A commercial enterprise operates several regional outlets. Each outlet buys inventory autonomously from local suppliers, maintains a complete set of double-entry ledgers, and extracts its own trial balance at the close of the financial period. Which accounting treatment correctly reflects the financial relationship between the head office and these regional outlets?
- The head office maintains a reciprocal branch account in its ledger, while each outlet prepares individual financial statements for periodic integration.Answer
- BThe head office records all routine branch transactions centrally in a Branch Stock Account to ascertain individual outlet operating profits.
- CThe regional outlets are treated as internal sales departments, eliminating the necessity to reconcile inter-entity balances at the end of the accounting period.
- DCapital assets acquired independently by the outlets are debited directly to the head office Purchases Journal as operational cost.
Answer
The head office maintains a reciprocal branch account in its ledger, while each outlet prepares individual financial statements for periodic integration.
Because the outlets maintain complete double-entry ledgers, purchase inventory independently, and extract trial balances, they operate as independent branches. Under independent branch accounting, the head office maintains a reciprocal branch account in its books while the branch maintains a reciprocal head office account, allowing separate financial statements to be prepared and later consolidated.
Step-by-Step Solution
Key Concept
Independent Branch Accounting and Reciprocal Accounts