FINANCIAL ACCOUNTING

1.BILLS OF EXCHANGE

MEANING :

Bill of Exchange, can be understood as a written negotiable instrument, that carries an

unconditional order to pay a specified sum of money to a designated person or the holder of
the instrument, as directed in the instrument by the maker. The bill of exchange is either
payable on demand, or after a specified term.

In a business transaction, when the goods are sold on credit to the buyer, the seller can make
the bill and send it to the buyer for acceptance, which contains the details such as name and
address of the seller and buyer, amount of bill, maturity date, signature, and so forth.

FEATURES OF BILLS OF EXCHANGE

 An instrument which a creditor draws upon his debtor.

 It carries an absolute order to pay a specified sum.
 The sum is payable to the person whose name is mentioned in the bill or to any other
person, or the order of the drawer, or to the bearer of the instrument.
 It requires to be stamped, duly signed by the maker and accepted by the drawee.
 It contains the date by which the sum should be paid to the creditor.

PARTIES TO BILLS OF EXCHANGE

1. Drawer: The person who makes the bill, or who gives the order to pay a certain sum of money,
is the drawer of the instrument.
2. Drawee: The person who accepts the bill of exchange, or who is directed to pay a certain sum,
is called drawee.
3. Payee: The person receiving payment is called the payee, who can be a designated person or
the drawer himself.

Now, apart from the parties mentioned above, there are some other parties to a bill of
exchange, described as under:

 Drawee, in case of need: If in any bill of exchange, a person’s name is mentioned in addition
to the original drawee, who can be resorted for payment. Then, that person will be called as
drawee.
 Holder: The holder of the bill of exchange, is the person who possesses the bill and who has
the right to recover the amount from the parties.
 Acceptor: The person who accepts the bill is called acceptor. Usually, a debtor or drawee is
the acceptor. However, it can be accepted by some other person also, on behalf of the
debtor/drawee.
 Endorser: If the holder of the bill, endorses it to another person, then the person will be
called as the endorser.
 Endorsee: The person to whom the bill of exchange is endorsed, is called as an endorsee.

BASIS BILLS OF EXCHANGE PROMISSORY NOTE

Meaning A promissory note is a written

Bill of Exchange is an
promise made by the debtor
instrument in writing showing
to pay a certain sum of money
the indebtedness of a buyer
to the creditor at a future
towards the seller of goods.
specified date.

Defined in Section 4 of Negotiable

Section 5 of Negotiable
Instrument Act, 1881.
Instrument Act, 1881.

Parties Three parties, i.e. drawer, Two parties, i.e. drawer and
drawee and payee. payee.

Drawn by Creditor Debtor

Liability of Maker Secondary and conditional Primary and absolute

Can maker and payee be the Yes No

same person?

Copies Bill can be drawn in copies. Promissory Note cannot be

drawn in copies.

Dishonor Notice is necessary to be Notice is not necessary to be

given to all the parties given to the maker.
involved.
BASIS BILLS OF EXCHANGE CHEQUE

Meaning A document used to make A written document that

easy payments on demand shows the indebtedness of
and can be transferred the debtor towards the
through hand delivery is creditor.
known as cheque.

Defined in Section 6 of The Negotiable Section 5 of The Negotiable

Instrument Act, 1881 Instrument Act, 1881

Validity Period 3 months

Not Applicable

Payable to bearer on demand Always Cannot be made payable on

demand as per RBI Act, 1934

Grace Days 3 days of grace are allowed.

Not Applicable, as it is always
payable at the time of
presentment.

Acceptance A cheque does not require Bill of exchange needs to be

acceptance. accepted.

Stamping Must be stamped.

No such requirement.

Crossing
Yes No

Drawee Bank Person or Bank

Noting or Protesting If the cheque is dishonored it If a bill of exchange is
cannot be noted or protested dishonored it can be noted or
protested.

TYPES OF BILLS :

1) Documentary bill :

A bill of exchange which is always accompanied by supporting documents which confirm the
authenticity of trade or transaction that has taken place between the seller and the buyer is
called a documentary bill. The documents may include but not restricted to invoices, receipts,
bill of lading, railway bills etc.

2) Demand bill :

A bill which is payable on demand or when presented are at the site is called a demand bill. The
demand bill does not have a due date or time specifically mentioned for the payment and
hence the payment can be made when the bill is presented.

