Updated July 15, 2023
Definition of Branch Accounting
Branch Accounting is an accounting system that provides bookkeeping strategies for the branches of a firm or a business that are established in different areas for expanding the coverage and sales from the business, where each branch is treated as a different entity.
Different books of accounts are maintained for them individually.
To expand the business and increase sales volume, many firms carrying out their business open many other small shops (branches) in different locations. These shops are called Branches, and the main firm is Head Office. The head office is a different entity and keeps its own bookkeeping records. Similarly, the branches are treated as different entities, and book keeping of the same must be maintained. Branch Accounting provides the methods and ways to properly maintain the records and guidelines for preparing financials.
Objectives of Branch Accounting
- Must be aware of the cash flow the branches produce and their financial situation.
- To know the profit & loss generated by branches and the financial position of the individual branches.
- To know and evaluate the performance of individual branches and compare them with other branches to find the optimal practices for the required growth.
How Does It Work?
In the Branch accounting system, all the branches and head office are treated as separate entities, and accordingly, the books of accounts are maintained. Branch Account is a nominal ledger account where all the income, expenditures, Assets, and liabilities are maintained and tallied. A branch account is open for a particular period (financial year period). Upon the completion of the period, the balances in the branch account are transferred to the Head office account (profit or loss of the period is transferred to the head office account), and the branch account is carried with NIL Balance up until the next period starts.
There are several methods available for the system depending upon the nature of the branches as well as the system of accounting, or bookkeeping opted for the branches (i.e., dependent branch, independent branch). The most common methods used for branch accounting are as follows:
- Debtors Method
- Stock and Debtors Method
- Final Accounts method
- Wholesale Branches Method
- Income Statement System
To understand the concept furthermore, let’s take an example.
Following details are provided for a branch of the company. Prepare the branch account in the head office account of the company.
|Opening stock at Branch||15000|
|Opening Debtors at Branch||25000|
|Opening Petty cash at Branch||500|
|Goods sent to Branch||200000|
|Received from Debtors||200000|
|Closing stock at Branch||30000|
|Closing Debtors at Branch||50000|
|Closing Petty cash at branch||100|
|To Opening Balance b/d||By Cash|
|Received from Debtors||
|Petty Cash||500.00||By closing balance c/d|
|To Goods sent to branch||
|To Bank Account||Petty Cash||
|To Profit & Loss Account (Profit)||
Branch Accounting Format
|Proforma Branch Account|
|To Opening Balance b/d||By Bank Account (Cash Remitted)||XXXX|
|Stock||XXXX||By Return to HO||XXXX|
|Debtor||XXXX||By closing balance c/d|
|To Goods sent to the branch||XXXX||Debtor||XXXX|
|To Bank Account||Petty Cash||XXXX|
|To Profit & Loss Account (Profit)||XXXX||By Profit & Loss Account (Loss)||XXXX|
(The format could be adjusted per the suitable requirements and the nature of the branch accounting method opted.)
Need for Branch Accounting
The need for branch accounting arises to ascertain the profitability of a branch to determine the scalability of business over at that place of business. If the business seems to fail, the management can decide to close the business in that area, and in case it looks scalable, the company may expand business in that area or open more branches. The separate accountability provides the running cost of the business in that area, the profit-making capability of the branches, and a comparison for finding the optimal business activities to follow.
- The ability to maintain distinct financial records and books of accounts for various branches is provided by branch accounting.
- Branch accounting helps identify the profitability of different branches and determine the requirements of different branches as per their requirements.
- Branch accounting enables the head office to find out the progress reports of different branches and find out the most optimal method for making the required profitability for the business.
- Branch accounting requires different branches to maintain their books of accounts, and for the same staff, workforces need to be hired, which may cost the business significantly.
- The cost also increases due to duplication of responsibility and staff at different branches.
- The Branch accounting results in decentralized decision-making and is not solely dependent upon the Head office, which may result in a longer time for any decision. The decision may create conflicts as the same decision may not be made by the Head office and the Branch office.
The Branch Accounting system requires the introduction of a lot of funds for managing the activities of the branches of a business company where the companies have several branches and accounting of all those branches is maintained. In the system, both the Head office & branches are treated as separate entities and helps to evaluate the performance of the branches as well as the comparison between the different branches.
This is a guide to Branch Accounting. Here we also discuss the definition and objectives of branch accounting and its advantages and disadvantages. You may also have a look at the following articles to learn more –