Definition of Branch Accounting
Branch Accounting is an accounting system that provides book keeping 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 and different books of accounts are maintained for them individually.
For the expansion of the business and increasing the volume of sale, a lot of firms carrying out their business opens many other small shops (branches) in different locations. These shops are called as Branches and the main firm is called as Head Office. Head office is a different entity and keep its own book keeping records and similarly, the branches are treated as different entities and book keepings of the same is also needed to be maintained. Branch Accounting provides the methods and ways to properly maintain the records and guidelines for preparing financials.
Objectives of Branch Accounting
There are lot of objectives associated with Branch Accounting, some of them are as follows:
- To know the cash flow generated by the branches and the cash position of the branches.
- To know the profit & loss generated by branches and to know the financial position of the individual branches.
- To know and evaluate the performance of individual branches and comparing them with other branches to find out 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 a separate entity and accordingly the books of accounts are maintained. Branch Account is open as a nominal ledger account where all the income, expenditure and Asset, 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 is 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.
Methods of Branch Accounting
There are several methods available for the Branch Accounting system depending upon the nature of branches as well as the system of accounting or book keeping 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
- Whole sale Branches Method
- Income Statement System
Example of Branch Accounting
For understanding 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
The Following could be taken as Proforma for Branch Accounting:
|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 as per the suitable requirements as well as the nature of branch accounting method opted.)
Need for Branch Accounting
The need of branch accounting arises to ascertain the profitability of a branch to determine the scalability of business over at that place of business. In case the business seems to fail the management can decide to close the business in that area and in case it looks scalable, company may expand business in that area or may open more branches. The separate accountability provides the running cost of the business in that area and the profit making capability of the branches and comparison of the same for finding out the optimal business activities to follow.
Following are the advantages of Branch Accounting:
- Branch Accounting enables to maintain the separate books of accounts and financials of different branches separately.
- Branch accounting helps in identifying the profitability of different branches and finding out the requirements of different branches as per their requirements.
- Branch accountings enables the head office to find out the progress reports of different branches and finding out the most optimal method for making the required profitability for the business.
Followings are the disadvantages of Branch Accounting:
- Branch accounting requires different branches to maintain their books of accounts and for the same staff, workforces are need to be hired which may cost the business significantly.
- The cost also gets increased due to duplication of responsibility and staffs at different branches.
- The Branch accounting results into decentralized decision making and not solely dependence upon the Head office that may results into a longer period of time for taking any decision and 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 lot of funds for managing the activities of the branches of a business company where the companies are having the number of branches and accounting of all those branches are maintained. In the system, both Head office & branches are treated as separate entities and branch accounting 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 along with advantages and disadvantages. You may also have a look at the following articles to learn more –