What is Branch Accounting – How Does it Work & Why is it Important
Multinational companies maintain operations in different countries. They have branch offices and subsidiaries in each country that are engaged in production, business, operations and manufacturing processes.
As all the branches are located worldwide, accountants need to keep a tab on the financial standing and performance of all branches as per their country of establishment. Branch accounting is the bookkeeping technique that accountants use to deal with several branches at one time.
Read on to know the importance of branch accounting, its benefits and drawbacks.
What is the Meaning of Branch Accounting?
Branch accounting is a double-entry bookkeeping technique which is used by a business or organisation to maintain separate accounts for each operating location or branch. Its goal is to optimise transparency and cash flow and analyse each branch’s performance and financial standing. In a branch accounting system, branches create separate balance sheets, trial balances and profit and loss account statements.
Balance accounts are typically found in multinational organisations, geographically dispersed companies and chain operators. However, after keeping their own books, the branches send them to their head office to combine them with other units.
Why is it Important?
Branch accounting is a useful tool and an important aspect of managing a business. Using branch accounting helps to improve transparency and financial performance of a company. It aids in understanding the profit and loss produced by the branches. Branch accounting also helps us get a clear image of the cash position of the branch while giving an idea about the goods and cash required by the different branches as well.
Knowing the performance and the profitability could help the business analyse and come up with ideas for expansion of business and tips for improvement. This could also help meet the requirements of specific enactments, as each branch account must record all information for audit purposes.
History of Branch Accounting
Though branch accounting seems synonymous with franchise operations and chain stores, it has existed since the Venetian banks of the 14th century. A few records of a Venetian shipping firm dating back to 1410 show evidence of using branch accounting for maintaining overseas and home business records at the same time.
Luca Pacioli’s Summa de Arithmetica (1493), considered the first accounting textbook, has a chapter dedicated to branch accounting. By the 17th century, it was broadly used by the German counting houses. Moravian settlements also used it during the 1700s.
Today, multinational companies are engaged in branch accounting as they have to maintain the finances for operations that are carried out in multiple countries.
How Does Branch Accounting Work?
In this technique, the branch and head offices are treated as separate entities, and their accounts are managed separately. Each branch office is treated as an individual profit or cost centre. Every branch opens its nominal ledger account in which all the account receivables, expenses paid, wages and incomes are noted down by certified internal auditors and financial planners.
In simple words, the branch ledger keeps a tally of all the assets and liabilities, profits and losses and debits and credits for a specific period. At the end of this designated accounting period, the branch tallies its figures and arrives at an ending balance. All the balances are moved to the head office account. This will leave the branch office with zero balance until and unless the following financial year begins.
What are the Types of Branch Accounting?
There are four types of branch accounting which are as follows:
1. Dependent Branch
These branches do not maintain their own set of books. The head office collectively manages its profit and loss along with the balance sheet. The separate branches provide only a few pieces of information like inventory, cash accounting and debtor accounting.
The head office manages the branch accounts using any of the following methods:
- Debtor system
- Stock and debtors method
- Wholesale branches method
- Final accounting method
2. Independent Branch
An independent branch maintains its own books, whether it is an overseas branch or a domestic branch. The technique for calculating the branch accounts is similar in both cases except when it is located in a foreign country. The trial balance received in a foreign currency will be converted to the currency of the country where the head office is located.
3. Foreign Branch
The accounting process is similar to that of a home branch. However, in this case, converting the trial account balance to the home currency is a must. Entries will be issued for transit goods and transit cash after reviewing the trial balance receipt.
4. Home Branch
Home branches have complete control over their books. They can devise their own trial balances and final accounts and later forward the copies of these accounts and balances to the head office to include them in their books. Therefore, an account is present in the records of the head office that is similar to the individual account.
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Examples of Branch Accounting
Let’s understand branch accounting with the help of an example.
A company has a branch office in Chennai. The transaction between the head office and branch of a single year can be calculated in the following way:
| Opening stock of the branch as on January 1 2021 | Rs. 1,000 |
| Debt as of January 1 2021 | Rs. 2,000 |
| Goods sent to branch by headquarters | Rs. 10,000 |
| Goods returned to the head office by the branch | Rs. 50 |
| Credit Sales | Rs. 8,000 |
| Cash Sales | Rs. 5,000 |
| Rent | Rs. 150 |
| Salaries and Wages | Rs. 60 |
| Sundry Expenses | Rs. 40 |
| Cash collection from Debtors | Rs. 7,000 |
| Debtors as of December 31 2021 | Rs. 1,000 |
| Closing stocks as of December 31 2021 | Rs. 1,500 |
After calculating a balance sheet, it can be found that the amount spent on the operation of the branch is equal to the money earned.
What are the Advantages of Branch Accounting?
Here are some of the advantages of branch accounting:
- It helps in understanding the profit and loss borne by every branch.
- Helps in understanding the rent, salary, wages and expenses of each branch individually.
- Guides in understanding the cash position and debtor’s inventory of every branch.
- Analysing the performance and progress of each branch.
- Decision-making becomes easier after analysing the branch’s performance.
- It helps in the proper operation of the branches.
What are the Disadvantages of Branch Accounting?
Mentioned below are some of the disadvantages of branch accounting:
- It involves extra cost and workforce.
- Branch accounting requires a separate manager for every branch, and this can, in turn, lead to mismanagement.
- It might lead to delays in decision-making due to the requirement for extra staff.
- Requires extra infrastructure at each location.
- Converting the trial balance of every foreign branch might not always be possible on time.
Things to Know about Branch Accounting
Listed below are the things you should know about branch accounting:
- Branch accounting is a system where separate books are present for each branch.
- It helps in analysing the performance of each department individually, which helps in taking necessary actions.
- Every branch’s head office is seen as a separate entity.
- However, it increases the costs borne by companies due to increased infrastructure and workforce.
Final Word
On a concluding note, it is clear that companies with several branches at different locations must use branch accounting to remain updated about the financial situation of every branch. This will help a lot in tracking and understanding the performance of a company’s subsidiaries. However, you must be prepared to spend more money to use this method of accounting as it requires extra workforce and infrastructure.
FAQs
Ans. The twelve branches of accounting are financial accounting, cost accounting, tax accounting, managerial accounting, auditing, forensic accounting, fiduciary accounting, project accounting, government accounting, fund accounting, international accounting and political campaign accounting.
Ans. Petty cash is a small amount of cash belonging to the company. It is often kept in hand to bear minor incidental expenses like employee reimbursement or office supplies. In larger companies, each branch has its individual petty cash fund.
Ans. It is a type of managerial accounting that aims to keep a tab on a company’s total cost of production. Cost accounting helps in decision-making of the management. It includes all input costs that include fixed and variable costs. Its types include lean, standard, marginal, and activity-based costing.
Ans. If the branch sells a fixed asset for cash, the proceeds will be remitted to their head office. However, if the branch sells fixed assets on a credit basis, they will get reflected as debtors at the branch when the accounting period closes.
Ans. A branch account is like a nominal account. The main branch of the organisation may send goods to the subsidiaries at selling or cost prices, which will be documented in the books of the branch account.
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