Branch Accounting Basics: Methods, Transactions, and Branch Types

Branch

A branch refers to a geographically separate unit of an enterprise that operates under the control of a central head office. While located away from the main office, a branch typically engages in the same core activities as the parent enterprise.

For example, the State Bank of India (SBI) has branches in numerous cities across the country and also operates internationally, all functioning under the supervision of its central headquarters.

Branch Accounting

Branch accounting refers to the system of recording and managing the financial transactions of a branch whether these transactions involve the head office, third parties, or other branches in the books of the head office.

To maintain effective control and oversight, it is important to determine the profit or loss of each branch separately. This helps in evaluating the performance of individual branches and making informed managerial decisions.

To achieve this, an appropriate accounting system must be implemented to accurately record transactions between the head office and its branches. The choice of accounting method depends on factors such as the size of the branch, the nature of its operations, and the level of control the head office wishes to maintain.

In simple terms, branch accounting is the process of maintaining the financial records of a branch in an organized and systematic manner.

Objectives of Branch Accounting

Branch accounting serves several important purposes within an organization. Its key objectives include:

Determining Profit or Loss: It helps ascertain the individual profit or loss of each branch, enabling performance evaluation.
Effective Control: By maintaining separate records, branch accounting allows the head office to monitor and control branch operations more efficiently.
Assessing Financial Position: It provides a clear picture of the overall financial status of the business by combining head office and branch accounts over a given accounting period.
Estimating Requirements: It aids in forecasting the branch's needs for goods and cash, ensuring timely replenishment and smooth operations.
Improving Efficiency: Based on the analysis of branch accounts, the head office can offer suggestions to improve operational efficiency and productivity at the branch level.
Legal Compliance: It assists in meeting statutory requirements as prescribed under the Companies Act and other regulatory frameworks.

Types of Branches Accounting

Dependent Branches

A Dependent Branch is a branch that does not maintain its own set of books. Instead, all accounting records are maintained by the head office. In simple terms, dependent branches do not keep independent books of accounts. They are also referred to as Agency Branches.

When the business policies and administrative control of a branch are entirely managed by the head office, the branch’s financial transactions are recorded by the head office based on the reports and returns received from the branch.

Features of Dependent Branches

Supply of Goods: Dependent branches usually rely on the head office for the supply of goods. These branches sell only the goods received from the head office and are generally not allowed to make purchases from the open market, except with express permission from the head office.
Expense Management: All major expenses of the branch are paid directly by the head office.
Petty Cash Handling: To manage minor daily expenses (e.g., conveyance, entertainment), the head office provides the branch with petty cash. The branch manager uses this petty cash to pay for such expenses and maintains a petty cash book, either in a simple format or under the imprest system.
Sales and Collections: Branches typically sell goods for cash. However, they may also sell on credit if authorized by the head office. Cash received from sales or from debtors is either remitted to the head office daily or deposited into a bank account on behalf of the head office.
Maintenance of Memorandum Records: Although dependent branches do not maintain full accounting records, they often keep certain memorandum books such as a cash book, debtors ledger, and stock register for internal tracking and reporting purposes.

Accounting Procedure for Dependent Branches

In the case of a dependent branch, the head office maintains all accounting records. To do so, it may adopt any of the following accounting systems:

Debtors System
Stock and Debtors System
Wholesale Branch System
Final Accounts System

Debtors System - Also known as the Synthetic Method or Direct System, this method is typically used for small-sized branches.

Under this system, the head office opens a single branch account for each branch in its books.
The primary objective of this branch account is to ascertain the profit or loss of the branch.
The Branch Account is treated as a nominal account.
The opening balances of stock, debtors, and petty cash are debited to this account, while expenses, remittances, and closing balances are recorded accordingly.

This system provides a simplified way to track branch transactions without maintaining detailed books at the branch level.

Stock and Debtors System - This method is used when the head office seeks more detailed control over inventory and debtors at the branch, especially for larger or high-volume branches.

Instead of a single branch account, multiple accounts are maintained to reflect various aspects of branch operations:

Branch Stock Account
Branch Debtors Account
Branch Expenses Account
Branch Adjustment Account (to determine gross profit)
Branch Profit and Loss Account

This system helps in achieving better stock control, enables detailed analysis, and provides greater transparency of branch performance.

Wholesale Branch System - In this method, a manufacturer may choose to sell products through:

Wholesalers and approved stockiest, and/or
Retail branches owned by the head office

To evaluate the profitability of selling through retail branches compared to wholesaling, the Wholesale Branch System is used.

It helps distinguish between:

Wholesale profit (profit earned by selling at wholesale price)
Retail profit (additional profit earned from selling at retail price)

Since retail prices are higher than wholesale prices, this system helps the head office assess whether direct retailing is more profitable than selling through intermediaries.

Final Accounts System - Under this system, the head office prepares branch trading and profit & loss accounts to determine the branch’s net profit or loss.

This method is more detailed than the Debtors System.
It includes multiple line items such as opening stock, purchases, sales, expenses, and closing stock.
It's suitable when the head office wants a comprehensive view of branch performance.

Treatment of Certain Branch Transactions (Dependent Branch)

In branch accounting under the Debtors System (commonly used for dependent branches), certain transactions require specific treatment. Below are the guidelines for recording such transactions in the Branch Account maintained by the head office:

Branch Expenses Paid Out of Petty Cash

If petty expenses (e.g., conveyance, entertainment) are paid by the branch out of the petty cash:

These expenses need not be shown separately in the branch account.
Only the closing balance of petty cash (after deducting these expenses) will appear on the credit side of the branch account.

However, if the imprest system is used and the head office reimburses the branch for these expenses:

The expenses must be debited to the branch account.
The opening and closing balances of petty cash will appear on the debit and credit sides, respectively.

Depreciation of Fixed Assets

Depreciation is not shown separately in the branch account.
Only the net book value of the asset (after depreciation) is shown on the credit side of the branch account as part of the closing balance of fixed assets.

Credit Sales, Bad Debts, Sales Returns, Allowances, and Discounts Allowed

These are related to debtors and are not shown separately in the branch account.
However, they are considered indirectly while calculating:

Opening or closing balances of debtors
Cash received from debtors

These debtor-related figures are then included in the branch account.

Goods in Transit

This refers to the difference between goods sent by the head office and received by the branch.
Treatment options:

It can be shown on both sides of the branch account (to balance the discrepancy), or
It can be ignored completely during branch account preparation, depending on the accounting policy.

Purchase of Fixed Assets by the Branch

If the branch purchases fixed assets using remitted cash:

The branch account is credited for the amount of the purchase.
The remittance (cash) from the branch is reduced accordingly.

If the branch purchases the asset on credit:

The liability for the purchase is shown on the debit side of the branch account.

Sale of Fixed Assets

If the branch sells fixed assets for cash:

The cash remittance to the head office increases.
The reduction in asset value is automatically adjusted.
The net amount from the sale is shown on the credit side of the branch account.

Independent Branch

An Independent Branch is one that maintains a complete set of books of accounts and operates with a full accounting system, separate from the head office. It functions as a semi-autonomous unit, capable of recording all its business transactions independently.

An independent branch:

Maintains its own books,
Prepares its own trial balance, and
Draws up its own Trading and Profit & Loss Account and Balance Sheet.

At the end of the accounting period, the branch sends a copy of the trial balance to the head office. The head office then incorporates these figures into its own books to prepare consolidated financial statements for the entire business.

Unlike dependent branches, independent branches do not rely heavily on the head office for day-to-day operations such as supplies or expense payments.

Features of Independent Branches

Autonomous Procurement - Independent branches are not dependent on the head office for the supply of goods. They can make purchases from the market as needed, though they may also receive goods from the head office.
Freedom in Pricing and Sales - These branches can sell goods for cash or on credit and are allowed to set their own selling prices based on profitability and market conditions.
Retention and Use of Funds - Independent branches are not required to remit collections from sales or debtors to the head office on a regular basis. They can retain funds to manage their operational expenses. Any surplus cash may be remitted to the head office periodically.
Complete Accounting System - Each branch maintains a full set of accounting records, enabling them to:

Prepare a Trial Balance
Draft their own Trading and Profit & Loss Account
Compile a Balance Sheet

Reporting to Head Office - Despite their independence, these branches are accountable to the head office. At the end of every financial period, they must submit their trial balance and other financial statements to the head office for consolidation.

Treatment of some specific transactions case of independent branch

Cash in transit

If the cash sent by branch to head office or the cash sent by head office to branch has not been received by the other party upto the end of the year. It is known as cash transit there is a difference in the balances of two accounts of this transactions also. To reconcile the two balances the following journal entry is passed in head office books as the end of the year.