3) Usance bill :

This is also termed as time bill which means it is the bill which has specifically mentioned the
time period for the payment on it. Usance bill is considered as a time-bound bill because of the
specific time and period mentioned on it.

4) Inland bills :

A Bill drawn in India and payable only in India or a bill that is drawn by an Indian resident table
in India or any other country is termed an inland bill. Inland bill is quite opposite of Foreign bill.

5) Clean bill :

A bill without documents of proof is called Clean Bill. Clean bills charge higher interest rate than
the other documentary bills since there are no documents involved.
6) Foreign bills :

A bill of exchange bound to be paid outside India is called foreign bill. The bill of exchange
which is not an inland bill is termed as a foreign bill. It is further divided into

a) Export bill :

A bill drawn for a party outside India which is drawn by an exporter is termed as an export bill.

b) Import Bill :

A bill which is drawn outside India by an exporter is called import bill. This Bill is issued for
Indian importers.

7) Accommodation bill :

Whenever a bill is accepted or drawn or endorsed regardless of any condition is termed as

accommodation bill.

8) Trade Bill :

A Bill which is drawn for the purpose of a trade order transaction is termed as trade bill. Trade
bills are common in case of international trading.

9) Supply bills :

When a bill is drawn on government department by a supplier or a contractor

to supply certain goods, it is termed as a supply bill. The objective of supply is used to obtain
cash from financial institutions against pending payment to meet the financial needs.
Government department usually does not accept this kind of business but they are eligible for
getting cash loans from commercial banks going to its non-negotiable characteristics.

10) Fictitious Bill :

A bill in which the name of either of the party that is drawer or drawee or both are fictitious, it
is termed as a fictitious bill.
 11) Hundis :

These are promissory notes and bill of exchange which are indigenous in nature that is usually
used for agricultural financing and inland trade.

DIFFERNCE BETWEEN TRADE BILL AND ACCOMODATION BILL:

Trade Bill:
 There are drawn for trade purposes.
 These are drawn against proper consideration.
 These bills are proof of debt.
 For obtaining the debt from drawee, drawee can resort to legal action.

Accommodation Bill:
 These are drawn and accepted for financial assistance.
 These are drawn in the absence of any consideration.
 These bills are not a proof of debt.
 Legal action cannot be resorted the recovery of amount against these bills by the immediate
parties.

2.CONSIGNMENT

MEANING :

Consignment is a process under which the owner consigns/handovers his materials to his
agent/salesman for the purpose of shipping, transfer, sale etc.

Following are the points that throw more light on the nature and scope of a consignment −

 Here, ultimate ownership of the goods remains with the manufacturer or whole seller
who handovers goods to his agent for sale on commission basis. Consignment is merely
a transfer of possession of goods not an ownership.

 Since ownership of goods remain with the manufacturer (consignor), consignee (agent)
is not responsible for any loss or destruction of goods.

 The goods are sold on owner’s risk and hence, profit/loss goes to owner.
  Consignee only gets re-imbursement of expenses incurred by him and commission on
sale made by him, because sale that proceeds, belongs to owner (consignor).

Why is Consignment not a Sale?

Following are the reasons that explain why consignment is not a sale −

 Ownership − Ownership of goods need to be transferred from seller to buyer in case of

sale, but ownership of goods remains with the consignor, till the goods are sold by the
consignee.

 Risk − In case of a consignment, normally, risk remains with the consignor in the event
of goods being lost or destroyed.

 Relationship − The relation between a seller and a buyer will be of debtor and creditor
in case where goods are sold on credit basis. On the other hand, the relationship
between a consignor and a consignee is that of principal and agent.

 Goods Return − Usually, the sold goods cannot be returned back; however, if there is
any manufacturing defect or any other technical fault, seller is obliged to take them
back. On the other hand, consignee may return the unsold stock of goods to consignor
anytime.

Important Terms :
Pro-forma Invoice
Invoice implies that the sale has taken place, but pro-forma invoice is not an invoice. Proforma
invoice is a statement prepared by the consignor of goods showing quantity, quality, and price
of the goods. Such pro-forma invoice is issued by the consignor to consignee regarding the
goods before the sale actually takes place.

Account Sale
Statement showing the details of goods received, goods sold, expenses incurred, commission
charged, remittances made, and due balance is called Account Sale and it is remitted by the
consignee to the consignor of goods on a periodic basis.

Commission
There are three types of commission payable to consignee on sale of the goods −

 Simple Commission − This is usually a fixed percentage on the total sale, calculated as
per mutually agreed terms.
  Over-riding Commission − In case of an extra-ordinary sale of the goods, some specific
amount is payable to consignee in the form of an incentive is called overriding
commission. Over-riding commission is also calculated on the total sales.

 Del-credere Commission − “An agreement by which an agent or factor, in consideration

of an additional premium or commission (called a del credere commission), engages,
when he sells goods on credit, to insure, warrant, or guarantee to his principal the
solvency of the purchaser, the engagement of the factor being to pay the debt himself
if it is not punctually discharged by the buyer when it becomes due.”

A del credere commission is paid by the consignor to his agent for taking additional risk of
recovery of debts from the consignee on an account of credit sales made by him (agent) on
consignor's behalf.

Direct Expenses
Expenses, which increases the cost of the goods and are of non-recurring nature and incurred
till the goods reach the warehouse of consignee may called direct expenses.

Indirect Expenses
Warehouse rent, storage charges, advertisement expenses, salaries, etc. comes under the
category of the indirect expenses. The distinctions between direct and indirect expenses are
important especially at the time of valuation of the unsold closing stock.

Advance
Amount paid in advance by a consignee to consigner as security called as advance.

Valuation of unsold Consignment

Valuation of unsold stock will be done like a closing stock of a Trading concern and should be
valued at the cost or the market price whichever is low. This stock will be valued at −

 Proportionate cost price and

 Proportionate direct expenses.
Here, proportionate direct expenses mean — all expenses incurred by the consignor and the
expenses of consignee, which are incurred by him till the goods reach the warehouse.

Invoicing Goods higher than Cost

Under this method, goods are charged at the cost + profit and the pro-forma invoice also
shows this higher price of such goods. To know the actual profit, at the end of an accounting
period, consignment account will be credited with excess price so charged. Value of the stock
will also be adjusted to the extent of profit element. Main reason to adopt this policy by
consignor is −

 To hide actual profit from consignee.

 Valuation of a stock at the consignor’s warehouse is comparatively easy in this case.

 In this case, consignor usually directs consignee to sale goods on invoice price only. It
prevents different sale price to different customers.

Loss of Goods
There may be two types of losses as explained below −

Normal Loss − Normal loss may occur due to inherent characteristics of goods like
evaporation, drying up of goods, etc. It is not separately shown in the consignment account,
but included in the cost of goods sold and the closing stock by inflating the rate per unit. To
calculate the value of unsold stock, following formula is used.
Valueofclosingstock=TotalvalueofgoodssentNetquantityreceivedbyconsignee×Unsoldquantity

Valueofclosingstock=TotalvalueofgoodssentNetquantityreceivedbyconsignee×Unsoldquantity

Netquantityreceived=Goodsconsignedquantity−NormallossquantityNetquantityreceived=Good
sconsignedquantity−Normallossquantity

Abnormal Loss − An abnormal loss may occur due to any accidental reason. It is credited to
the consignment account to calculate actual profitability. Valuation of closing stock is done on
the same basis as explained earlier i.e. proportionate cost + proportionate direct expenses.

Abnormal Loss and Insurance

If, there is an insurance policy in respect of the consigned goods; following entries will be
passed in the books of a consignor −

SL.No. In the Books of Consignor In the Books of Consignee

1 Payment of Insurance Premium Consignment A/cDr

(a) If insurance premium is paid by To Cash A/c
the consignor, then cash will be
Or
credited.
To Consignee A/c
(b) If Insurance premium is paid by
 the consignee, then consignee’s A/c (Being Insurance premium paid)
will be credited.

2 Abnormal Loss A/cDr

At the time of Abnormal Loss To Consignment A/c

(Being Loss Incurred)

3 Insurance Company (Name of the

insurer) A/cDr
Acceptance of Claim by Insurance
Company To Abnormal Loss A/c

(Being claim admitted)

4 Bank A/cDr

On receipt of Claim To Insurance Company A/c

(Being amount of claim received)

5 Profit & Loss A/cDr

To Abnormal Loss A/c

In Case of Loss
(Being amount of Abnormal Loss
transferred)

WHAT IS CONSIGNMENT?
Consignment is a business arrangement between a consignor (owner) and a third party
(consignee). This word has come from the French word “consigner” which means ‘to hand over
or to transmit’. The consignee agrees to sell the goods handed over to him by the consignor for
a fee. For the consignor, it is outward consignment and for the consignee, it is inward
consignment. Also, there is another similar term called consignment shop. The consignment
shop is a retail store which displays goods for the buyers for sale.

