Branch Accounting – Understand the Basics

branch

As a business, whether for-profit or not-for-profit, grows or plans to expand, it typically opens additional locations. Banks, cafes, supermarkets, department stores, restaurants, beauty salons, airlines, and even government agencies can operate in more than one location, domestically or internationally, to meet the needs of their customers or clientele.

Such additional places can be either in the form of one Agency or a branch.

Branch or agency?

Depending on the objective, the company can take the form of a branch office or an agency. Both are part of a central organization and conduct their operations outside of it home officethey are not a separate legal entity from the latter.

The main difference between the two lies in their degree of autonomy or independence. For example, a sales agency does not normally maintain stocks, but only displays goods, takes orders and arranges for the delivery of the goods. In other words, the agency merely acts on behalf of the Home Office (HO), while the latter handles the other aspects of the operation such as purchasing goods, advertising and lending.

However, the branch has a higher degree of autonomy and thus acts more independently of the home office than the agency, especially in the following aspects:

  • Providing a wider range of services to customers or clientele

  • Exercise of major management decisions

  • Dealing with other aspects of business operations, such as B. Warehousing, fulfillment of customer orders, credit and collections

  • Maintaining a separate accounting system

Separate branch accounting system

Because of this greater degree of autonomy, the branch office typically maintains its own separate accounting system while the agency does not. In fact, it is the home office that records all agency transactions in the former’s accounting system.

Such maintenance of separate accounting records by the branch office and the home office facilitates more effective control over operations and allows top management to better assess branch office performance and make strategic business decisions for the company.

Accounting for branch operations

The accounting transactions recorded by the branch are generally of the following type:

  • External transactions or transactions with parties outside the company as a legal entity (e.g. customers, suppliers, vendors, utilities)

  • Internal Transactions

    • within the branch

    • with other branches of the company

    • with home office

The recording of the external transactions of the branch and those which by their very nature only affect the branch (ie internal transactions within the branch) is done using the regular accounts and journal entries. However, when recording the branch’s transactions with the HO, sure corporate accounts must be created and used. Likewise, branch-to-branch transactions, or branch-to-branch transactions, are typically settled or settled through the HO using corporate accounts.

At the end of the accounting period, the branch prepares its own financial statements based on its account balances, but for internal reporting purposes only. These branch office accounts have yet to be combined with those of the HO for external reporting purposes such that the resulting reports reflect the financial condition and results of operations of the entity as a unit.

Company Accounts

At the time of incorporation of the branch, the following typical internal accounts are maintained in the books or records of the branch and head office:

  • Branch books of accounts

    • Home Office account.

  • Accounts of the Ministry of the Interior

    • Investment in Branch account (one account for each branch)

The intercompany accounts are Home Office and Investment in Branch mutual accounts, meaning they are inversely related or opposite to each other. The home office account has a normal credit balance, while the branch investment account has a normal debit balance. Any authorized transaction recorded in one account should also be recorded in the other account. Provided all transactions are recorded, both accounts should have the same or the same balance.

The “Home Office” account appears in the Equity section of the branch balance sheet, while the “Investment in Branch” account appears in the Assets section of the HO balance sheet. However, in the preparation of the company’s financial statements, these intercompany accounts are eliminated as they are internal activities that do not affect the external users of the report.

Common intra-company transactions

The following are the most common transactions between the branch and HO recorded by both using the above corporate accounts:

  • Transfer of assets from HO to branch and vice versa (e.g. cash, fixed assets, inventory)

  • Recognition of branch income or losses (after the branch closes the income and expense accounts in its “Income Summary” account)

  • Recording of expenses incurred by the branch but billed and paid to the HO (e.g. purchase of office supplies by the HO for the branch)

  • Allocation of expenses of the HO that are charged to the branch (e.g. branch’s share of the advertising costs of the HO for the company)

  • Transactions between branches (e.g. personal accounts of branch employees for collections, transfers of fixed assets, authorized expenses incurred by a branch employee in another branch)

Reconciliation of investments in branch and indoor office accounts

As discussed above, the balances of the Home Office and Investment in Branch accounts should be equal or equal. In reality, however, these two accounts rarely balance out due to time differences and recording errors. It is therefore necessary to regularly reconcile these two accounts to determine the reconciliation entries and make the necessary adjustments by making appropriate journal entries in one or both of the branch and HO accounts

Branch accounting and business growth

New branches not only signal corporate growth, but can also drive further growth. For this growth to be sustainable, the information provided by the branch’s accounting system must be complete, accurate and up-to-date so that top management can make the right business decisions at the right time. Finally, “many would say that the information provided by a company’s accounting system is the most important single source of information for financial decision makers” (Chalmers, Keryn, et al. “Accounting in Action”). Financial accounting principles. . . . 2nd ed. Queensland: John Wiley & Sons Australia, Ltd., 2010. 5th printing).