Cash in transit account Dr.

To branch account

Narrations - cash in transit taken into books

At the beginning of the next year, reverse entry will be passed.

When goods are dispatched by the head office to branch and the branch does not receive it even upto the end of the year it is known as goods in transit. In same way when goods are returned by branch to head office and head office does not receive it upto the end of the year it is also known as goods as goods in transit.

It is quite understandable that a difference should arise in the balance of two balances of two accounts due to these transactions. Therefore, to reconcile the following journal entry will be passed in head office books in both the circumstances.

Cash in transit account Dr.

To branch account

Narrations - cash in transit taken into books

In the balance sheet of head office both the above items will be shown as an asset.

Depreciation on fixed assets

Often the accounts of fixed assets of a branch are maintained in the head office books. In such a case.

Entry for the depreciation in head office books

Branch account Dr.

To branch fixed assets accounts

The branch passes the following entry in its own books for depreciation

Depreciation account Dr.

To Head office (HO) accounts

Any purchase of fixed assets by the branch in such a case should be debited to head office account and credited to bank or supplier account in the branch books. Similarly in head office the same should be debited to branch fixed assets account and credited to branch account.

Inter branch transactions

Where there are number of branches inter branches, transactions are likely to take place e.g., cash or goods sent by one branch to another of expense incurred by one branch on behalf of another. Such transaction is usually adjusted assuming that they were extend into under the instructions form the head office. Suppose Kolkata branch transfer some goods to Mumbai branch under the direction of the head office. The entries will be as follows:

In the books of Kolkata branch

Head office (HO) account Dr.

To goods supplied to branch account

In the books of Mumbai branch

Goods received from branches account Dr.

To Head Office (HO) account

In the books of Head office (HO)

Mumbai branch account Dr.

To Kolkata branch account

Note: Inter branch transactions without the knowledge of head office may be passed as between the branches only in the usual manner.

Foreign Branches

A foreign branch usually maintains a complete set of books under double entry principles. It is an independent branch and located outside country. So, the accounting principle of a foreign branch will be the same as those applying to an inland branch. Before a trial balance of the foreign branch is incorporated in the head office books. It maintains its account in a foreign currency because all transactions are made in currency of that country. Head office has to convert the trial balance received into currency of its own currency before incorporating the trail balance in its books of accounts.

Rules for conversion – in case fluctuating rates of exchange the following rules for conversion are applied.

Nature of account	Exchance rate applicable
Fixed assets	Rates ruling at the time they are acquired
Fixed liabilities	Rates ruling on the date of trail balance
Current assets and liabilities	Rates ruling on the date of trail balance
Remittances sent by the branch	At the actual rates at which they were made
Goods received from head office as well as goods returned to head office	At the rates ruling on the dates of dispatch or the date of receipt.
The nominal account except – depreciation on fixed assets and opening and closing stocks	Average rate ruling during the accounting period
Depreciation on fixed assets	Rate of conversion applicable in case of the particular asset concerned as indicated in Rates ruling at the time they are acquired
Opening and closing stocks	Rates ruling of on opening and closing dates respectively.
Balance in head office account	Value at which the branch account appears in head office books on the date.

Difference in exchange

As a result of conversion of branch trail balance in home currency, a difference in the trial balance is will often arise. If a loss (dr.) results. It should br debited to profit and loss account if a profit (cr.) result, the prudent course is to credit it to exchange reserve account so as to provide for future losses on exchange.

FAQ's

What is the difference between a dependent and an independent branch?

A dependent branch does not maintain its own books and relies on the head office for accounting and supplies. An independent branch maintains its own set of books, prepares its own financial statements, and operates more autonomously.

What are the common accounting systems used for dependent branches?

The common systems include the Debtors System, Stock and Debtors System, Wholesale Branch System, and Final Accounts System

Why is it important to maintain separate branch accounts?

Separate branch accounts help in determining the profit or loss of each branch, controlling branch operations, estimating requirements, and complying with legal regulations.

How does an independent branch report to the head office?

An independent branch prepares its own trial balance and financial statements, which are sent to the head office for consolidation with the head office’s accounts.

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Branch Accounting Basics: Methods, Transactions, and Branch Types

Branch

Branch Accounting

Objectives of Branch Accounting