EXAMPLES
Clothes, toys, musical instruments, furniture, antiques, automobiles, books, music, tools, etc.
 FEATURES OF CONSIGNMENT
 The possession of the goods transfers from one party to another.
 The consignor is responsible for all the risks, expenses and damages associated with the
consigned goods.
 The relation of the persons in the consignment is that of consignor (principal) and the
consignee (agent) and not of the buyer and seller.
 Only the possession of the goods is with the consignee and not the ownership.
 Profit or loss on the sale of the goods belongs to the consignor.
 The consignor sends Pro-forma Invoice. While the consignee sends Account Sales. Account
Sales include the details regarding the goods, sales, expenses, commission, advances, and
balances due.

OBJECTIVES OF CONSIGNMENT
 To make large consignments and increase sales volume by attracting customers.
 To launch a new product and create and capture the market for the same.
 Earning higher revenue from a different geographical area for the same product.
 To grow and expand the business.
 Sustainment in the domestic and international market.
 To increase sales by utilizing the talent and expertise of the consignee.

BASIS FOR
CONSIGNMENT SALE
COMPARISON

Meaning When the goods are delivered to the A transaction in which goods are
agent by the owner for selling exchanged for a price is known
purposes, is known as Consignment. as a sale.

Parties Consignor and Consignee Seller and Buyer

Relationship Principal and Agent Creditor and Debtor

between parties

Possession and Possession is transferred, but Both are transferred with the
Ownership ownership is not transferred, until they transfer of goods.
are sold to the final consumer.
 BASIS FOR
CONSIGNMENT SALE
COMPARISON

Returning back of The consignee can return the unsold The buyer cannot return the
goods stock to the consignor. goods to the seller until and
unless the seller agrees to the
same.

Risk of loss Borne by consignor Borne by buyer

Expenses incurred Met by consignor Met by buyer

Consideration Commission to the agent. Profit to the seller.

3.JOINT VENTURE
MEANING :

Joint ventures, in very simple words, are business ventures that two or more people or entities
undertake for a certain period of time. They are created keeping specific and pre-determined
purposes in mind. The venture generally comes to an end once those purposes are met unless the
parties decide to continue working together.

These parties to a joint venture are governed by a contractual agreement they enter into. The
agreement specifies things like their obligations, the rate at which they will share profits or losses,
their rights and liabilities towards each other, etc.

Parties that create such joint ventures are called joint venturers or co-venturers. These parties can
be either natural persons (humans) or even artificial legal persons (companies).

Transactions of such joint ventures are peculiar. This is because these entities are neither singular
in nature, and nor are they treated as completely separate entities as such. They are even different
from typical partnership forms of business.
Features of Joint Ventures

A joint venture typically has the following features.

1. Specific Purposes

Parties create joint ventures keeping pre-determined purposes in mind. They generally state this
purpose clearly in their agreement.

2. Agreement

The parties to a joint venture, i.e. the co-venturers, generally execute a written agreement
between them. This agreement states details like their obligations, profit/loss sharing ratios, their
rights and liabilities, etc.

3. Specific Duration

Since all joint ventures are created for a specific purpose, they generally come to an end once that
purpose is fulfilled. The parties can, however, continue working together as well if they mutually
agree to do so.

4. Profit Sharing

The parties always agree on the ratio in which they will share their profits and losses. If there is no
agreement to this effect, they have to share profits equally.

5. Structure of the Venture

Parties can create a joint venture by exercising control on any of the following aspects:

 Assets,

 Operations, or

 Entity itself.
DIFFERNCE BETWEEN JOINT VENTURE AND CONSIGNMENT

The main differences between joint venture and consignment are as under:

1. Nature

Joint venture: It is a temporary partnership business without a firm name.

Consignment: It is an extension of business by principal through agent.

2. Parties

Joint venture: The parties involving in joint venture are known as co-ventures.

