Independent Branch Accounting

A complete set of accounting books are maintained by an independent branch. They get their goods from the HO as well as from the other parties. It has its own bank account and therefore, it is called a frill accounting. It has its own trial balance, trading and profit and loss account and balance sheet.

After the end of an accounting period and finalisation of accounts, the copies of these statements are sent to the HO. The head office then incorporates the final figures in its books and consolidates the accounts.

Accounting for Independent Branches

A complete set of accounting books are maintained by an independent branch. They get their goods from the HO as well as from the other parties. It has its own bank account and therefore, it is called a frill accounting. It has its own trial balance, trading and profit and loss account and balance sheet.

After the end of an accounting period and finalisation of accounts, the copies of these statements are sent to the HO. The head office then incorporates the final figures in its books and consolidates the accounts. The independent branch maintains an HO Account in its books and credits it with whatever it receives from the HO and debits everything that is sent to the HO.

All the transactions with the HO are all shown in this account. Thus, this account proves to be a capital account. Though the branch has an independent status, it cannot function in- dependently because it depends largely on the HO for all its resources especially the resources given to it in the initial stages at time of commencing the branch.

Therefore, the investments made by the HO in the branch are similar in nature to the personal account. The HO also maintains a branch current account which records the same transactions but has a reciprocal effect of the HO account. Thus, they are equal but have an opposite side balance.

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Methods to Incorporate Branch Transactions

Independent branches have some unique transactions which must be accounted in a certain way. They include:

• Goods in transit
• Cash in transit
• Head office expenses chargeable to branch
• Depreciation on branch fixed assets
• Inter-branch Transactions

These transactions require adjustment entries to be done at the end of the accounting period. This is required because the balances of the books of the HO and branch will not tally due to time slack involved in completing the transaction.

Let us study about adjusting entries to be done in each case.

ADJUSTMENT ENTRIES

The adjustment entries to be made in case of independent branches are as follows:

Goods in transit

When goods are sent by the HO to the branch, the HO debits the branch account immediately. However, the branch credits the HO account only when the goods are received by it. While the goods are in transit, it shows that it has moved out from the HO but not yet received by the branch. This is not a problem in the entire accounting period because it balances not immediately but later on.

When it comes to the closing of the accounting year and the goods are not received then such goods are recorded as goods in transit. There is a debit entry in the branch account of the HO books but no entry in the HO account of the branch books. Therefore, the accounts will not tally and show a difference. If head office decides to pass an adjustment entry, the entry would be made as:

Goods in Transit A/c ……………………. Dr
To Branch A/c
(Being goods in transit)

If the branch decides to pass an adjustment entry, the entry would be:

Goods in Transit A/c ……………………. Dr
To Head office A/c

The adjustment entry has to be made either at the HO or branch but not in both. Usually, it is made in the HO books of accounts.

Cash in transit

To take care of the branch’s expenses, the HO has to transfer cash from time to time. Like goods, the cash transfer entries are made in the books of both HO and branch. When cash is transferred from the HO to the branch, the HO immediately debits the branch account and the branch account cred- its the HO account on receipt of the cash.

However, the transfer does not happen immediately and may take some time. It has to be adjusted when this transfer happens during the closing of the accounting period. Therefore, there would be a debit in the books of head office but no reciprocal entry in the books of the branch. Therefore, either the HO or the branch has to pass an adjustment entry to tally the books.

In case the HO decides to adjust, then the entry would be:

Cash in Transit A/c ……………………. Dr
To Branch A/c

But if the adjustment is made in the branch account then the entry would be:

Cash in Transit A/c ……………………. Dr
To Head Office A/c

This adjustment entry is done either in the HO account or branch account but not both. Usually, it is done in the books of the head office.

Head office expenses chargeable to branch

The expenses of the independent branch are borne by the branch itself. However, the HO may decide to allocate some of its expenses to the branch. For example, the time of the support staff at the branch or any other expenses which the HO thinks incurs majorly for the branch.

The journal entry passed in the books of the HO for allocating the expense to the branch is:

Branch A/c ……………………. Dr
To Expenses
(Being head office expenses chargeable to branch)

In this case, the branch will also have to pass a corresponding entry in its books to record the expense.

Head Office Expenses A/c ……………………. Dr
To Head Office A/c
(Being head office expenses chargeable to branch)

The HO expense is closed like all other accounts by transferring the balance to the profit and loss account at the year-end.

Depreciation on branch fixed assets

The fixed assets accounts are all maintained at the HO accounts. Therefore, all entries related to the assets are done in the books of the HO. For example, the HO purchases a fixed asset for a branch and it debits the branch fixed assets account and credits the cash account.

There is no entry in the branch account unless payment for the asset is made by the branch. In case the branch makes a payment, it claims a remittance for the payment and does not debit the fixed assets account in its books.

Thus, depreciation on such fixed assets has to be done by the branch in its books as the asset is used by the branch and not by the HO. The normal entry for depreciation is done by debiting the depreciation account and crediting the fixed asset account.

But since there is no fixed asset, the entry passed for depreciation is not like the normal entry. It will be made as follows:

Depreciation A/c ……………………. Dr
To Head Office A/c
(Being depreciation on fixed assets)

The HO too needs to make this entry as the fixed assets account is maintained with it and the value of the asset needs to be reduced. So, it passes the entry as below:

Branch A/c ……………………. Dr
To Branch Fixed Assets A/c
(Being depreciation on branch fixed assets)

This is the case where the fixed assets are maintained by the HO. For all the cases where the branch maintains the fixed assets accounts in its books then the normal entry for depreciation must be followed.

Inter-branch Transactions

It is not always that transactions happen between the HO and the branch only. When a business has many branches, transactions may also happen between two or more branches. For example, branch A wants goods from the HO but if the HO is located far away and branch B is nearby and has ample stock, then to save the transportation cost, the HO would suggest branch B to supply goods to branch A.

In such a case, the branch which is transferring the goods will make an entry as though it is returning the goods to the HO and the branch that is receiving the goods will make an entry as though it is receiving the goods from the HO. The entries will be passed as follows:

In the books of the HO:

Receiving Branch, A ……………………. Dr
To Sending Branch B
(Goods transferred from branch A to branch B)

In the books of the sending branch:

Head Office A/c
To Goods Sent to HO A/c ……………………. Dr
(Being goods sent to branch A under instructions from HO)

In the books of the receiving branch:

Goods from HO A/c ……………………. Dr
To Head Office A/c
(Being goods received from branch B under instruction from HO)