Branch Accounting is the system of the bookkeeping under which the company maintains separate accounts for each of the operating locations or branches of the company and it is followed with the motive of increasing the transparency and knowing the cash flow position and the financial picture of each such location of working of the company.
Meaning of Branch Accounting
Branch Accounting is a system in which separate books of accounts are maintained for each branch. These branches are divided as per geographical locations, and each branch has its profit centers and cost center. In this accounting system, separate Trial Balance, Profit & loss statement and balance sheet are prepared by each branch.
Types of Branches
#1 – Dependent Branch
Dependent branches are those branches that do not maintain separate books of accounts; ultimately, there profit & loss statement and Balance sheets are collectively managed by the Head office only. Only a few pieces of information have been maintained by branches separately, like Cash Accounting, Debtors Accounting, and Inventory.
#2 – Independent Branch
Independent branches are those branches that maintain separate books of accounts ultimately, and their profit & loss statement and Balance sheets are maintained separately from their Head office. In this case, the Head office and Branches are treated as separate entities.
E.g., If Head Office sending material to its branch, then the Head office will record sales in the HO book and raise an invoice in the name of the branch, and the branch will mark this as purchase in-branch books of accounts.
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Journal Entries of Branch Accounting
The following are the journal entries of branch accounting
#1 – Inventory – If the Head office transferred inventory of $1000 to its branch office, then below journal entries will be passed in the books of Head office.
#2 – Cash Remitted by Branch to Head office – If Branch office remit cash of $500 to Head office.
#3 – Head office Paid Expenses of Branch – If Head office paid wages $500, Rent $ 400 & Salary $300 on behalf of the branch.
Examples of Branch Accounting
Below are the examples of branch accounting
ABC Ltd. Company has it’s branch office at Chennai, and the following is the transaction between branch and Head office during the Year Jan’ 2018 – Dec’2019. In this example, the Head office is sending goods to the branch at the cost price.
Here, the Head office sends goods at invoice price, which includes a profit of 20% on invoice price and all expenses of Branch paid by HO. In this case, to ascertain the branch profit, adjustments will have to be made in Branch A/c, which is a difference between Invoice Price and Cost Price.
Here, goods sent to the branch are at a selling price, which is cost plus 50 %. All cash received is remitted by Branch to HO and branch expenses paid by HO directly. Branch only maintains stock and sales ledger, rest all transactions HO maintains in its books.
Advantages of Branch Accounting
- It helps to ascertain the Profit & Loss of each Branch
- It helps to know the debtors, Inventory and cash position of each branch
- It helps to ascertain the wages, Rent, Salary, and other expenses of each branch separately.
- Separate accounting of each branch helps to make decisions according to branch requirements.
- By Separate branch accounting, it is easy to track the progress and performance of each branch.
- It helps to control the overall branch operation.
Disadvantages of Branch Accounting
- Due to a separate account for each branch, it requires more manpower.
- It requires a separate branch manager for each branch.
- It requires separate infrastructure at each location or unit.
- It increases the expenses of the company because of a separate set up at each location.
- In this accounting system, there is a chance of delay in decision making because of multiple authority.
- In this accounting system, there is a chance of Mismanagement because of decentralized operation and minimum control of the Head office.
- It is a system where separate books of accounts maintained for each branch.
- In this system, the Head office and each branch are treated as separate entities.
- It helps to ascertain the performance of each branch separately, which helps in taking necessary action.
- It Increases the expenses of the company because of manpower, Infrastructure, or operational expenses.
It is useful when the business organization operates a number of branches at different locations because it helps to understand and track the performance of each branch. At the same time, it involves lots of costs because of a separate set up at each location. Therefore, it affects the profitability of the company also.
This has been a guide to what is Branch Accounting and its meaning. Here we discuss the types of branches along with examples, journal entries, advantages, and disadvantages. You can learn more about financing from the following articles –