Consignment: Consignor and consignee are involving parties in the consignment.

3. Relation

Joint venture: The relation between co-ventures is just like the partners in partnership firm.

Consignment: The relation between the consignor and consignee is 'principal and agent'.

4. Sharing Profit

Joint venture: The profits and losses of joint venture are shared among the co-ventures in their
agreed proportion.

Consignment: The profits and losses are not shared between the consignor and consignee.
Consignee gets only the commission.

5. Rights

Joint venture: The co-ventures in a joint venture have equal rights.

Consignment: In consignment, the consignor enjoys principal's right whereas consignee enjoys the
right of agent.

6. Exchange Of Information

Joint venture: The co-ventures exchange the required information among them regularly.

Consignment: The consignee prepares an account sale which contains a details of business
activities carried on and is being sent to the consignor.

7. Ownership

Joint Venture: All the co-ventures are the owners of the joint venture.

Consignment: The consignor is the owner of the business.

8. Method Of Maintaining Accounts

Joint venture: There are different methods of maintaining accounts in joint venture.As per
agreement the co-ventures maintain their account.

Consignment: In consignment, there is only one method of maintaining account.

9. Basis Of Account

Joint venture: Cash basis of accounting is applicable in joint venture.

Consignment: Actual basis is adopted in consignment.

10. Continuity

Joint venture: As soon as the particular venture is completed, the joint venture is terminated.

Consignment: The continuity of business exists according to the willingness of both consignor and
consignee.
DIFFERNCE BETWEEN JOINT VENTURE AND PARTNERSHIP

BASIS FOR
JOINT VENTURE PARTNERSHIP
COMPARISON

Meaning Joint Venture is a business A business arrangement where two or

formed by two or more than more persons agree to carry on business
two persons for a limited and have mutual share in the profits and
period and a specific purpose. losses, is known as Partnership.

Governing Act There is no such specific act. The partnership is governed by the
Indian Partnership Act, 1932.

Business carried Co-venturers Partners

on by

Status of Minor A minor cannot become a co- A minor can become a partner to the
venturer. benefits of the firms.

Basis of Liquidation Going Concern

Accounting

Trade Name No Yes

Ascertainment of At the end of the venture or Annually

Profit on interim basis as the case
may be.

Maintenance of Not necessary Mandatory

separate set of
books

MEMORANDUM JOINT VENTURE ACCOUNT :

A Joint Venture account will be prepared but not as part of accounts. The name of such an
account is Memorandum Joint Venture Account. In the books, only one account is opened as
 “Joint Venture with…..Account” or “Joint Venture Investment Account”. This account is
prepared through the following methods:-

 Goods sent or cash spent on Joint venture is debited to this accounts.

 No account is taken of goods used or a cash spent on Joint Venture by the other part.
 If any cash or acceptance is received on account of Joint Venture, or from other party this
account is credited.
The account is then debited with own share of profit, the credit being given to Profit and Loss
Account. If the memorandum Joint Venture Account shows a loss, the Profit and Loss Account is
debited and this account will be credited with own share of loss. The balance in this account
will now show the amount owing to the other party.

4.DEPARTMENTAL ACCOUNTS

Departmental stores have many types of stores under a single roof, for example one
departmental store may have a cosmetic store, shoe store, stationery store, readymade
departmental store, grocery stores, medicines, and many more.

It is essential to know the profit and loss account of each departmental store at the end of the
accounting year. However, it can be done by maintaining the department wise Trading & Profit
and Loss account.

Objectives of Departmental Accounting

Following are the main objectives of the departmental accounting −

 To know the financial position of each and every department separately, it is helpful to
make a comparison.

 Calculate commission of the managers department wise.

 Evaluate performance, planning, and control.

Advantages of Departmental Accounting

Following are the advantages of a department accounting −

 It is helpful in evaluating the result of each department.

 It helps to know the profitability of each department.

 Investors and outsiders may know the detailed information.

  It is helpful in making comparison of each expenses (same department) of the different
accounting years and different expenses (other departments) of the same accounting
year.

Methods of Departmental Account

There are two methods of keeping Departmental Accounts −

 Separate Set of Books for each department

 Accounting in Columnar Books form

Separate Set of Books for each Department

Under this method of accounting, each department is treated as a separate unit and separate
set of books are maintained for each unit. Financial results of each unit are combined at the
end of accounting year to know the overall result of the store.

