The stock and debtors system is a way to account for the transactions that take place within a company’s head office and dependent branches. The head office uses the debtors system to open branch accounts in its ledger. It is best suited for smaller branches. However, large companies may also use this system. It is an alternative to the cash basis. Here are some differences between the two. Read on to learn about each.
The Debtors System is a good choice for small-sized branches. It allows the Head Office to maintain a strict control on the stock of each branch. The Debtors System also allows the Head Office to keep a general record of the stock balance for all branches. Unlike the cash system, the debtors system allows the head office to monitor the profit and loss of all branches. This system is also known as the one-account system.
The Debtors System has several benefits, including the ability to find profit in the long run. The Branch Account is generally a debit balance. For example, a trading firm in Kolkata has a branch in Patna. The Patna branch charges goods at cost plus 25%. The Patna branch has its own Sales ledger and remits cash received daily to the Head Office. Head Office pays all expenses.
Sectional and self-balancing are two different systems. A sectional balancing system only balances one section of a group of ledgers. For example, a company could post its transactions in a sales ledger, while the creditors ledger would have total debtors and creditors. A trial balance would be prepared for each ledger separately. The self-balancing system balances all ledgers.
A branch stock account shows surplus and deficit. In the example, the credit side of the account will be higher than the debit side because part of the goods were lost in transit. However, the credit side would reflect a surplus of stock. The surplus is then transferred to the branch profit and loss account. Once the inventory is fully utilized, the business can focus on other important aspects of its operation. With a proper branch stock account, a company can avoid unexpected losses.
The HO will also prepare a memorandum branch trading and profit and loss account. This is similar to the debtors account, as all figures are converted from cost price. Branches may also be allowed to keep their own records. The branch may also purchase goods from the open market. The only difference is the ownership of the branch by the HO. The branch account will be credited with goods supplied to the branch by the HO.