Branch Accounting

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

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. read more. 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.read more, 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.read more are prepared by each branch.

Key Takeaways

  • 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.
Branch Accounting

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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. read more, 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.

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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 $1,000 to its branch office, the journal entries below would be passed into the head office books.

Branch Accounting Journal entry 1

#2 – Cash Remitted by Branch to Head OfficeIf the branch office remits cash of $500 to head office.

Branch Accounting Journal entry 2

#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.

Branch Accounting Journal entry 3

Examples of Branch Accounting

Below are the examples of branch accounting

Example #1

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.

Solution

Branch Accounting Example 2.2png
Example 1.2png

Example #2

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.

Opening Balance

  • 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

Closing Balance

  • Stock at Invoice Price: 25000
  • Debtors: 5000
  • Petty Cash: 200
Branch Accounting Example 2.1png

Example #3

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.read more. 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
Branch Accounting Example 3.1png

Advantages of Branch Accounting

Disadvantages of Branch Accounting

Important Points

  • 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.

Conclusion

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)

What is the purpose of branch accounting?

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.

Are there more types of branch accounting?

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.

What are the methods of branch accounting?

The four methods of branch accounting include 
Synthetic Method, 
Analytical Method, or Stock and Debtors Method, 
Final Account Method, or Trading and Profit or Loss Method Method, and
Wholesale Price Method.

What are the objectives of branch accounting?

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.

Recommended Articles

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 –

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Comments

  1. Lawrence malambao says

    Great content,i love it.

  2. Anani​Juliet​ says

    Nice

  3. Akshita says

    So helpful thankyou

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