Foreign branch accounting

Meaning of Foreign Branches :

Foreign branches are independent branches which are operating in foreign countries.

Accounting in respect of Foreign Branches :

Accounting in respect of foreign branches is done in the books of the branch as well as in the books of the Head Office.

Accounting at Branch :

As the foreign branch is an independent branch, it keeps a complete set of books on the double entry system, prepares all the necessary accounts including the account of the Head Office, prepares its own trial balance, Trading and Profit and Loss Account and Balance Sheet. In short, the accounting procedure adopted at a foreign branch is exactly the same as that adopted at an independent domestic branch.

Accounting at the Head Office :

The trial balance received by the Head Office from the foreign branch is in foreign currency. Therefore, before incorporating the items in the trial balance of the foreign branch, the Head Office is required to convert the various items in the trial balance into the currency of the Head Office. Thereafter, it has to incorporate the items in the Converted Branch Trial Balance in its books, prepare the Branch Trading and Profit and Loss account and Balance Sheet and Branch Account.

Rates at which the items in the trial balance of a foreign branch should be converted :

It is true that the items in the trial balance of a foreign branch should be converted into the currency of th e Head Office. But the question is at what rates the various items in the trial balance of a foreign branch should be converted. The following points should be borne in mind while converting the items in the Trial Balance of a foreign branch :

1. If the rate of exchange is not subject to wide and frequent fluctuations, all the items in the trial balance (other than remittances and Head Office Account) can be converted at a fixed rate of exchange.

2. If the rate of exchange is subject to wide and frequent fluctuations, then, different rates should be adopted for different items. They are :

a. Opening stock should be converted at the opening rate of exchange (i.e, the rate of exchange prevailing at the beginning of the accounting year).

b. Closing stock should be converted at the closing rate of exchange (i.e., the rate of exchange prevailing on the last day of the accounting year).

c. All the other revenue items (i.e., expenses and incomes, except depreciation on fixed assets and reserve for bad debts, should be converted at the average rate for the year. (In this context, it may be noted that according to the recommendation of the Institute of Chartered Accountants, in the year in which the local currency is devalued, the revenue items should be converted at the closing rate, and not at the average rate.)

Depreciation on fixed assets should be converted at the same rate at which the converted fixed asset is converted.

d. Fixed assets should be taken at the same figure at which they (i.e., branch fixed asset) appear in the books of Head Office.

If that figure is not given, the fixed assets should be converted at the rate of exchange prevailing on the date on which the fixed assets were acquired. If that rate is not given, then, the fixed assets should be converted at the opening rate of exchange.

If additions to fixed assets are made on various dates, average date of exchange for the period should be adopted.

e. Fixed liabilities should be converted at the rate of exchange prevailing on the date on which they were contracted. If that rate is not given, then, they should be converted at the opening rate of exchange.

f. All current assets and current liabilities should be converted at the closing rate of exchange.

g. Remittances appearing in the branch trial balance are converted at the actual rates at which they were effected. If they are not given, they should be converted, i.e., taken, at the samme figure at which they appear in the Head Office books.

i. Head Office account is converted, i.e., taken at the same figure at which Branch Account appears in the Head Office books,

j. Goods received from Head Office should be converted, i.e., taken, at the same figure at which goods sent to branch appear in the head office books. If that figure is not given, then, the goods received from Head Office should be converted at the average rate of exchange, as it is a revenue item.

However, it should be noted that the converted Trial Balance, generally, does not tally. This is because the different items in the branch trial balance are converted at different rates. The difference in tial balance is taken as Difference in Exchange and is entered in the Profit and Loss Account, either on the debit side or on the credit side.depending upon its nature, if the difference is small. On the other hand, if the difference is fairly large, it is taken as Exchange Fluctuations Account or Exchange Suspense Account and is shown in the Balance Sheet either as an asset or as a liability, depending upon the nature, and is carried forward to be set off against future differences.

After having converted the Branch Trial Balance into head office currency, the Head Office will incorporte the items in the branch trial balance in its books and prepare the Branch Trading and Profit and Loss Account and Balance Sheet and the Combined Trading and Profit and Loss Account and the Balance Sheet, as required.

bank reconciliation statement steps

1. Tick off all the items in the pass book with the entries in the bank column of the cash book and make a list of the entries as are found not ticked either in the cash book or the pass book. The unticked items are responsible for the difference in the balances shown by the cash book and the pass book.

