Meaning and Uses of Branch Accounting

What is a Branch Accounting?
A branch accounting is a system of accounting where branch transactional activities are kept separate from each other.

 

There are two methods of branch accounting. In the bid to prepare records that provides insight into the activities of the branches of a business organization, management have a choice of two main methods. These are:
a. The head office keeps all the accounting records, or
b. Each branch has its own full accounting system.
Our approach to explaining branch accounting will be to treat these methods separately for easy understanding.

 

Branch AccountsBranch Accounting When Head Office Mains All Accounts
For a business with few branches that sells expensive items, monitoring and checking stock of inventories will not be an issue as the volume of transaction is low. However, this task of monitoring and checking stock will be herculean in a business with many branches selling relatively inexpensive items but in large volume.
The accounting solution to this problem in branch accounting is to record all transactions at the branch in terms selling prices. The accounts are then reconciled in each accounting period- checking to ensure that closing stock is as it should be.
Example 1- (simple scenario where head office keeps all accounts of the branch)
$
Stock on hand at 1 January- at selling price                                              1,200.00
January 10, goods sent to branch by head office@ selling price           12,000.00
January 15, good sold by head office @selling price                               11,000.00
January 21, goods sent to branch by head office @ selling price          8,000.00

 

 

Here, closing stock can be calculated thus:
Opening stock @ January 1st – selling price                                             1,200.00
Add goods sent (12,000.00 + 8,000.00)                                                   20,000.00
Goods available for sell @ branch (selling price)                                     21,200.00
Less goods sold (selling price)                                                                     11,000.00
Closing stock @ 31 January should therefore be (selling price)           10,200.00

 

 

Any difference other than the allowance for deficiency due to the fact that goods may be damaged, or that customers might steal some can be said to be stolen by employees.

 

Assuming that allowance for deficiencies in the above example is $1,200.00, the branch closing stock should be expected to be $9,000.00; anything short of this has to be investigated for possible fraud employing some forensic accounting skills.

 

A business can decide to either use the double column system or the integrated system (stock and debtor system). The double column system is built on the premise of preparing periodic trading account with an extra column that would show the selling prices (just for control and monitoring purpose). The integrated system even introduced further adjustments to take care of the credit sales (if any).

 

 

Branch accounting when Branches Maintains Its Own Full Accounting Records
I have to start by emphasising that this method is rarely used by companies with many smaller branches as the cost of having full fledged accounting department could outweigh the potential benefits of preparing branch accounts in the first place.

 

Because branches needs resources to operate and those resources come from the head office, there is need for proper accountability from both ends. To do this, both the branch and the head office will maintain their respective current accounts.

 

The branch will have the head office as a creditor in its account while the head office will have the branch office as a debtor.

 

The current accounts are used to track stock or resource movement between the branch and head office. Full double entry records are needed both in the branch records and in the head office records in order to correctly deal with this. By double entry I mean that each transaction will have to be recorded twice in each sets of record. There are however some cases when transaction(s) only affects one partly and only the concerned entity will have to do the double entry.

 
5 Uses of Branch accounting
1. Control purposes and risk management
2. Fraud prevention
3. Branch Profitability analysis
4. Monitoring the movement of stock
5. To check if anyone at branch is stealing

Copy Guarded by IamShekhar's WP-CopyGuard.
%d bloggers like this: