Branch Accounts

Branch accounting is a bookkeeping system in which separate accounts are kept for each branch or operating location of an organization. Branches are often geographically dispersed, and the accounting system allows the Head Office (HO) to monitor their performance individually.

Objectives of Branch Accounts

The primary reasons for maintaining branch accounts include:

• Performance Evaluation: To determine the profit or loss made by each branch separately.
• Control: To exercise strict control over the inventory and cash of the branch.
• Resource Allocation: To identify which branches are performing well and deserve more investment or expansion.
• Inventory Management: To monitor stock levels and prevent wastage or pilferage.
• Statutory Requirement: In some cases, to comply with local tax and legal requirements for specific regions.

Classification of Branches

Branches are generally classified into two types:

• Dependent Branches: These branches do not maintain a full set of books. All accounting records are maintained by the Head Office. They usually sell goods supplied only by the HO.
• Independent Branches: These branches maintain their own complete set of accounting records, including a double-entry system. They may purchase goods from outside suppliers.

Branch Accounts in the Head Office Books

Depending on the nature of the branch, the HO may use different methods to record transactions:

1. The Debtors System (Cost Price Method)

This is commonly used for dependent branches. The HO opens a Branch Account for each branch. It is a nominal account where:

• Debit side: Opening assets (stock, debtors, petty cash), goods sent to branch, and expenses paid by HO.
• Credit side: Remittances received from branch, closing assets, and goods returned to HO.
• The balance represents Profit or Loss.

2. The Stock and Debtors System

This system provides more detailed control. It involves opening accounts like Branch Stock Account, Branch Debtors Account, Branch Adjustment Account, and Branch Expense Account.

Loading and Invoice Price

Often, the Head Office sends goods to the branch at Invoice Price (IP), which is Cost + a Mark-up (Loading). This is done to keep the actual profit margin secret from branch employees.

Formula: Invoice Price = Cost + Loading (Profit).
To find the profit in the stock: (Rate / 100 + Rate) * Invoice Price.

Reconciliation of Branch and Head Office Books

In independent branches, the Branch maintains a Head Office Account and the HO maintains a Branch Current Account. Ideally, these balances should be equal and opposite. However, differences arise due to:

• Goods-in-Transit: Goods sent by HO but not yet received by the branch.
• Cash-in-Transit: Cash sent by the branch but not yet received by the HO.
• Direct Expenses: Expenses paid by one party on behalf of the other not yet recorded.

Reconciliation Entry: To reconcile, the 'in-transit' items are adjusted. For example, for Goods-in-transit: Debit Goods-in-Transit A/c and Credit Branch Current A/c.