2. Take balance as per cash book or pass book as the starting point.

3. Adjust the starting point with the other balance by adding or subtracting the unticked items as located in step1.

4. If balance as per cash book has been taken as the starting point, then balance as per cash book is to be adjusted according to entries passed in the passbook or viceversa.

The following table will help to prepare the Bank Reconciliation Statement.

		Starting Balance
	Items	Dr.Balance as per Cash book or Overdraft as per pass book	Cr. Balance as per Pass book or Overdraft as per cash book
1	Those items which affect the debit side of cash book
	a. Cheques deposited but not collected by bank	-	+
	b. Cheques though entered in the cash book but omitted to be sent to the bank.	-	+
2	Those items which affect the credit side of cash book
	a. Cheques issued but not presented for payment	+	-
3	Those items which affect the credit side of pass book
	a. Interest/Dividend credited by Bank	+	-
	b. Amount deposited directly by a customer into bank account	+	-
	c. Cheques sent to the bank but omitted to be entered into cash book	+	-
4	Those items which affect the debit side of pass book
	a. Bank charges charged by the bank	-	+
	b. Interest on Overdraft.	-	+
	c. Payment made by the bank on standing instructions of the customer	-	+

why bank reconciliation statement is prepared

Introduction

The statement that is prepared for reconciling the two balances (i.e., for explaining the difference between the two balances (Pass book balance - Cash book balance) is called Bank Reconciliation Statement.

The balance shown by the pass book is known as bank balance as per the pass book.

The balance shown by the bank account in the ledger or the bank columns in the cash book is known as bank balance as per the cash book.

Theoretically, the pass book balance should agree with the cash book balance on any date because the same transactions are entered in both the books.

But, in actual practice, these two balances do not agree owing to many reasons. The reasons for the difference between the two balances are as follows:

1.Cheques issued and entered in the cash book, but not presented to the bank for payment.

2.Cheques deposited into the bank for collection and entered in the cash book, but not collected by the bank.

3.Cheques received and entered in the cash book but not sent to the bank.

4.Direct payment into the trader's bank account by the customers of the trader entered (i.e., credited in the bank's book, but not entered in the cash book.

5.Bank commission, bank charges and interest on overdraft debited in the banker's book, but not entered in the cash book.

6.Interest allowed on bank balance by the banker and credited in the banker's book, but not entered in the cash book.

7.Interest and dividend collected and credited by the banker in the banker's book, but not entered in the cash book.

8.Cheques and bills sent to the bank for collection dishonoured and entered i.e., debited in the banker's book, but not entered in the cash book.

9. Payments made by the bank on behalf of the customer and debited in the bank's book, but not entered in the cash book.

10.Wrong entries in the cash book.

11.Wrong entries in the pass book.

Important

• Debit balance as per cash book means Cash at Bank.
• Credit balance as per cash book means Bank Overdraft.
• Debit balance as per pass book means Bank Overdraft.
• Credit balance as per pass book means Cash at Bank.

Bank Reconciliation Statement - BRS

A Bank Reconciliation Statement is a statement prepared by organizations to reconcile the balance of cash at bank in a company's own records with the bank statement on a particular date.

This statement is the most common tool used by organizations for reconciling the balance as per books of company with the bank statement and is made at the end of every month.

The main objective of reconciliation is to ascertain if the discrepancy is due to error rather than timing.

The difference between the two records on a given date may arise because of the following;

Cheques drawn but not yet presented to the bank

Cheques received but not yet deposited in the bank

Interest credited and not recorded in the organization's books

Bank charges debited but not recorded in the organization's books.


Let us discuss on this topic in detail in the coming posts....

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Accounting Questions and Answers

1.Why do capital expenditures increase assets (PP&E), while other cash outflows, like paying salary, taxes, etc., do not create any asset, and instead instantly create an expense on the income statement that reduces equity via retained earnings?

Answer:- Capital expenditures are capitalized because of the timing of their estimated benefits – the lemonade stand will benefit the firm for many years. The employees’ work, on the other hand, benefits the period in which the wages are generated only and should be expensed then. This is what differentiates an asset from an expense.

2. Walk me through a cash flow statement.

Answer:- Start with net income, go line by line through major adjustments (depreciation, changes in working capital and deferred taxes) to arrive at cash flows from operating activities.

• Mention capital expenditures, asset sales, purchase of intangible assets, and purchase/sale of investment securities to arrive at cash flow from investing activities.
• Mention repurchase/issuance of debt and equity and paying out dividends to arrive at cash flow from financing activities.
• Adding cash flows from operations, cash flows from investments, and cash flows from financing gets you to total change of cash.
• Beginning-of-period cash balance plus change in cash allows you to arrive at end-of-period cash balance             

3.What is working capital?

