Branch accounting is a vital aspect of financial management for companies that operate multiple branches.
It involves maintaining separate accounting records for each branch and consolidating them to prepare the overall financial statements of the organization. Branch accounting helps businesses to assess the performance of each unit, identify areas for improvement, and allocate resources effectively.
In this article, we will explore what branch accounting is all about and why it is important for businesses. We will also discuss its key objectives and how it can help organizations make informed decisions about their operations.
Branch Accounting Objectives
The primary objective of branch accounting is to provide accurate and timely financial information to management so that they can make informed decisions about the branch’s operations. This information is also used by other departments within the company, such as marketing and HR, to help them understand the financial performance of the branch. Other objectives of the branch accounting are as given below:
- 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 number 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 Branches and Foreign Branches.
1) Inland Branch
- Dependent Branch
- Independent Branch
2) Foreign Branch
The methods used in Branch Accounting
Branch accounting is bookkeeping in which distinct accounts are kept for each 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 each branch’s overall financial condition and performance.
Each branch (designated as a geographically distinct operational unit) is handled as a separate profit or cost centre in-branch accounting. Each division of the company has its 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 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
Advantages and Disadvantages 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 the purpose of Branch Accounting?
The primary objective of branch accounting is to determine the branch’s revenue, expenditures, assets, and liabilities. The branch accounts to 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; 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.
For more accounting topics, please check out the Fundamentals of Accounting blog.