Professional Documents
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Branch Accounting
Branch Accounting
Branch: A branch is a separate segment of a business. In order to increase the sales, business houses are
requires to market their products over a larger territory and may generally split their business into
certain divisions or parts. These various parts or divisions may be located in different part of the same
city or in different cities of the same country or in different countries in the world. These are known as
branches. The head office controls the activities of various branches.
Branch accounting: Branch accounting is the process through which the accounting system of a branch
is maintained.
Objectives of branch accounting: The main objects of branch accounts are dependent on the nature of
the business and specific need of a particular branch. The objectives of keeping the branch accounts
acceptable to all businesses are as follows.
Types of Branches:
i. From accounting point of view the following are the main types of branches:
a) Dependent Branch (Branch not keeping full system of accounting)
b) Independent Branch (Branch keeping full system of accounting)
c) Foreign Branch
I. Such branches sell only those goods which are received from the head office and are not
usually allowed to make purchases in the open market except with the express permission
of the head office.
II. Goods are supplied by the head office to such branches either at cost price or at invoice
price.
III. All expenses of the branch such as rent, salary of staff, advertisement etc., are paid by the
head office.
IV. Petty expenses such as cartage, entertainment, freights etc. are paid by the branch
manager out of petty cash book balance. Such book is maintained at the branch either as
simple petty cash book or on imprest system.
V. The amount received from cash sales or cash received from debtors is either remitted to
the head office daily or deposited in the account of the head office in some local bank.
VI. The branch manager is normally expected to sell the goods for cash only but he may be
authorized to sell goods on credit as well.
The branch with the above features, do not keep proper set of books of accounts. In order to
supply the requisite accounting information to the head office at regular interval, each branch keep
some memoranda of records, such as Stock Register, the Cash Book and the Petty Cash Book.
Stock Register : It is maintained with a view to keep a record of all goods received from the head office,
or returns made to the head office during that period, sales made at the branch during the period,
breakages and losses of goods and balances of stock available in hand at the close of the accounting
period.
Cash Book: It is maintained to keep records of cash transactions such as cash sales, receipts from
debtors, & cash remitted to head office from time to time.
Petty Cash Book: It is maintained to record small paymen of expenses such as carriage, postage,
conveyance and entertainment etc.
If however the branch is authorized to make credit sales, a Sales Day Book and a Debtors Ledger will
also be required to be maintained.
A dependent branch does not keep proper accounts but accounts are maintained in the head
office books only. Thus the system of accounting for the branch to be adopted by the head
office depends on:
Debtor System
This system is also called synthetic methods, is adopted generally in those branches
which are fairly small in size. Under this system, the head office opens a separate
account for each branch in order to record all transactions relating to the branch. This
account is a nominal account in nature and is prepared to calculate profit and loss for
each branch. The goods supplied by the head office to the branch may be either at cost
price or at cost plus profit. The following are the journal entries which are passed in the
books of the head office to record branch transactions.
It should be carefully noted that sales, discounts, bad debts, expenses paid by branch and
return from debtors to the branch are not direct transactions between the branch and the head
office, and therefore they are not taken care off while preparing for the Branch Account in the
books of the head office according to this system.
Moreover, losses due to pilferages, wastage and other losses of stock due to normal or
abnormal reasons are also completely ignored under this method.
The main defect of this method is that it does not provide full information for analysis of branch
profit & loss. To overcome this problem, a separate Branch Trading & Profit and Loss Account
has to be prepared, which is, of course, a memorandum account not forming a part of the full
system of accounting.
In short, branch account is debited with the opening balance and branch assets, goods sent to
branch account less returns, cheque received for remittance and closing balances of branch
assets. The difference between the two sides will be profit or loss of the branch.
Branch account (In the books of the head office) will appear as under after posting of the
entries.
Branch Accocunt
(IN H.O. BOOKS)
1) Branch Expenses paid by the branch out of Petty Cash. Such expenses will be deducted from
the branch cash and at the close reduced balance of cash will be shown on the credit side of the
branch account. Such expenses need not be shown in the branch account. If such expenses are
re-imbursed by the head office to the branch (if the petty cash is maintained on imprest system),
then these must be debited to the branch account. However, same opening and closing
balances of petty cash will be shown on the debit and credit side respectively of the branch
account.
2) Depreciation of Fixed assets. This is not shown in the branch account. But the closing balance
of the fixed assets will be shown on the credit side of the branch account after deduction of the
amount of depreciation.
3) Credit sales, bad debts, sales returns, allowances, and discount allowed pertaining to branch.
These items are pertaining to debtors account and will not be shown in the branch account.
However, these items will be taken into consideration while ascertaining the amount of opening
or closing balance of debtors or amount received from debtors which are shown in the branch
account.
4) Goods in transit. Goods in transit is the difference between goods sent by head office and
received by the branch. Such goods will be shown either on the both sides of the branch account
or will be ignored totally while preparing the branch account.
5) Purchase of fixed asset by the branch. If the branch has purchased any fixed assets, then on
one hand branch account will be credited by the head office and on the other the remittance
from the branch will be reduced by the amount. If branch has purchased the asset on credit
basis and liability arising from such purchase will be shown on the debit side of branch account.
6) Sale of Fixed Asset. If the sale is for cash, cash remittance will increase from the branch but
asset will reduce in value to be shown on the credit side of the branch account as this is
automatically adjusted through the above adjustments.
I. In order to keep secret from the branch manager the cost price of the goods and profit
made, so that the branch manger may not start a rival and competitive business with
the concern.
II. In order to have effective control on stock i.e. stock at any time must be equal to
opening stock plus goods received from the head office minus sales made at the branch.
The branch records are not in any way affected due to invoicing of goods at cost plus profit.
But, in order to calculate the profit or loss made by branch, some accounting adjustments, as
stated below, are required to be passed in the books of the HO for eliminating the profit
element included in (i) branch opening stock, (2) goods sent to branch less returns made by
branch to head office and (3)branch closing stock.
III. For adjustment of excess price of goods sent to branch less returns to head office
Closing stock should always be valued at cost or market price whichever is lower. This is based
on the principle sof conservatism, i.e. no profit should be anticipated and all losses should be
provided. Moreover the unsold stock lying in the branch will not earn any profit unless sold.
Therefore, it is necessary to make provision for the profit element included in the unsold stock.