What is Branch Accounting? Need, Types

  • Post last modified:1 March 2022
  • Reading time:12 mins read

What is Branch Accounting?

Branch accounting is a bookkeeping system in which separate accounts are maintained for each section of the organisation.

A branch refers to an establishment that carries out the same or substantially the same business activity as carried out by its Head Office (HO). HO refers to the central and principal office of a company where the administration and policy decisions are carried out.

According to Sec. 2 (14) of the Companies Act, 2013, a branch office, in relation to a company, means any establishment described as such by the company.

The decisions made at the HO are communicated to branch offices and they work according to the instructions of the HO. The operations of branches may vary from one to another and so the accounting of branches depends upon the nature, size, geographical location, operations, etc. Branch accounting is an accounting system where separate accounts are maintained for all branch offices of a company.


Need for Branch Accounting

Under branch accounting, the trading and profit and loss accounts for each branch are prepared. These accounts can be compared to establish the profitability of each branch. By evaluating the financial performance of each branch, inefficient branches can be identified and decisions regarding them can be made accordingly.

For instance, a branch making losses for consecutive years can be shut down by the company. In a nutshell, it can be said that branch accounting helps a company to decide whether to expand or close a branch.

In addition, branch accounting also helps to determine cash and stock requirements for each branch along with the amount of stock held by each branch at the end of an accounting period.


Types of Branches

There are various types of branches depending on the way they operate, their geographical location, etc. The most common classification of branches as mentioned below:

Let us now define these types of branches.

  • Inland branches: The branches which are located within the boundaries of a country (where the HO is located) are called inland branches. For example, the branch of SBI at Singtam, Sikkim is an inland branch. They are also called domestic branches and can be further classified as dependent branches and independent branches.

  • Foreign branches: The branches which are located outside the boundaries of a country are called foreign branches. For example, the branch of SBI at Handsworth, Birmingham (UK) is a foreign branch.

Dependent Branches

The HO is responsible for policymaking and policy administration. In addition, the HO is also responsible for decision making and maintaining the books of accounts for dependent branches. In case of dependent branches, they handle operations only on the instructions and monitoring of the head office. The HO prepares the accounts of the dependent branches and ascertains the profit or loss of each dependent branch.

However, to assist the HO in preparing the accounts, the branch maintains the following books:

  • Debtor’s ledger: This ledger gives information related to the amounts receivable from debtors.

  • Stock ledger: This ledger provides information related to the movement of goods and the stock position at the branch.

Features of Dependent Branches

Some important features of dependent branches are as follows:

Purchases of stock

All the stock is provided by the HO to the branch. However, only in emergency situations, the branch is allowed to make purchases from local vendors and the payment is issued from the HO to the vendors.

Sales

Branches sell their goods only on a cash basis. They can sell on credit only when the HO permits them to do so. The amount collected is immediately transferred into the HO’s account or the customer pays directly to the HO.

Expenses

All the expenses of dependent branches are borne by the head office directly. For example, paying rent, salaries, electricity bills, taxes, etc.

Petty expenses

For petty expenses, such as entertaining clients with refreshments, purchasing stationary, photocopying and the branch is issued with a petty cash account and the branch has to maintain the petty cash accounts and submit reports to get a new balance of petty cash.


Independent Branches

When the operations of a branch become large-scale and complex, it is not practical to be dependent on the HO. Branches are made responsible for maintaining their own books of accounts. It is desirable that branches having large-scale and complex operations should be independent and operate as individual units.

All the branches are expected to replicate the activities of the HO and provide the statement of accounts at the end of the financial year to the HO. Such branches that operate as individual units are known as independent branches.

Features of Independent Branches

Some of the important features of independent branches are as follows:

Books of accounts

Independent branches maintain their own books of accounts in the form of trial balance, trading and profit and loss accounts and balance sheet. The copies of all these statements are forwarded to the HO. These figures are then transferred in the books of accounts of the HO.

By using the data received from all independent branches, the HO prepares the consolidated profit and loss account and the consolidated balance sheet which reflects the financial position of the whole company.

Purchases of stock

The independent branch purchases its own stock, but can get some stock from the HO. It may also transfer some to its stock to other branches as required by the HO. The payment of the stock is made by the independent branch itself. The branch manager of independent branches is usually empowered with more authority.

Sales

Sales can be done by either cash or credit and the branch manager has more power to decide this. The payment is received in the branch’s bank account and the revenue of the branch is tracked. At the end of the financial year, revenues are transferred to the HO. The transfer may be made in part or in full.

Expenses

All major expenses and minor petty cash expenses are handled by the independent branch itself. At the end of the financial year, the books of accounts are submitted to the HO.

Audit

The branch accounts are audited to have better control and to verify that all regulatory requirements are being adhered to.


Foreign Branches

A foreign branch represents its parent company in a foreign country. Foreign branches have an ability to do business on its own. Usually, a foreign branch needs to be a limited company but depends on the law of the country, it is operating in. If it is a limited company, the entire shareholding belongs to the parent company.

The most distinctive feature of a foreign branch is that it receives its revenue in foreign currency which must be converted into the currency of the HO in order that the HO can consolidate its books of accounts and prepare overall financial statements.

For example, if an American company has its HO at New York and a branch in India, then the Indian branch would receive all its revenue in Indian rupees. For preparing the final accounts, the American company will have to convert the Indian Branch’s data from Indian Rupee (INR) to United States Dollar (USD). In the case of foreign companies, foreign exchange fluctuations play an important role.

Apart from the need of currency conversion, all other features of foreign branches are similar to independent branch. It means that foreign branches can purchase its own stock and maintain its own books of account.

All major expenses and minor petty cash expenses are handled by the foreign branch itself. A lot of authority is given to the branch heads but the foreign branches are subjected to scrutiny and audit each year for better monitoring.

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