Systems of maintaining accounts of a dependent branch

There are three systems of maintaining accounts of a dependent branch:

1. Debtors System: Under this system, the branch keeps its books as usual, maintaining debtors and creditors accounts. But instead of sending goods to the branch at cost price, the head office sends them at a selling price. The branch then sells these goods to its customers at a higher price and includes a profit margin. The branch's profit is ascertained by preparing a Profit and Loss Account.

2. Stock and Debtors System: Under this system, the branch keeps two accounts: a stock account and a debtors account. The head office sends goods to the branch at cost price, and the branch sells them at a higher price. The branch records these transactions in its stock and debtors accounts. The branch's profit is ascertained by preparing a Profit and Loss Account.

3. Final Accounts System: Under this system, the branch does not maintain any accounts. Instead, the branch sends all its transactions to the head office, which maintains the accounts. The head office prepares the branch's Profit and Loss Account and Balance Sheet.

Profit Ascertainment under each system

1. Debtors System: The branch's profit is ascertained by preparing a Profit and Loss Account. The Profit and Loss Account shows the branch's sales, cost of goods sold, and expenses. The difference between sales and cost of goods sold is the gross profit. The gross profit minus expenses is the net profit.

2. Stock and Debtors System: The branch's profit is ascertained by preparing a Profit and Loss Account. The Profit and Loss Account shows the branch's sales, cost of goods sold, and expenses. The difference between sales and cost of goods sold is the gross profit. The gross profit minus expenses is the net profit.

3. Final Accounts System: The head office prepares the branch's Profit and Loss Account and Balance Sheet. The Profit and Loss Account shows the branch's sales, cost of goods sold, and expenses. The difference between sales and cost of goods sold is the gross profit. The gross profit minus expenses is the net profit. The Balance Sheet shows the branch's assets and liabilities.

Branch Stock Account and its importance

A branch stock account is a record of the stock held by the branch. It helps in keeping effective control over the branch stock in the following ways:

1. Stock Control: The branch stock account helps in maintaining stock control. It shows the quantity and value of goods held by the branch, enabling the management to control stock levels and ensure that there is no overstocking or understocking.

2. Stock Valuation: The branch stock account helps in valuing the stock held by the branch. It shows the cost of goods received, the cost of goods sold, and the closing stock value, enabling the management to determine the cost of goods sold and the gross profit.

3. Stock Reconciliation: The branch stock account helps in reconciling the physical stock with the book stock. By comparing the quantity and value of goods held by the branch with the stock account, the management can identify any discrepancies and take corrective action.

4. Stock Transfer: The branch stock account helps in recording the transfer of stock from the head office to the branch. It shows the quantity and value of goods transferred, enabling the management to track the stock movement and maintain accurate records.