Branch Accounting

Meaning

 Branch means any subordinate division of a business, subsidiary shop, office etc. Acc to the
provisions contained in sec29 of the Companies Act 1956 it would appear that a branch is
any establishment carrying on either the same or substantially the same activity as that
carried on by head office of the company.

A branch is a separate segment of a business. In order to increase the sales, business

houses are requires marketing 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 following are the main objects of maintaining branch accounts:

a.      Profit or loss of each branch can be found out

b.      They help in controlling branches

c.       Actual financial position of the business can be found out on the basis of head office
and branch accounting periods.

d.      Branch requirements of goods and cash can be estimated.

e.      Suggestions for increasing the efficiency of the branch can be sent on the basis of
branch accounts.

f.        They help in complying with the requirements of law because acc to companies act
1956.

Types of Branch:
From the accounting point of view, branches may be classified into-

a)      Dependent Branch

b)      Independent Branch
c)       Foreign Branch

(a) Dependent Branch:  The term ‘Dependent Branch’ means a branch which does not
maintain its own set of books. All records have to be maintained by the head office. When
the business policies and the administration of a branch are wholly controlled by the head
office, its accounts also are maintained by it. In such a case, Branch accounts are written up
at the head office out of reports and returns received from the branch.

The following are the main features of such branches:

a.       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.
b.      Goods are supplied by the head office to such branches either at cost price or at
invoice price.
c.       All expenses of the branch such as rent, salary of staff, advertisement etc., are
paid by the head office.
d.      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.
e.      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.
f.        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.

ACCOUNTING IN RESPECT OF DEPENDENT BRANCHES

In case of a dependent branch, the head office may keep accounts of the branch acc to any
of the following systems
1)      Debtors System
2)      Stock and Debtors system
3)      Wholesale System
4)      Final Account system 

(1) Debtors System (Synthetic Method)

This system is adopted in case of branches of small size. Under this system, a branch
account is opened separately for each branch in the books of head office. This account is
nominal account in nature. The opening balances of stock, debtors (if any), petty cash are
debited to the branch account.
(2) Stock and Debtors System
Profit and loss of a branch can be found out by preparing branch account but there is
another method for the same purpose. This method is known as stock and debtors method.
If it is desired to exercise a more detailed account control over the working of a branch, the
accounts of the branch are maintained under which is described as the stock and debtors
method.
(3) Wholesale Branch System
Manufacturers may sell goods to the consumers either through the wholesalers and
approved stockists or through their branches. In order to know whether self-retailing
through branch is more profitable than wholesaling, it is necessary to make distinction
between profit due to wholesale and profit due to retail business of the branch. Wholesale
price is always less than retail price.
(4) Final Accounts System
The head office can also ascertain the profit or loss of a dependent branch by preparing
branch trading and profit and loss a/c at cost. In such cases, the head office may also
maintain a branch account. 

Treatment of Certain Branch Transactions in case of dependent

branch
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.

(b) Independent Branch and Their features

Independent branches are those which act independently within the broad policies
framed by the Head office in conducting their day-to-day activities.
The main features of independent branches.
a.       They
need not depend on the Head office for their requirements of supplies of
goods. They can make purchases themselves. Of course, they can also obtain supplies of
goods from the head office as and when they want.
b.      They can sell goods only for cash and credit at any price they consider
profitable.
c.       They need not remit the money received by them from cash sales and debtors to
the Head office periodically. They can retain the funds and meet their day-to-day expenses
out of those funds. Finally, if they have surplus cash in their hands, they can remit the same
to the Head office.
d.      They keep a complete set of books for recording their transactions. So, they can
prepare their own Trial Balance, Trading and Profit and Loss Account and Balance Sheet.
e.      However, as they are ultimately responsible to the Head office, at the end of
every financial period, they are required to submit a copy of their Trial Balance to the Head
office.

Treatment of some Specific Transactions in case of Independent Branch

 (1) Cash in transit: If the cash sent by branch to H.O. or the cash sent by H.O. to
branch has not been received by the other party upto the end of the year, it is known as
cash in transit. There is a difference in the balances of two accounts on account of this
transaction also. To reconcile the two balances, the following journal entry is passed in H.O.
books at the end of the year:
Cash in Transit a/c ------------Dr.
To Branch a/c
(Cash in transit taken into books)
At the beginning of the next year, reverse entry will be passed.

(ii) Goods in transit: 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 the same way when goods are returned by branch to head office and the head office does
not receive it upto the end of the year it is also known as goods in transit.
It is quite understandable that a difference should arise in the 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:
Goods in Transit a/c ----------- Dr.
To Branch a/c
(Goods in transit taken into books)
In the Balance Sheet of Head office both the above items will be shown as an asset.

(iii)
Depreciation on Fixed Assets: Often, the accounts of fixed assets of a branch
are maintained in the head office books.  In such a case,

1 Entry for depreciation in H.O. Books:

.
Branch A/c                             Dr                         XXX
     To Branch Fixed Assets A/c XXX
2 The branch passes the following entry in its own
. books for Depreciation:
Depreciation A/c                         Dr                     XXX
     To Head Office A/c XXX

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’s A/c) in the branch books.  Similarly, in
head office books the same should be debited to branch fixed assets account and credited
to Branch A/c.
(iv) Inter-Branch Transactions: Where there are number of branches, inter-branch
transactions are likely to take place, e.g., cash or goods sent by one branch to another or
expenses incurred by one branch on behalf of another.  Such transactions are usually adjusted
assuming that they were entered into under the instructions from the H.O.  Suppose Kolkata
branch transfers some goods to Mumbai branch under the directions of the H.O.  The entries
will be as follows:

1 In the books of Kolkata Branch:

.

Head Office A/c                        Dr                        XXX

XXX
        To Goods Supplied to Branch A/c
2 In the books of Mumbai Branch:
.
Goods received from Branches A/c        Dr           XXX
        To Head Office A/c XXX
3 In the books of Head Office:
.
Mumbai Branch A/c                      Dr                  XXX
        To Kolkata Branch a/c XXX
Note:     Inter-branch transactions without the knowledge of head office may be
passed as between the branches only in the usual manner.

Foreign Branches
 Introduction: A Foreign branch usually maintains a complete set of books under
double entry principles. So, the accounting principles 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 H.O. books, it has to be converted into home currency.
Rules for conversion: In case of fluctuating rates of exchange, the following rules for
conversion are applied:

Nature of Account Exchange Rate Applicable

Fixed Assets Rates ruling at the time they were
acquired.
Fixed Liabilities
Rates ruling as on the date of the Trial
Current Assets & Liabilities
Balance.
Remittances sent by the branch
Rates ruling as on the date of the Trial
Goods received from H.O. as well as goods Balance.
returned to H.O.
At the actual rates at which they were
made.
The Nominal A/c’s (except next two) At the rates ruling on the date of dispatch
or the date of receipt.
Depreciation on Fixed Assets
Average rate ruling during the accounting
period.
Opening and Closing stocks
Rate of conversion applicable in case of
the particular asset concerned [as
indicated in (a) above].
Balance in H.O. A/c
Rates ruling of on the opening and closing
dates respectively.
Value at which the Branch A/c appears in
H.O. books on the date.

Difference in Exchange: As a result of conversion of branch trial balance in home

currency, a difference in the trial balance is will often arise. If a loss (Dr.) results, it should
be debited to Profit & Loss A/c, if a profit (Cr.) results, the prudent course is to credit it to
an exchange Reserve A/c so as to provide for future losses on exchange.