Branch Accounting Methods and Systems for Business Expansion
Understanding Business Branches
A branch is an extension or subdivision of a large business, operating in different geographical locations under the control of a head office.
Example: The Bata Shoe Company often operates branches in various towns and cities.
The Role of the Head Office
The Head Office is the principal place of business that establishes and controls all branches. It provides directions and controls the operations of all branches.
Key Characteristics of a Business Branch
- It is not a separate legal entity.
- It operates as a separate profit center.
- Operations are strictly controlled by the head office.
- It sells the same goods or services as the head office.
- Capital investment is provided by the head office.
- Branches can be classified as dependent, independent, or foreign.
Fundamentals of Branch Accounting
Branch accounting is the process used to maintain the accounting system of a branch.
It helps in:
- Ascertaining the profit or loss.
- Determining the financial position.
- Controlling branch operations effectively.
Objectives of Branch Accounting:
- Assessing the progress and performance of each branch.
- Determining stock and cash requirements.
- Complying with audit requirements.
Classification of Business Branches
- Dependent Branches: These branches do not maintain complete transaction records; they rely entirely on the head office for accounting.
- Independent Branches: These branches maintain their own complete books of accounts and possess more operational autonomy.
- Foreign Branches: These branches operate in different countries, requiring specialized accounting treatment (e.g., currency conversion).
Defining Dependent Branches
Dependent branches typically exhibit the following characteristics:
- They sell goods supplied exclusively by the head office.
- All cash collected is immediately remitted to the head office.
- Major expenses (e.g., rent, salaries) are paid directly by the head office.
- They maintain limited records, usually only a cash book and debtors account.
Accounting Systems for Dependent Branches
The head office can use several methods to maintain accounts for dependent branches:
- Debtors System: The head office treats the branch as a debtor.
- Stock and Debtors System: This system tracks stock and debtors separately (analytical approach).
- Final Account System: This involves preparing final accounts (Trading and P&L) specifically for the branch.
- Wholesale Branch System: This method is specifically used for branches engaged primarily in wholesale operations.
The Debtors System in Branch Accounting
Under the Debtors System, the head office prepares a single ‘Branch Account’ for each branch. This single account effectively combines the Trading Account, Profit & Loss Account, and Balance Sheet items of the branch. This system is generally suitable for small branches.
Charging Goods to Dependent Branches
Goods supplied by the head office to the dependent branch can be charged using two primary methods:
- Cost Price Method: Goods are sent at their original cost price without any profit margin added.
- Invoice Price Method: Goods are sent at a price higher than the cost price (often the selling price).
Cost Price Method: Branch Account Details
When using the Cost Price Method, the Branch Account is structured as follows:
- Debit Side: Includes opening balances of stock, debtors, petty cash, fixed assets, and prepaid expenses.
- Credit Side: Includes remittances to the head office, goods returned by the branch, and closing balances.
Note on Remittances: Remittances to the Head Office consist of cash sales, receipts from debtors, and any other cash collections made by the branch.
The Invoice Price Method (Loading)
Under this method, goods are sent to the branch at a price higher than the cost price, known as the invoice price.
- The difference between the invoice price and the cost price is termed “load” or “loading.”
- This load is included in the valuation of goods supplied, goods returned, and opening/closing stocks.
- Adjustment entries must be made by the head office to remove the load from the accounts to determine the true profit.
Understanding Stock Reserve
When the Invoice Price Method is used:
- The load on opening and closing stocks is typically shown as “Stock Reserve.”
- The load on goods sent to the branch and goods returned by the branch is adjusted through the “Goods Sent to Branch Account.”
Key Accounting Considerations
When using the Invoice Price Method, remember these points:
- Opening stock, closing stock, goods sent, and goods returned are initially recorded at the invoice price.
- The load on these items must be shown on the opposite side (credit side for debit items, debit side for credit items) in the Branch Account to neutralize the profit element.
- The Stock Reserve Account is specifically utilized to record the load on opening and closing stocks.
Stock and Debtors System (Analytical Approach)
This system is typically used when goods are sent at the invoice price and the branch size is large, requiring detailed tracking.
Multiple specialized accounts are maintained by the head office:
- Branch Stock Account
- Branch Adjustment Account
- Branch Debtors Account
- Branch Expense Account
- Branch Profit & Loss Account (P/L)
- Branch Cash Account
- Branch Fixed Asset Account
Branch Stock Account: This account tracks stock at the invoice price. It is debited with opening stock and goods sent, and credited with sales and goods returned. Differences in the Branch Stock Account are treated as surplus or shortage of stock.
Accounting for Independent Branches
Independent branches operate as autonomous units, maintaining complete accounting records internally.
- The independent branch maintains a Head Office Account in its books.
- Conversely, the head office maintains a Branch Account in its books.
- Transactions between the head office and the branch are recorded reciprocally in these accounts.
- At the end of the accounting period, the branch prepares a trial balance and final accounts (Trading, P&L, and Balance Sheet) and submits them to the head office for consolidation.