Answer:-Working capital is defined as current assets minus current liabilities; it tells the financial statement user how much cash is tied up in the business through items such as receivables and inventories and also how much cash is going to be needed to pay off short term obligations in the next 12 months.

Examples of Journal entries in a simplified way - 3

16,Charged Manohar Rs. 50 commission for service rendered to him

Account to be debited            Manohar's A/c.(Personal A/c - Debit the receiver of benefit)

Account to be credited           Commission A/c(Nominal A/c-Credit Incomes and gains)

Reason - 

(a)Manohar is the receiver of benefit, i.e., service.

(b)Commission earned is an income.

17,Charlie agreed to pay interest of Rs.100 on the amount advanced to him

Account to be debited            Charlies Loan A/c.(Personal A/c - Debit the receiver of benefit)

Account to be credited           Interest on Loan A/c(Nominal A/c-Credit Incomes and gains)

Reason - 

(a)Charlie is the receiver of benefit, i.e., the period of credit.

(b)Interest on loan advanced is an income.

18. Received loan from Shankar Rs.1000.

Account to be debited            Cash A/c.(Real A/c - Debit what comes in)

Account to be credited           Shankar's Loan A/c(Personal A/c-Credit the giver of benefit)

Reason - 

(a)Cash comes in.

(b)Shankar is the giver of benefit i.e., loan.

19.Office furniture stolen Rs.50.

Account to be debited            Loss by theft A/c.(Nominal A/c - Debit losses and expenses)

Account to be credited           Furniture  A/c(Real A/c-Credit what goes out)

Reason - 

(a)Furniture stolen is a loss

(b)When furniture is stolen, furniture goes out.

20.Paid Income tax Rs.500

Account to be debited            Drawings A/c*.(Personal A/c - Debit the receiver of benefit)

Account to be credited           Cash A/c(Real A/c-Credit what goes out)

Reason - 

(a)When income-tax, i.e., the personal expense of the owner, is paid by the business, the owner is the receiver of benefit.

(b)Cash goes out.

***Income tax paid should be taken as the personal expense of the owner, i.e., as drawings.

21.Paid Life Insurance Premium Rs. 300

Account to be debited            Drawings A/c*.(Personal A/c - Debit the receiver of benefit)

Account to be credited           Cash A/c(Real A/c-Credit what goes out)

Reason - 

(a)When life insurance premium i.e., the personal expense of the owner, is paid by the business, the owner is the receiver of benefit. 

(b)Cash goes out.


***Life insurance pais should be taken as the personal expense of the owner, i.e., as drawings.

22.Allowed discount to Karunakar Rs. 20

Account to be debited            Discount Allowed A/c (Nominal A/c - Debit losses and expenses)

Account to be credited           Karunakar's A/c(Personal A/c-Credit the giver of benefit)

Reason - 

(a)Discount allowed is an expense.

(b)Discount is allowed to Karunakar for his prompt payment. So, Karunakar is the giver of benefit.

23. Discount Received from Gangadhar Rs.10.

Account to be debited            Gangadhar A/c (Personal A/c - Debit the receiver of benefit)

Account to be credited           Discount Received A/c(Nominal A/c-Credit Incomes and gains)

Reason - 

(a)Discount is given by Gangadhar for prompt payment made to him. So Gangadhar is the receiver of benefit.

(b)Discount received is an income.

24.Bank charges Rs. 30

Account to be debited            Bank charges A/c (Nominal A/c - Debit expenses and losses)

Account to be credited           Bank A/c(Personal A/c-Credit the giver of benefit)

Reason - 

(a)Bank charges are an expense.

(b)Bank charges are charged by the bank for the service rendered to the business. So, Bank is the giver of benefit i.e., banking service.

25.Railways freight paid on machinery purchased Rs. 100

Account to be debited           Machinery A/c*** (Real A/c - Debit what comes in)

Account to be credited          Cash A/c(Real A/c-Credit what goes out)

Reason - 

(a)Machinery comes in

(b)Cash goes out.

***Railway freight paid on machinery purchases should be tr eated as a part of cost of machinery purchased.


26.Till takings for the month Rs.1000

Account to be debited          Cash A/c (Real A/c - Debit what comes in)

Account to be credited         Sales A/c(Real A/c-Credit what goes out or
                                                             Nominal A/c-incomes and gains)

Reason - 

(a)Cash comes in.

(b)Goods go out on sale or goods sold are income for the business.