A branch can be described as any establishment carrying on either the same or substantially the same activity as that carried on by head office of the company. It must also be noted that the concept of a branch means existence of a head office; for there can be no branch without a head office – the principal place of business. Branch offices are of a great utility in the sense that they allow business to be expanded closer to the clients and hence they facilitate face to face interaction with customers.
From the accounting point of view, branches may be classified as follows:
- Inland Branches which can be further classified as:
- Independent Branches which maintain independent accounting records
- Dependent Branches for which whole accounting records are kept at Head Office
- Foreign Branches
When the head office wholly controls the business policies and the administration of a branch and its accounts also are maintained by it, the branch is described as Dependent branch. Branch accounts, in such a case, are maintained at the head office out of reports and returns received from the branch. Some of the significant types of branches that are operated in this manner are described below:
- A branch set up merely for booking orders that are executed by the head office. Such a branch only transmits orders to the head office
- A branch established at a commercial center for the sale of goods supplied by the head office, and under its direction all collections are made by the H.O and a branch for the retail sale of goods, supplied by the head office.
Goods may be invoiced to branches (1) at cost; or (2) at selling price; or (3) in case of retail branches, at whole sale price.
If goods are invoiced to the branch at cost, the trading results of branch can be ascertained by following any of the three methods: (i) Debtors Method, (ii) Stock and Debtors method, (iii) Trading and Profit and Loss Account (Final Accounts) Method
Debtors’ method of branch accounting
This method of accounting is suitable for small sized branches. Under this method, separate branch account is maintained for each branch to compute profit or loss made by each branch. Various accounting adjustments to respective branch account are as follows:
- The opening balance of stock, debtors (if any), petty cash(if any), are debited to the Branch Account; the cost of goods sent to branch as well as any direct purchases made by branch(for which Head Office makes the payment), expenses of the branch paid by the head office, salaries, rent, insurance, etc., are also debited to it.
- Conversely, amounts remitted by the branch and the cost of goods returned by the branch are credited.
- At the end of the year, the value of unsold stock, the total of customers balances outstanding and that of petty cash are brought into the branch account on the credit side.
- Accordingly, the branch account will reveal profit or loss; Debit ‘balance ’will be the loss suffered by the working of the branch and vice versa.
If the branch is allowed to make small purchases of goods locally as well as to incur expenses out of its cash receipts, it will be necessary for the branch to supply to the head office a copy of the Cash Account, showing details of cash collections and disbursements
Stock and Debtors method of branch accounting
If it is desired to exercise a more detailed control over the working of a branch, the accounts of the branch are maintained under Stock and Debtors Method. According to this method, the following accounts are maintained by the Head Office:
- Branch Stock Account (or Branch Trading Account) is used for the Ascertainment of shortage or surplus
- Branch Debtors Account is used for the Ascertainment of closing balance of debtors
- Branch Expenses Account is used for the Ascertainment of total expenses incurred
- Goods sent to Branch Account is used for the Ascertainment of cost of goods sent to branch
- Branch Cash / Bank Account is used for the Know about cash flow at branch (eg : where Branch is allowed to incur expenses locally)
- Branch Fixed Asset Account is used for the Control over branch Fixed Assets
- Branch Profit and Loss Account is used for the Calculation of net profit or loss.
Branch Trading and Profit and Loss accounts are prepared considering each branch as a separate entity. The main advantage of this method is that, it is easy to prepare and understand. It also gives complete information of all transactions which are ignored in the other methods. It should be noted that Branch Trading and Profit and Loss account is merely a memorandum account and therefore, the entries made there in do not have double entry effect
Whenever, goods sent to branch are invoiced at selling price, certain considerations need to be kept in mind such as:
- It would be obvious that, if Branch Account is debited with the sales price of goods and subsequent to the debit being raised there is a change in the sale price, the amount of debit either has to be increased or reduced on a consideration of the quantity of unsold stock that was there at the branch at the time the change took place. Such an adjustment will be necessary as often as the change in sale price occurs.
- Moreover, the amount of anticipatory or unrealized profit, included in the value of unsold stock with the branch at the close of the year will have to be eliminated before the accounts of the branch are incorporated with that of the head office. This will be done by creating are serve.
It may also be necessary to adjust the value of closing stock on account of the physical losses of stock due to either pilferage or wastages which may have occurred during the year. This adjustment is made by debiting the cost of such goods to Goods Lost Account and the amount of loading (included in the lost goods),to the Branch Adjustment Account.
When goods are invoiced at wholesale prices to retail branches,, the Head Office (particularly ,the manufacturing concern) supplies goods to its retail branches at wholesale price which is cost plus wholesale profit.
Profit of branch = Sale proceeds at shop-wholesale price of the goods sold.
For this purpose, it is assumed that Manufacturer would always be able to sell the goods on wholesale terms thereby Manufacturer profit = Wholesale price-Cost.
Many concerns, therefore, invoice goods to such shops at wholesale price and determine profit or loss on sale of goods on this basis.
Branch Stock Account or the Trading Account is debited with:
The value of opening stock at the Branch; and
- Price of goods sent during the year at wholesale price.
It is credited by:
- Sales effected at the shop; and
- Closing stock of goods valued at wholesale price.
The value of goods lost due to accident, theft etc. also is credited to the Branch Stock Account or Trading Account calculated at the wholesale price. At this stage, the Branch Stock or Trading Account will reveal the amount of gross profit (or loss).It is transferred to the Branch Profit and Loss Account. On further being debited with the expenses incurred at the shop and the wholesale price of goods lost, the Branch Profit and Loss Account will disclose the net profit(or loss)at the shop.
Since the closing stock at the branch has to be valued at wholesale price, it would be necessary to create a stock reserve equal to the difference between its wholesale price and its cost (to the head office) by debiting the amount in the Head Office Profit and Loss Account. This Stock Reserve is carried forward to the next year and then transferred to the credit of the (Head Office) Profit and Loss Account.
When the size of the business is big, it is desirable that the branch maintains complete records of its transactions. These branches are called independent branches and each independent branch maintains comprehensive account books for recording their transactions; therefore, a separate trial balance of each branch can be prepared. The head office maintains one ledger account for each such branch, where in all transactions between the head office and the branches are recorded.
A debit balance in the Branch Account should always be equal to the net assets at the branch. The important thing to remember, when independent sets of accounts are maintained, is that the branch and head office books are connected with each other only through the medium of the Branch and the Head Office Account which are converse of each other. Also, when the accounts of branch and head office are consolidated, both the Branch and Head Office Accounts will be eliminated
Now, foreign branches generally maintain independent and complete record of business transacted by them in currency of the country in which they operate. Thus, problems of incorporating balances of foreign branches relate mainly to translation of foreign currency into home currency. This is because exchange rate of home currency may not stable in relation to foreign currencies due to international demand and supply effects on various currencies. The accounting principles, which apply to inland branches, also apply to a foreign branch after converting the trial balance of the foreign branch in the home currency.
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