Branch Accounting is the system of bookkeeping under which the company maintains separate accounts for each of the operating locations or branches of the company. It is followed to increase transparency and know the company’s cash flow position and financial picture.
Meaning of Branch Accounting
Branch Accounting is a system in which separate accounts are maintained for each branch. These branches are divided by geographical location, and each department has its profit and cost centersProfit CentersProfit Center is the segment or division of a business responsible for generating revenue & contributing towards its overall profit. Here, the objective is to increase sales & reducing the cost incurred. . In this accounting system, separate Trial BalanceTrial BalanceTrial Balance is the report of accounting in which ending balances of a different general ledger are presented into the debit/credit column as per their balances where debit amounts are listed on the debit column, and credit amounts are listed on the credit column. The total of both should be equal., Profit & Loss Statements, and Balance SheetsBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. are prepared by each branch.
Table of contents
- Branch Accounting is a mechanism that companies use to enable separate maintenance of accounting records for branches in different geographical locations in which the company operates.
- Its types include Dependent and Independent. The former means the branch depends on the headquarters, so its costs and profits are redirected to the head office. The latter means branches that are separate entities of the main branch and thus maintain separate accounting records.
- Branch accounting benefits the company in the making, analyzing & tracking of decisions according to a particular branch’s requirements over time and in controlling each branch’s overall operations.
- Its disadvantages include, chances of mismanagement . Decision-making delays occur due to various accounts. It also increase a company’s expense due to separate setups at different locations.
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Types of Branches
#1 – Dependent Branch
Hanging branches do not maintain separate accounts. Ultimately, the Head Office collectively manages its profit & loss statements and balance sheets. Only a few pieces of information have been supported by separate branches like Cash AccountingCash AccountingCash Accounting is an accounting methodology that registers revenues when they are received & expenditures when they are paid in the given period, thereby aiming at cash inflows & outflows. , Debtors Accounting, and Inventory.
#2 – Independent Branch
Independent branches maintain separate books of accounts. Ultimately, the branches keep their profit & loss statements and balance sheets separate from their Head Office. Therefore, the head office and branches are treated as separate entities in this case. For example:- If the Head Office sends material to its branch, the Head Office will record sales in the HO book and raise an invoice in the name of the component, and the department will mark this as a purchase in-branch books of accounts.
Journal Entries of Branch Accounting
The following are the journal entries of branch accounting.
#1 – Inventory – If the head office transferred inventory of $1,000 to its branch office, the journal entries below would be passed into the head office books.
#2 – Cash Remitted by Branch to Head Office – If the branch office remits cash of $500 to head office.
#3 – Head Office Paid Expenses of Branch – If the head office paid wages of $500, rent of $400, and salary of $300 on behalf of the branch.
Examples of Branch Accounting
Below are the examples of branch accounting
ABC Ltd. is a company that has its branch office in Chennai, India, and the following is the transaction between its branch and head office during the year January 2018 – to December 2019. In this example, the head office sends goods to the branch at the cost price.
- Opening StockOpening StockOpening Stock is the initial quantity of goods held by an organization during the start of any financial year or accounting period. It is equal to the previous accounting period's closing stock, valued in accordance with appropriate accounting standards based on the nature of the business. at Branch as on January 1, 2018 = 1,000
- Debtors as on January 1, 2018 = 2,000
- Goods Sent to Branch by Head Office = 10,000
- Goods Returned by Branch to Head Office = 50
- Cash Sales = 5,000
- Credit Sales = 8,000
- Cash Collected from Debtors = 7,000
- Salaries and Wages = 60
- Rent = 150
- Sundry Expenses = 40
- Closing Stock as of December 31, 2018 = 1,500
- Debtors as of December 31, 2018 =1,000
Here, the head office sends goods at invoice price, which includes a profit of 20% on invoice price and all branch expenses paid by HO. 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.