Due to high cost, this method of accounting is followed only by very big business houses or
where to do so is compulsory as per the law. Insurance business is one of the best examples,
where to follow this system is compulsory.

Allocation of Department Expenses

 Some expenses, which are specially incurred for a particular department may be
charged directly to the respective department. For example, hiring charges of the
transport for delivery of goods to customer may be charged to the selling and
distribution department.

 Some of the expenses may be allocated according to their uses. For example, electricity
expenses may be divided according to the sub meter of each department.

Following are the examples of some expenses, which are not directly related to any particular
department may be divide as −

 Cartage Freight Inward Account − Above expenses may be divided according to

purchase of each department.

 Depreciation − Depreciation may be divided according to the value of assets employed

in each department.
  Repairs and Renewal Charges − Repair and renewal of the assets may be divided
according to the value of the assets used by each department.

 Managerial Salary − Managerial salary should be divided according to the time spent by
the manager in each department.

 Building Repair, Rents & Taxes, Building Insurance, etc. − All the expenses related to
the building should be divided according to the floor space occupied by each
department.

 Selling and Distribution Expenses − All the expenses relating to selling and distribution
expenses should be divided according to the sales of each department, such as freight
outward, travelling expenses of sales personals, salary and commission paid to
salesmen, after sales services expenses, discount and bad debts, etc.

 Insurance of Plant & Machinery − The value of such Plant & Machinery in each
department is the basis of the insurance.

 Employee/worker Insurance − Charges of a group insurance should be divided

according to the direct wage expenses of each department.

 Power & Fuel − Power & fuel will be allocated according to the working hours and
power of the machine (i.e. Hours worked x Horse power).

Inter-Department Transfer
An inter-department analysis sheet is prepared at a regular interval such as weekly or monthly
basis to record all the inter-departmental transfers of goods and services. It is necessary, as
each department is working as a separate profit center. Transfer of the prices of such
transactions can be cost base, market price, or duel basis.

Following Journal entry will pass at the end of that period (weekly or monthly) −

Journal Entry

Receiving Department A/c Dr

To Supplying Department A/c

Inter-Department Transfer Price

There are three types of transfer prices −

 Cost based transfer price − Where the transfer price is based on standard, actual, or
total cost, or marginal cost is called cost based transfer price.
  Market based transfer price − Where the goods are transferred at selling price from
one department to another is known as market based price. Therefore, unrealized
profit on the goods sold is debited from the selling department in the form of a stock
reserve for both the opening and the closing stock.

 Dual pricing system − Under this system, the goods are transferred on the selling price
by the transferor department and booked at the cost price by the transferee
department.

5.BRANCH ACCOUNTING

NEED FOR BRANCH ACCOUNTING

As stated earlier. each branch is treated as a separate profit ccntrc. Hence it should record
various transactions in such a manner that its profit or, loss can be worked out and
incorporated in the firm's overall results at the end of the accounting year. Moreover, the
branches conduct all activities under the direction and control of the head office which may
need a variety of information from time to time about the functioning of each branch. This
becomes possible only ifathe branches keep proper , . - and departmental accounts books of
account. Thus, the main reasons of keeping branch accounts can be summarized as follows :

i) to find out the profit or loss of each branch for the accounting period:

ii) to ascertain the financial position of each branch at the end of the accounting year; I .

iii) to incorporate the net effect of branch transactions and their assets and liabilities in a firm's
final accounts;

iv) to estimate requirements of cash and stock for each branch;

v) to evaluate the progress and performance of each branch; vi)

to calculate the commission for payment to the managers, if based on profit of branch; vii)

to assess the prospects for expansion of business in each branch; and

viii) to meet audit requirements.

Types Of Branches
Branches may be classified as under from the accounting point of view:
1. Inland Branches
2. Foreign Branches
1. Inland Branches
The branches opened in the different parts of the nation, where the original undertaking being
registered are called inland branches. These types of branches are also called home branches or
national branches. There are two types of inland branches, which are:
a) Dependent branch
b) Independent branch

a). Dependent Branch

Dependent branches are the branches that do not keep their records but all the records are
maintained by head office. They are not authorized to act solely without the prior permission of
the head office. All the plans, policies, rules and regulations of these branches are totally
formulated and executed by the head office. In other words, all the functions of dependent
branch are totally controlled by head office.
Under dependent branch, two types of branches are included, which is termed as service
branch and retail branch.

