Branch Accounting is a kind of accounting in which distinct accounts are kept for each location of a business or organization. Branch Accounting and its Objectives is to increase responsibility and control since profitability and efficiency can be carefully monitored at the branch level.
Branch accounting and its objective may include additional accounting and infrastructure costs for a company. This is because branch accountants may be required to guarantee accurate financial reporting and conformity with head office policies and procedures.
Branch Accounting Objectives
- To determine the profit or loss generated by each branch.
- To be aware of each branch’s financial situation.
- To exercise control over the branch’s operations.
- To ascertain the amount of products or cash required by each branch.
- To provide specific recommendations for improving the operation of various branches.
- To compare one branch’s performance to that of another branch.
- To adhere to legal regulations.
Types of Branch Accounting
There are several kinds of branches based on the nature and scope of their operations, but all branches work under the supervision of the Head Office. As a consequence, the branch accounting system is not uniform in all instances.
The two types of Branch Accounting are Inland Branch and Foreign Branch.
1) Inland Branch
- Dependent Branch
- Independent Branch
2) Foreign Branch
Method used in Branch Accounting
Branch Accounting is a kind of bookkeeping in which distinct accounts are kept for each of an organization’s branches or operational locations. Typically found in geographically distributed businesses, multinational corporations, and chain operators, it enables better visibility into transactions, cash flows, and the overall financial condition and performance of each branch.
Each branch (designated as a geographically distinct operational unit) is handled as a separate profit or cost center in-branch accounting. Each division of the company has its own account. It tracks inventory, accounts receivable, wages, equipment, operating costs like rent and insurance, and petty cash in that account.
As with any double-entry accounting system, the ledger maintains a running total of assets and liabilities, debits and credits, and eventually, profits and losses for a certain time period.
Technically defined, a branch account and its objective is a temporary or notional ledger account in accounting terminology. It is valid for a certain accounting term. At the conclusion of the period, the branch reconciles its numbers and calculates its ending balances, which are subsequently transferred to the relevant head office or head department accounts. The branch account is left with a zero balance until the accounting period or cycle starts again.
There are many alternative ways for maintaining branch accounts, which vary according to the type and complexity of the company as well as the branch’s operational autonomy. The most prevalent are as follows:
- Debtor system
- Income statement system
- Stock and debtor system
- Final accounts system
Advantage and Disadvantage of using Branch Accounting
The main benefits (and often goals) of branch accounting are increased responsibility and control since the profitability and efficiency of several sites can be carefully monitored.
On the negative, branch accounting may result in an organization incurring more costs related to personnel, working hours, and infrastructure. Each operational unit must have its own account coding structure. Appointing branch accountants may be essential to guarantee accurate financial reporting and conformity with head office policies and procedures.
What is purpose of Branch Accounting?
The primary objective of branch accounting is to determine the branch’s revenue, expenditures, assets, and liabilities. The branch accounts assist the H.O. (Head Office) in determining whether a specific branch is profitable and should remain open.
An independent branch maintains all of its own finances and is able to independently determine its revenue, expenditures, assets, and liabilities. In the case of a dependent branch, the H.O. maintains its accounting, and therefore its revenue, expenditures, assets, and liabilities may be determined only by the H.O.
Additionally, branches are categorized into several categories depending on their location, accounting system, and manner of pricing products supplied to branches by H.O.