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Goods sent to branch at selling price
Under this approach, the head office uses the price at which the goods are sold in the
market to charge the goods which are sent to the branch. Therefore, when the goods are
transferred to the branch, the head office treats them as if they are sold. However, if at
the end of the year some remains as branch closing inventory, it is not acceptable for the
head office to recognise part of the profit associated with the unsold inventory as profit
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because the sale is just within the entity. Thus, it is necessary to adjust unrealised profit
on unsold inventory at the end of the year through the branch adjustment account. When
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the entity decides to use selling price to charge goods sent to the branch, there are three
methods it can adopt. The first is the debtor’s method, the second is the inventory and
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debtors’ method, and the third is the final accounts method.

(a) Debtors’ method
This is an approach which uses selling price to charge goods sent to the branch.
The approach considers a branch as a selling outlet or as a debtor to the head office.
This method is usually adopted when a branch is small and does not make credit
sales, and if it does, the debtors are paying in the same branch at which the sale took
place. The main accounts for recording branch transactions at the head office are
the branch inventory account, goods sent to branch account, and inventory reserve
account. In this case, the head office maintains a separate account for each branch.
For instance, a branch that just receives goods and sells them, its account will be
debited with the goods sent at the selling price and credited with the value of goods
sold by the branch. The difference, which is the balance, will be showing the value
of the inventory on hand at the selling price. The following journal entries to be
recorded in the books of Head office when the entity adopts debtors’ method:

(i) When goods are sent to branch at the selling price
Dr Branch inventory account xxx
Cr Goods sent to branch account xxx

(ii) When goods are sold and cash remitted to the head office
Dr Bank account xxx
Cr Branch inventory account xxx

Example 5.1

Kwetusafi Ltd is a retailing entity whose headquarter is in Dar es salaam and a branch
in Mtwara. The entity policy is to sell its products to customers at a 25 per cent profit
margin and the same price is used to transfer goods to the branch.
The following information relates to the branch operations for March, 2022

Student’s Book Form Five
131

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