* Service Branch: All the branches which are booking or executing orders on behalf of head
office are called service branches. These are the branches which are busy in execution all the
orders for the sake of head office.

* Retail Branch: Retail branches are also dependent branches, but they are concerned with the
head office for selling goods, produced by the head office itself or purchased from outside in a
bulky position and are sent to the retail selling branches for selling them out as like.

b). Independent Branch

The branches that can keep their accounts themselves and sell goods that are sent by the head
office as well as those purchased by themselves are known as independent branches. These are
the branches which can sell the goods to head office too. They can pay their own expenses and
can deposit their collection in their own name in the bank. These branches record separately
and independently all the transactions which are even recorded by the head office.

2. Foreign Branches
Because of the rapid development of trade, commerce and industries and with the growing
tough competition, the business enterprises are opening their branches abroad in order to
capture the potential market and accelerate their business globally. Therefore, the branches
established abroad is called foreign branch. The accounting procedure of foreign branch is just
like an independent branch except in the following cases:
- Exchange rate and conversion of foreign currency into home currency
- Effects of foreign exchange rate are to be incorporated in the books of head office.
TYPES OF BRANCHES

What Is Cash in Transit?

Whenever money has left point A but has not yet arrived at point B, that's cash in transit. It's
easy to picture cash in transit as physical cash, such as when you bag up money from your
cash registers and carry it to the bank. In reality, the majority of cash-in-transit transactions
happen behind the scenes, such as a check that's in limbo while the bank gets it cleared.

In accounting terms, cash in transit is any item you record on your income statement that
hasn't yet shown up on your bank statement. For example, you may have logged a customer
payment but the check is still clearing at the bank, or you may have written a check for office
expenses, but the recipient hasn't cashed it yet. Since the cash balance reported on the
balance sheet is supposed to represent all the cash that's available to your business, it would
be misleading to include money that the bank has not yet processed. Cash in transit is a way
of adjusting the cash balance to account for checks received or paid that have not yet cleared.

STOCK AND DERBTOE SYSTEM OF ACCOUNTING

This method is applicable particularly where there are large numbers of transaction and they

are numerous. This method helps the Head Office to make efficient control on branches as

there are a few more accounts are to be opened viz:

(a) Branch Stock Account;

(b) Branch Debtors Account;

(c) Branch Stock Adjustment Account;

(d) Goods Sent to Branch Account;

(e) Branch Profit and loss Account.

Stock and Debtors system is generally used when the goods are sent to the branch at
pro-forma invoice price and the size of the branch is large. Under this system, the
branch maintains a few central accounts to exercise greater control over the branch
stock and other related expenses. These accounts usually are:
1.
Branch Stock Account
2.
Branch Debtors Account
3.
Branch Expenses Account
4.
Branch Adjustment Account
5.
Goods Sent to Branch Account
6.
Branch Stock Reserve Account
Branch Stock Account
This account is on the pattern of a stock account. The account helps the Head Office in
maintaining an effective control over the Branch Stock and tells about shortage and
surplus in the branch stock because of the difference between the pro-forma invoice
price and the selling price.
Unlike traditional accounting practice, branch stock a/c is always maintained on the
selling price or pro-forma invoice price. Selling price is used to record the goods sold
by the branch to its customer and goods returned by the branch customers. Rest of the
information (even opening and closing balances) in branch stock a/c is recorded at
pro-forma invoice price.
Branch Debtors Account
Branch debtors' a/c is maintained in the traditional manner to record transactions in
between branch and its credit customers.
Branch Expense Account
The purpose of maintaining this account is nothing but the compile all branch
expenses at one place. This will include all types of expenses i.e. cash based expenses
and receivables based expenses.
Branch Adjustment Account
Branch adjustment a/c replaces the branch income statement (profit & loss a/c). This
is the account in which all expenses and losses are closed along with the margin that is
a difference between cost and the selling price. This difference is split into two; one is
termed as "surplus" that comes from the branch stock a/c representing the difference
between selling price and pro-forma invoice price, the second is termed as "loading"
that represents the difference between pro-forma invoice price and cost. This loading
is calculated on opening and closing stock balances and also on the net of the goods
sent branch