You may be wondering what branch accounting is? In simple terms, it is the practice of using a double-entry bookkeeping system for the operations of multiple branches of the same company.
These accounts are nominal, and each branch recorded debits and credits in General Ledger. The types of branch accounting methods used by companies vary and are influenced by the type of branch accounting system in place and the nature of each branch.
For example, if ABC company operates one retail branch, they will transfer their inventory to the branch at cost and apply depreciation to equipment at a 25% rate. One of the main benefits of branch accounting is that it helps companies increase transparency by keeping separate accounts for each branch. This way, they can know their overall cash flow position and profitability.
Branches can also be categorised into profit centres and cost centres. Each branch is given its financial statement, and the two types of branch accounting are centralised and decentralised. However, it is important to note that both types of branch accounting are valuable and necessary.
Did you know?
There are two major types of accounting: accrual method & cash method. Also, the bookkeeping technique is an upgraded accrual method that combines the two major approaches.
Also Read: Cost Accounting – What is Cost Accounting, Types & More!
What Is Branch Accounting and Why Is It Important?
If we talk about explaining the branches of accounting, they are a useful tool for managing the business, and branch accounting is an important aspect. While there are many benefits to having multiple locations, it is not the best option for every business.
Using branch accounting helps your company to increase visibility and improve financial performance. This type of accounting is used in several industries and dates back to Venetian banks.
Each branch has its account, which records inventory, accounts receivable and accounts payable. In addition to the general ledger, branches also maintain their petty cash.
The Types of Branch Accounting
1. Dependent Branches
The term “dependent branch” refers to the branch that does not maintain its own set of books. All records must be kept at the headquarters in the case of an independent branch.
Therefore the head office can manage the branches’ accounts using any of the following procedures:
- Debtors system.
- System of debtors and stocks.
- Final accounting system.
- Wholesale branch system.
2. Independent Branch
An independent branch is a branch that has its books, and it can be an overseas branch or a home-based branch. The method of calculating is identical in both cases, except for the branches located outside the country. The trial balance received by the branch in a foreign country is to be converted to that currency in the head office.
3. Home Branch
The branch will keep the complete set of books. They can also purchase items from third parties and receive articles from the main office.
It can prepare its trial balances and final accounts and forward its copies to the headquarters for inclusion in the books of the head office. Therefore, it has an account at the head office in its books, which is akin to an individual account.
4. Foreign Branch
For foreign branches, the accounting process is the same as for the home branch. The head office will review the trial balance receipt from the foreign branch and issue the appropriate entries for transit goods, transit cash and other required adjustments. A trial account balance for the department in a foreign currency will need to be converted to a home currency using the following method.
The Journal Entries of Branch Accounting
Those who are not familiar with branch accounting should first learn about the purpose of Journal Entries. This book will explain the fundamentals of branch accounting and will provide an introduction to these accounts.
It will also explain how to reconcile these accounts. If you are unfamiliar with the term, it refers to separate accounts from the head office. However, in most cases, the head office owns the branch’s assets.
Journal entries record the financial transactions flowing in and out of the company. The transactions are all written down in the book of your company which is known as the general journal.
Journal entries constitute the initial step in the accounting process. The most important thing about accounting journal entries is that all use the double-accounting system.
The Importance of Journal Entries
- Branch accounting is a vital component of management accounting.
- It is used to record the profit and loss of the branch and compute any adjustments required for overvaluation.
- It should also be integrated with the head office’s books. This will allow management to monitor the progress and performance of each branch. Its primary objective is to provide an overview of the entire company’s financial position.
- Journal entries are the initial stage in the process of recording. Therefore, they’re mandatory for the preparation of additional accounting statements. The income statement, the balance sheet and the cash flow report are based on the first recordings of journal entries.
Also Read: Fundamentals of Accounting – Learn About Accounting Process and Steps & Basic Features of Accounting
The Examples of Branch Accounting
Let’s know what are the branches of accounting with examples to help you understand in a better way. Branches are independent entities with their books of accounts, profit & loss statements and balance sheets. Unlike the main office, branches operate independently and are treated as such—a head-office records sales and purchases in the head office book.
The department marks purchases in the branch books of accounts and then transfers the ₹77,390 inventory back to the head office. Journal entries pass into the head office books from the branch. Branches also have separate books of accounts for expenses, inventory and fixed assets.
Branches and departments differ in their accounting systems. A retail business might have several branches in various cities, while a bank may have one head office and several branches.
The simplest way to account for branches is to set up a single branch account at the head office. This is often called the debtor’s system, and it works well when only a few branches need to be tracked. A branch account has a different name than the head office and is typically a nominal ledger account.
Another branch of accounting is fiduciary accounting. This branch involves accounting for the property and business of a third party. Examples of fiduciary accounting include companies in bankruptcy and other situations where the ownership of an entity is in question.
In these cases, the balance sheet should reflect the number of assets owned by each business. This balance sheet should represent the company’s overall financial health. A well-designed balance sheet will highlight all of the branches.
The Advantages of Branch Accounting
The advantages of branch accounting are significant for many companies.
- Unlike the debtor’s system, branch accounts do not record credit sales or bad debts. They also do not reflect allowance and discount allowed. Another advantage of branch accounting is that it can handle advanced accounting tasks such as buyer relationship administration and point-of-sale operations.
- This type of accounting system has increased automation and security features. As a result, branch accounting has become a popular option for many businesses.
- Using branch accounting allows you to keep separate financial records for each branch, assessing profitability better.
- Branch accounting can help you determine whether your business is profitable in each branch and how scalable it is in a particular location.
- Because a branch’s profitability can be compared to the other branches, you can make better decisions about the best way to proceed.
- Keeping separate accounts for each branch is helpful because it helps you keep track of each branch’s debtors, inventory and cash position.
- Separate accounts for each branch make it easier to compare each branch’s performance with those of the same concern.
- You can distinguish between loss-making and profit-making branches.
The Disadvantages of Branch Accounting
If you’re thinking about opening a new branch of your company, you’re probably wondering about the disadvantages of branch accounting. Branch accounting is associated with efficient internetworking among branch offices.
These offices keep their books as per generally accepted accounting principles and then submit them to the head office, which combines the details with other units. Historically, this system has been around since the Venetian banks of the fourteenth century when shippers started using brand accounting forms.
- The drawbacks of this system include the increased costs and workforce involved.
- Since each branch is managed independently, each branch’s head office will have to hire a separate manager. Further, it can lead to mismanagement.
- There can be delays in decision-making because it requires additional staff to manage each branch.
- The trial balance of a foreign branch must be converted into the home currency. This is not always possible on time.
Conclusion
This system demands a lot of money to manage the operations of branches of a business firm in which the company has many branches. Then, accounting for all of those branches is governed. Within the framework, head office and branches are considered distinct entities, and branch accounting aids in evaluating the efficiency of branches and comparing the various branches.
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