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 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. and cost center. In this accounting system, separate Trial Balance, Profit & loss statement and balance sheetBalance 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.
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 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 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.
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.
- Opening Stock at Branch as on 1st Jan 18: 1000
- Debtors as on 1st Jan 18: 2000
- Goods Sent to Branch by Head Office: 10000
- Goods Returned by Branch to Head Office: 50
- Cash Sales: 5000
- Credit Sales: 8000
- Cash Collected from Debtors: 7000
- Salaries and Wages: 60
- Rent: 150
- Sundry Expenses: 40
- Closing Stock as on 31.12.2018: 1500
- Debtors as on 31.12.2018: 1000
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.
- Stock at Invoice Price: 20000
- Debtors: 4000
- Petty Cash: 200
- Goods Sent to Branch at invoice Price: 40000
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 %. All cash received is remitted by Branch to HO and branch expenses paid by HO directly. 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 maintains in its books.
- Opening Stock at Selling Price: 15000
- Opening Debtors: 5000
- Goods Received from HO at Selling Price: 21000
- Cash Sales: 10000
- Credit Sales: 15000
- Goods Returned to HO at Selling Price: 3000
- Discount allowed to Debtors: 800
- Bad Debts Written Off: 200
- Expenses: 500
- Closing Stock at Selling Price: 3000
Advantages of Branch Accounting
- It helps to ascertain the Profit & Loss of each Branch
- It helps to know the debtorsKnow The DebtorsA debtor is a person or entity that owes money to the other party in a transaction. The receiver is referred to as the creditor, and the payment terms vary for each transaction based on the terms and conditions agreed upon by the parties., Inventory and cash position of each branch
- It helps to ascertain the wages, Rent, Salary, and other expensesExpensesOther 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. 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 –