Steps for preparing Final Accounts

The following steps should be followed in preparing the final accounts where we have a foreign branch.

1. Update the trial balance of the branch that is given in the foreign currency with the following items:

a) closing  inventory  DR   Balance sheet
                                              CR  profit and loss.

b) Accrued or prepaid expenses.     Accrual       :  DR.  profit and loss (expense)
                                                                                     CR    balance sheet (liability)

                                                          Prepayment :  DR.  Balance sheet (Asset)
                                                                                      CR   Profit and loss (expense, income)

c) Depreciation:    DR.  Profit and loss (expense)
                                         CR  Balance sheet (provision)

2. Translate the updated trial balance of the branch using the exchange rates given and depending on the method of translation.

Once the trial balance has been translated into the local currency, the debit side may not be the same as a credit side and balancing figure is the exchange gain or loss. If the debit side is more than the credit side, then difference is an exchange gain and if the credit side is more than the debit side then the difference is an exchange loss.

3. Prepare the final accounts of the branch in the normal way using the trial balance of the head. And the translated trial balance of the branch.

Care should be taken on the treatment of the exchange gain or loss. The following points should be applicable.

a) If the functional currency method is being used, then any exchange gain or loss will appear in the column  of the branch and the combined business in the profit and loss accounts. An exchange gain will appear as other incomes under gross profit and exchange loss and expense in the profit and loss account.

b) If the presentation method is being used, then the exchange gain or loss will be taken to a foreign  exchange reserve  which will appear as part of capital and reserves in the balance sheet of the branch and the combined business or added to the head office current account.