- Stock at Invoice Price: 20,000
- Debtors: 4,000
- Petty Cash: 200
- Goods Sent to Branch at invoice Price: 40,000
Expenses Paid by HO
- Rent: 1000
- Salaries & Wages: 500
- Other Expenses: 200
- Cash Sales: 5000
- Credit Sales: 40000
- Cash Collected from Customer: 39000
- Goods Return by Branch at Invoice Price: 1000
- Stock at Invoice Price: 25000
- Debtors: 5000
- Petty Cash: 200
Here, goods sent to the branch are at a selling price, which is cost plus 50%. The branch remits all cash received to HO, and the HO pays branch expenses directly. The branch only maintains stock and sales ledgerSales LedgerA sales ledger is a ledger entry that records any sale in the book of records, even if the payment is received or not yet received. It records the sales and the cash when received and the amount owed to the business.. Rest all transactions HO holds in its books.
- Opening Stock at Selling Price = 15,000
- Opening Debtors = 5,000
- Goods Received from HO at Selling Price = 21,000
- Cash Sales = 10,000
- Credit Sales = 15,000
- Goods Returned to HO at Selling Price = 3,000
- Discount allowed to Debtors = 800
- Bad Debts Written Off = 200
- Expenses = 500
- Closing Stock at Selling Price = 3,000
Advantages of Branch Accounting
- It helps to ascertain the profit & loss of each branch.
- It helps to know each branch’s debtorsKnow The DebtorsA debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion. inventory and cash position.
- It helps to determine each branch’s wages, rent, salary, and expensesother expensesOther expenses comprise all the non-operating costs incurred for the supporting business operations. Such payments like rent, insurance and taxes have no direct connection with the mainstream business activities. separately.
- Separate accounting of each chapter helps to make decisions according to branch requirements.
- By separate branch accounting, it is easy to track the progress and performance of each unit.
- It helps to control the overall branch operation.
Disadvantages of Branch Accounting
- Due to a separate account for each branch, it requires more workforce.
- It requires an individual branch manager for each branch.
- It requires other infrastructureInfrastructureInfrastructure refers to fundamental physical and technological frameworks that a region or industry establishes for its economy to function properly. at each location or unit.
- It increases the company’s expenses because of a different setup at each location.
- There is a chance of delay in decision-making in this accounting systemAccounting SystemAccounting systems are used by organizations to record financial information such as income, expenses, and other accounting activities. They serve as a key tool for monitoring and tracking the company's performance and ensuring the smooth operation of the firm. because of multiple authorities.
- There is a chance of mismanagement in this accounting system because of decentralized operation and minimum control of the head office.
- It is a system where accountants maintain a separate books of accounts for each branch.
- Each branch’s head office is treated as a separate entity in this system.
- It helps to ascertain the performance of each department separately, which helps in taking necessary action.
- It increases the company’s expenses because of the workforce, infrastructure, or operational costs.
It is useful when the business organization operates several branches at different locations because it helps to understand and track the performance of each department. But, at the same time, it involves lots of costs because of a separate setup at each location. Therefore, it affects the profitability of the company also.
Frequently Asked Questions (FAQs)
The purpose of Branch Accounting is to ascertain the profitability of the branches, the future of the company’s expansion, and the requirements of that particular branch concerning cash, stock, and other financial instruments.
Yes, Branch Accounting can be of two main types, Home and Foreign Branches. Home branches are further categorized into dependent and independent branches, wherein the head office manages the dependent branches. In contrast, the independent branch is loosely tied with the head office.
The four methods of branch accounting include
Analytical Method, or Stock and Debtors Method,
Final Account Method, or Trading and Profit or Loss Method Method, and
Wholesale Price Method.
The essential objectives of branch accounting includes determining a company’s branches revenue & expenditure, and assets & liabilities. It optimizes transparency and realizes the branch’s financial position.
This has been a guide to branch accounting and its meaning. Here we discuss the branch acc and examples, journal entries, advantages, and disadvantages. You can learn more about financing from the following articles –