merchandise.” Neither one of these accounts represents the full proprietorship of the head office in the branch, nor do both of them together represent the true proprietorship because of the fact that the merchandise is priced to the branch at a fictitious figure. The branch books cannot show the true status of relations with the head office so long as the policy, of billing goods in this way is maintained. That is the chief reason why it is best to set up the two accounts, in one of which appear the merchandise transactions at the fictitious figure, while in the other appear all other transactions correctly valued. This Head Office Merchandise account is more in the nature of a memorandum or consignment account and is offset by an account called “Purchases from Head Office.” On the branch books appear also accounts with Customers, Branch Sales, and Expenses—as in the other case. There is no Profit and Loss account because it is impossible to determine on the branch books the correct profit and loss for the period. All expense and income accounts are closed directly into Head Office General. The entries necessary to book properly the activities as set forth in the illustrative problem are as follows:
| Cash | $10,000.00 | |
| Head Office General | $10,000.00 | |
| Purchases from Head Office | 77,000.00 | |
| Head Office Merchandise | 77,000.00 | |
| Customers | 60,000.00 | |
| Cash | 25,000.00 | |
| Sales | 85,000.00 | |
| Expense | 10,000.00 | |
| Cash | 10,000.00 | |
| Cash | 45,000.00 | |
| Customers | 45,000.00 | |
| Head Office General | 66,000.00 | |
| Cash | 66,000.00 |
In closing the branch books the inventory is brought into the Purchases from Head Office account which by its balance shows at billed price the goods disposed of by sale. The latter figure is taken into the Head Office Merchandise account so that its balance will also be the amount of goods still on hand as shown by the inventory. Purchases from Head Office and Head Office Merchandise are memorandum accounts calling attention to the fact that the merchandise on hand at the branch is not carried at its correct valuation but must be adjusted before incorporation with the head office accounts. The entries to effect this adjustment on account of the inventory and to close the branch books are as follows:
| Purchases from Head Office (Inventory) | $14,000.00 | |
| Purchases from Head Office | $14,000.00 | |
| Head Office Merchandise | 63,000.00 | |
| Purchases from Head Office | 63,000.00 | |
| Sales | 85,000.00 | |
| Head Office General | 85,000.00 | |
| Head Office General | 10,000.00 | |
| Expense | 10,000.00 |
These entries close the books of the branch so far as is possible in view of the fact that accurate results as to profit and loss cannot be shown from the way in which merchandise is billed to the branch. There is perhaps no objection to using a Profit and Loss account as a summary account for income and expense items rather than the Head Office General account as shown here; though a Profit and Loss account is somewhat of a misnomer since profits and losses cannot be determined. In the problem given all expenses are grouped under one Expense account. This is done for the sake of brevity, and it is to be understood that as detailed an expense record will be kept on the books of the branch as may be necessary to give the information desired.
Head Office Books
Where the head office bills merchandise to the branch at any other figure than cost, the record of such shipments is best made in much the same way as with consignments. Memorandum accounts are set up to indicate that goods have been shipped to the branches. This is necessary because of the fact that shipments should not be entered in the regular merchandise accounts of the head office at any other figure than cost. Periodically, from memoranda carried in these special accounts, the true values of the merchandise shown as handled through them must be brought into the regular merchandising accounts. The manner of making these adjustments is taken up on page 535. Here will be shown all the accounts affected on the head office books by the current transactions with the branch. The entries necessary to record the data of the problem are as follows: