Question 4 OR

Branch accounts under the Stock and Debtors System

18 marks

Time to write: About 36 minutes
Topic: Branch accounts
Notes: Crux notes

Question

Question 4 OR · 18 marks

Meerut head office supplies goods to its branch at Civil Lines, Agra, at invoice price, that is, cost plus 50%. The branch remits all the cash it receives to Meerut, and all the expenses are paid by the head office. From the particulars below, which relate to Civil Lines for the year 2023, prepare the Branch Debtors Account, the Branch Stock Account, and the Branch Adjustment Account in the head office's books, to find out the branch's gross and net profit.

Balances as on 01.01.2023
Stock with Branch at invoice price	1,58,400
Branch Debtors	52,800
Branch Petty Cash	1,200
Transactions during the year 2023
Goods sent to Branch at invoice price	4,89,600
Return from Branch to H.O. at invoice price	14,400
Cash Sales	2,54,400
Credit Sales	2,08,800
Goods Returned by Debtors to the branch	7,200
Allowance to the customer on Selling Price (Already adjusted at the time of invoicing)	4,800
Cash received from Debtors	2,23,200
Discounts allowed to Debtors	5,760
Cash sent for petty expenses	4,800
Rent (Paid by head office)	5,760
Salaries (Paid by head office)	57,600
Balances as on 31.12.2023
Branch Stock at invoice price	1,65,600
Branch Petty Cash	240

Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

36 minfor 18 marks

Read from the question

prepare the Branch Debtors AccountDraw the format first (heading, columns, dates), then fill in the figures from your working.
find outFormula first, then the working, then the answer with its unit (₹, %, units).

What the paper leaves open

The allowance was already taken into account when invoicing, so the sales are net of it while the goods were recorded at full invoice price; it is credited to Branch Stock and debited to Branch Adjustment.
Any difference left in the Branch Stock Account after the stated items is shown as a shortage (or surplus) and treated by its nature.

Write it in this order

Read the data; tick every adjustment as you plan it 2 min
1 Branch Debtors Account 3 marks 5 min
2 Branch Stock Account, with the shortage found and split 5 marks 9 min
3 Branch Adjustment Account gross profit 5 marks 9 min
4 Branch Profit and Loss Account net profit 5 marks 9 min
Check: every adjustment used, both sides agree, dates in 2 min

1234

Final answer

Check your own figures against these.

Gross profit: ₹1,48,800
Net profit: ₹69,120; If the shortage were read as a normal loss (all ₹7,200 to Branch Adjustment), gross profit would be ₹1,44,000 and the net profit the same ₹69,120

Try it first. About 36 minutes for 18 marks. Write it out, then open the solution and check your figures against the final answer.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Basis of the answer

Invoice price = cost + 50%, so the loading is one-third of invoice price. Under the Stock and Debtors Method the H.O. keeps a Branch Stock Account at invoice price to find any shortage or surplus, a Branch Debtors Account, a Branch Adjustment Account for the gross profit and a Branch Profit and Loss Account for the net profit.
The allowance to customers (₹4,800) was already taken into account when invoicing: the sales are net of it, while the goods were recorded at full invoice price. It is credited to Branch Stock and debited to Branch Adjustment.
The Branch Stock Account then leaves a shortage of ₹7,200 at invoice price that nothing in the question explains. An unexplained shortage is an abnormal loss: Branch Adjustment A/c Dr with the loading (2,400), Branch Profit and Loss A/c Dr with the cost (4,800), To Branch Stock A/c.
Discount allowed is charged against the branch profit (Branch Expenses / Branch P&L, To Branch Debtors); petty expenses = opening petty cash 1,200 + cash sent 4,800 − closing 240 = ₹5,760. In the DU formats, petty expenses and discount are branch expenses closed to Branch Profit and Loss, which also bears the cost of an abnormal loss and sends the net profit to the General Profit and Loss Account.

Branch Debtors Account

3 marks

Dr	₹	Cr	₹
To Balance b/d	52,800	By Branch Stock A/c (returns by debtors)	7,200
To Branch Stock A/c (credit sales)	2,08,800	By Bank A/c (cash received)	2,23,200
		By Branch Profit and Loss A/c (discount allowed)	5,760
		By Balance c/d	25,440
	2,61,600		2,61,600

Dr	₹
To Balance b/d	52,800
To Branch Stock A/c (credit sales)	2,08,800
	2,61,600
Cr	₹
By Branch Stock A/c (returns by debtors)	7,200
By Bank A/c (cash received)	2,23,200
By Branch Profit and Loss A/c (discount allowed)	5,760
By Balance c/d	25,440
	2,61,600

Branch Stock Account (at invoice price)

Dr	₹	Cr	₹
To Balance b/d	1,58,400	By Goods Sent to Branch A/c (returns to H.O.)	14,400
To Goods Sent to Branch A/c	4,89,600	By Bank A/c (cash sales)	2,54,400
To Branch Debtors A/c (returns by debtors)	7,200	By Branch Debtors A/c (credit sales)	2,08,800
		By Branch Adjustment A/c (allowance to customers)	4,800
		By Branch Adjustment A/c (shortage: loading)	2,400
		By Branch Profit and Loss A/c (shortage: cost)	4,800
		By Balance c/d	1,65,600
	6,55,200		6,55,200

Dr	₹
To Balance b/d	1,58,400
To Goods Sent to Branch A/c	4,89,600
To Branch Debtors A/c (returns by debtors)	7,200
	6,55,200
Cr	₹
By Goods Sent to Branch A/c (returns to H.O.)	14,400
By Bank A/c (cash sales)	2,54,400
By Branch Debtors A/c (credit sales)	2,08,800
By Branch Adjustment A/c (allowance to customers)	4,800
By Branch Adjustment A/c (shortage: loading)	2,400
By Branch Profit and Loss A/c (shortage: cost)	4,800
By Balance c/d	1,65,600
	6,55,200

Branch Adjustment Account

Dr	₹	Cr	₹
To Stock Reserve A/c (loading in closing stock, 1,65,600 ÷ 3)	55,200	By Stock Reserve A/c (loading in opening stock, 1,58,400 ÷ 3)	52,800
To Branch Stock A/c (allowance to customers)	4,800	By Goods Sent to Branch A/c (loading on 4,75,200)	1,58,400
To Branch Stock A/c (loading on shortage)	2,400
To Branch Profit and Loss A/c (gross profit)	1,48,800
	2,11,200		2,11,200

Dr	₹
To Stock Reserve A/c (loading in closing stock, 1,65,600 ÷ 3)	55,200
To Branch Stock A/c (allowance to customers)	4,800
To Branch Stock A/c (loading on shortage)	2,400
To Branch Profit and Loss A/c (gross profit)	1,48,800
	2,11,200
Cr	₹
By Stock Reserve A/c (loading in opening stock, 1,58,400 ÷ 3)	52,800
By Goods Sent to Branch A/c (loading on 4,75,200)	1,58,400
	2,11,200

Branch Profit and Loss Account for 2023

Dr	₹	Cr	₹
To Salaries	57,600	By Branch Adjustment A/c (gross profit)	1,48,800
To Rent	5,760
To Petty expenses	5,760
To Discount allowed	5,760
To Branch Stock A/c (cost of shortage)	4,800
To Net Profit → General Profit and Loss A/c	69,120
	1,48,800		1,48,800

Dr	₹
To Salaries	57,600
To Rent	5,760
To Petty expenses	5,760
To Discount allowed	5,760
To Branch Stock A/c (cost of shortage)	4,800
To Net Profit → General Profit and Loss A/c	69,120
	1,48,800
Cr	₹
By Branch Adjustment A/c (gross profit)	1,48,800
	1,48,800

Proof on cost. Net sales 2,54,400 + 2,08,800 − 7,200 = 4,56,000; the goods sold were recorded at 4,56,000 + allowance 4,800 = 4,60,800 at invoice price, costing 3,07,200; gross profit = 4,56,000 − 3,07,200 = ₹1,48,800.

Result: gross profit ₹1,48,800; net profit ₹69,120. If the shortage were read as a normal loss (all ₹7,200 to Branch Adjustment), gross profit would be ₹1,44,000 and the net profit the same ₹69,120.

Where the 18 marks sit

#	Component	Marks
1	Branch Debtors Account	3
2	Branch Stock Account, with the shortage found and split	5
3	Branch Adjustment Account (gross profit)	5
4	Branch Profit and Loss Account (net profit)	5
	Total	18

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