What Are The Methods Of Branch Accounting?
Branch Accounting System
A business is often separated into a number of different branches each of which is treated as its own profit center. Branch accounting allows the business to prepare branch trading and profit and loss accounts in order that it can assess the profitability of each of these branches.
The advantages of branch accounting are that the business is able to identify the financial performance of each of its branches. By making comparisons it can identify inefficient branches and make informed managerial decisions about their future. In addition managers and staff can be given responsibility and motivated and rewarded on the basis of branch performance.
It should be noted that branches differ from departments in that they are operated from different locations; for example a retail business might have branches in different cities. In contrast departments are usually operated from the same location.
Recording Branch Accounting Transactions
The simplest method of branch accounting is for the head office to operate a single branch account for each branch. The method is sometimes referred to as the debtors system or direct method system. The method is most often used when there are a small number of branch accounting entries in the books of the head office.
Objectives Of Branch Accounting
To ascertain profit or loss at branch: Every business house wants to measure the performance of its branches separately. Hence, separate records for each branch are necessary. Efficiency or otherwise of a branch can also be measured with the help of its accounting records.
To ascertain true financial position of business: Branch Accounting helps the business to ascertain its true financial position. Accounting records of the assets and liabilities will helps in preparing in the balance sheet which is a mirror of the financial position.
Compliance with statutory requirement: Branch accounts are necessary to meet large requirements with the company law, Income tax laws and other such acts.
To increase efficiency of the branch: Branch accounts are the indicators of the efficiency of the branch. They will indicate the loopholes or drawbacks which can be rectified in time. In this way, branch accounts will be helpful in increasing the efficiency of the branch.
To exercise control over branch: Head Office exercises control only through information supplied by branches to head office. The main source of information is the accounts maintained from branch transactions.
How Branch Accounting Works
In branch accounting, each branch (defined as a geographically separate operating unit) is treated as an individual profit or cost center. Its branch has its own account. In that account, it records such items as inventory, accounts receivable, wages, equipment, expenses such as rent and insurance, and petty cash.
Like any double-entry bookkeeping system, the ledger keeps a tally of assets and liabilities, debits and credits, and ultimately, profits and losses for a set period.
Technically speaking, in bookkeeping terms, the branch account is a temporary or nominal ledger account. It lasts for a designated accounting period. At the period’s end, the branch tallies up its figures and arrives at ending balances, which are then transferred to the appropriate head office or head department accounts. The branch account is left with a zero balance until the accounting process begins all over again with the next accounting period or cycle.
Branch Accounting Methods
There are several different methods for keeping branch accounts, depending on the nature and complexity of the business and the operational autonomy of the branch. The most common include:
- Debtor system
- Income statement system
- Stock and debtor system
- Final accounts system
Types of Branches
#1 – Dependent Branch
Dependent branches are those branches that do not maintain separate books of accounts; ultimately, there profit & loss statement and Balance sheets are collectively managed by the Head office only. Only a few pieces of information have been maintained by branches separately, like Cash Accounting, Debtors Accounting, and Inventory.
#2 – Independent Branch
Independent branches are those branches that maintain separate books of accounts ultimately, and their profit & loss statement and Balance sheets are maintained separately from their Head office. In this case, the Head office and Branches are treated as separate entities.
Advantages and Disadvantages of Branch Accounting
The primary advantages (and often, the objectives) of branch accounting are better accountability and control since the profitability and efficiency of different locations can be closely tracked.
On the downside, branch accounting may involve added expenses for an organization in terms of manpower, working hours, and infrastructure. A separate account coding structure must be maintained for each operating unit. It may be necessary to appoint branch accountants to ensure accurate financial reporting and compliance with head office procedures and processes.