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 own profit center and cost
center. In this accounting system, separate Trial Balance, Profit & loss
statement and balance sheet are prepared by each branch.
Types of Branches
#1 – Dependent Branch
Dependent branches are those branches that do not maintain separate
books of accounts completely, there profit & loss statement and Balance
sheets are collectively maintained by the Head office only. Only a few
information has been maintained by branches separately like Cash
Accounting, Debtors Accounting, and Inventory.
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#2 – Independent Branch
Independent branches are those branches which maintain separate books
of accounts completely and their profit & loss statement and Balance
sheets are maintained separately from their Head office. In this case, Head
office and Branches are treated separate entity.
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 branch and
branch will record this as 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 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
Example #1
ABC Ltd. Company has it is 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.
Solution
Example #2
If goods are sent by the Head office 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.
Example #3
If goods are sent to branch at a selling price of the branch which is
cost plus 50 %, All cash received by branch remitted by Branch to HO.
Branch expenses paid by HO directly and branch only maintain stock
and sales ledger otherwise all transactions are maintained in the books
of HO.
Advantages of Branch Accounting
It helps to ascertain the Profit & Loss of each Branch
It helps to know the debtors, Inventory and cash position of each
branch
It helps to ascertain the wages, Rent, Salary and other expenses of
each branch separately.
Separate accounting of each branch helps to take 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.
Importance Points
It is a system where separate books of accounts maintained for each
branch.
In this system Head office and each branch treated as a separate
entity.
It helps to ascertain the performance of each branch separately which
helps to take the necessary action.
It Increases the expenses of the company because of manpower,
Infrastructure or operational expenses.
Conclusion
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 cost
because of a separate setup at each location, therefore, it affects
the profitability of the company also.
