Combined accounts for a proprietor, HUF or firm with several businesses or branches: what to remove and how

A proprietor runs a shop and a small factory, each in its own Tally company. A partnership firm has branches in three states, each with its own GSTIN and books. An HUF has a trading business and rental property kept separately. At year end someone has to produce one set of accounts for the person — for the income-tax return, the tax audit and the bank — and that is where "Works A/c" and "Shop A/c" refuse to agree. This guide covers when combined statements are needed, what to remove, how to deal with differences, and a worked example.

Why one set of statements

A proprietor (an individual), an HUF or a partnership firm is a single "person" for income tax (section 2(31) of the Income-tax Act, 1961), and the proprietor's business or the firm is one entity for accounting. Keeping separate books for each business, location or GSTIN is a bookkeeping choice; it does not create separate entities. So:

• Income tax. The return is filed by the person, and its balance sheet and profit and loss account are for the person's business as a whole. The profits of all the person's businesses are assessed together under "Profits and gains of business or profession", and a loss in one business is set off against the profit of another (section 70(1)) — except that a speculation business loss can be set off only against speculation profits (section 73), and a loss of a specified business under section 35AD only against profits of specified businesses (section 73A).
• Tax audit. The turnover limit for a tax audit (section 44AB of the Income-tax Act, 1961 for FY 2025-26) is tested on the person's total turnover from all its businesses — leaving out any business taxed on a presumptive basis under sections 44AD, 44ADA or 44AE (where opted) or covered by section 44B or 44BBA — as the ICAI Guidance Note on Tax Audit explains. The audit covers the complete accounts of all the units, so one tax audit report covers them. (From tax year 2026-27, section 63 of the Income-tax Act, 2025 takes the place of section 44AB.)
• Partnership firms and banks. A firm's financial statements are the firm's — all branches together. Lenders also assess the borrower as a whole and usually ask for statements of the whole business.

Two things are not combined: an individual's businesses and the businesses of an HUF of which the individual is karta (two different persons), and two firms with common partners. Statements adding up separate persons may be asked for by a bank, but they should be labelled as aggregated information, not as anyone's financial statements.

Combining is not consolidation

The proprietor's capital account usually sits in one set of books, and the other businesses show the money received from it as a "head office" or "proprietor" account. Those are inter-business balances and come out like any other.

For a parent and its subsidiaries, see consolidated financial statements under AS 21.

What to remove

1. Balances between the businesses

Every pair of mirror accounts — "Branch Delhi A/c" in the head office books and "Head Office A/c" in the Delhi books, or "Works A/c" in the shop and "Shop A/c" in the works — is removed from both sides. Look for them in each trial balance: ledgers named after another business, branch or the proprietor, and sundry debtor or creditor ledgers that are really the other business.

2. Sales and purchases between the businesses

Goods sent from the factory to the shop are sales in one set of books and purchases in the other. Left in, they double-count turnover — which can push the person over the tax audit limit, distort the gross profit ratio and mislead the bank. Remove the same amount from revenue and from purchases. Do the same for other charges between businesses: rent, service charges, interest on the "head office" balance.

3. Unrealised profit in closing stock

If the shop's closing stock includes goods bought from the factory at a mark-up, the factory's profit on them has not been earned from outsiders. Reduce closing stock and profit by that profit element, so stock is carried at the factory's cost (AS 2). Do the same for last year's closing stock: the unrealised profit removed last year is added back this year when that stock is sold, so the combined profit is not understated.

When the two sides do not agree

They rarely agree on the first attempt. The usual reasons, and the fix:

Do not remove the larger figure and post the difference to suspense or "other current assets". A difference that cannot be explained is an unresolved error in the books, and it belongs on the query list, not in the combined accounts.

Separately registered branches: the GST point

Under section 25(4) of the CGST Act, establishments of the same person with separate GST registrations — in different states, or separately registered within one state — are distinct persons, and Schedule I treats supplies between distinct persons in the course of business as supplies even without consideration. So a Mumbai branch sending goods to its Delhi branch raises a tax invoice and pays IGST (between two registrations in the same state it would be CGST and SGST), and the Delhi branch takes the input tax credit, subject to the usual conditions of sections 16 and 17. The value is governed by rule 28 of the CGST Rules; where the receiving branch is entitled to full credit, the invoice value is accepted as the value.

In the combined accounts the sale and the purchase come out, as with any inter-business transfer. The GST does not net off: the sending branch's output tax is a liability to the government and the receiving branch's credit sits in its own electronic credit ledger, which another registration cannot use. What remains in the combined balance sheet is each registration's actual GST payable or credit balance with the government. Do reconcile the transfers in the books with the GST returns — a branch transfer in GSTR-1 with no matching receipt in the other branch's books is a classic year-end query.

A worked example

A proprietor has a factory (Works) and a retail shop (Shop), each in its own Tally company. At 31 March 2026:

• Turnover. The combined turnover is ₹2.90 crore, not ₹3.30 crore. The tax audit limit is tested on the combined figure.
• Unrealised profit. Works sells to Shop at cost plus 20%, so the profit in ₹6 lakh of stock is ₹6 lakh × 20/120 = ₹1 lakh. Closing stock and profit both come down by ₹1 lakh.
• The difference. Shop sent Works a cheque for ₹50,000 on 31 March; it was credited in Works' bank on 2 April and Works recorded it then. In Works' books at 31 March, debit cash in transit and credit Shop A/c ₹50,000 (and on 2 April debit bank and credit cash in transit). Both accounts then show ₹12.40 lakh and are removed; the ₹50,000 stays in the combined balance sheet as cash in transit.

What to keep on file

• A combination sheet showing each line business by business, every removal and the combined figure.
• A register of the inter-business pairs, the balances in each set of books, and how differences were cleared.
• The unrealised profit working, with the mark-up and the stock it applies to.
• The reconciliation of inter-branch transfers with the GST returns, where branches are separately registered.
• If a business's books change after the combination is reviewed, a fresh review of the combined figures.

Frequently asked questions

Sources

• ICAI — Guidance Note on Tax Audit under section 44AB of the Income-tax Act, 1961
• Income-tax Act, 1961 — sections 2(31), 44AB, 70, 73 and 73A; Income-tax Act, 2025 — section 63 (from tax year 2026-27)
• CGST Act, 2017 — sections 16, 17, 25(4) and Schedule I, paragraph 2; CGST Rules, rule 28
• AS 21 Consolidated Financial Statements (scope) — ICAI
• AS 2 Valuation of Inventories — ICAI