Businesses that use branch accounting methods maintain separate accounts for each branch or location of the company. Basically, businesses use branch accounting to separate the accounts that each of its branches maintains. Companies do this to increase financial transparency and check the cash flow position of the company so as to get a better picture of the financial picture.
In this article, you will learn some general details about branch accounting and how it works for businesses that have multiple branches. Apart from that, you will also get an idea of the types of branches where branch accounting applies. In addition to that, we will share with you the major applications of branch accounting. Finally, we will discuss the major pros and cons of this type of accounting for businesses.
What Is Branch Accounting?
According to Investopedia,
“Branch accounting is a bookkeeping system in which separate accounts are maintained for each branch or operating location of an organization. Typically found in geographically dispersed corporations, multinationals, and chain operators, it allows for greater transparency in the transactions, cash flows, and overall financial position and performance of each branch.”
With the use of branch accounting, businesses maintain separate accounts for each of their branches. The branches of the business are most probably separated by geographical location, or each department of the organization has its own profit and cost centers. Here, each branch prepares separate financial statements, trial balances, profit & loss statements, and balance sheets.
In most cases, multinationals and chain operators resort to this type of accounting. This is because it enables the business to get greater transparency of the business processes like transactions, cash flow, and the overall financial position. This helps in getting a better idea of how the branch is performing.
In some cases, branch accounting is also the records that every branch of the company produces to show its performance. On the other hand, the corporate headquarters of the company actually maintains all the accounting records of all the entire branches. However, in most cases, branch accounting refers to the case when each branch keeps its own books and later sends them to the headquarters so as to combine with other units.
How Does Branch Accounting Work?
According to FreshBooks.com,
“Branch accounting works by each branch within an operating unit being treated as an individual profit center. Each branch will have its own account where items such as accounts receivable, inventory, and wages are kept. They are essentially separate branches of the same tree.”
In branch accounting, each branch of the organization (mostly a geographically separate unit) becomes an individual profit or cost center of the company. Each branch of the organization has its own account. In the account, the branch center of the company records items such as inventory, accounts receivable, equipment, wages, petty cash, expenses like rent and insurance, and more.
Each branch account maintains a double-entry bookkeeping system. Here, the company uses a ledger to keep a tally of assets and liabilities, profits and losses, and debits and credits for a particular time period. As it lasts for a designated period of accounting, it is also called a temporary or nominal ledger account.
At the end of each accounting period, the branch of the organization tallies all its figures and arrives at ending balances. The branches then send these balances and records to the head office or the head department of the accounts. Now, the branch has zero balance until the accounting process starts all over again, which mainly starts with the next accounting period or accounting cycle.
What Are The Types Of Branch?
The following are the types of branches based on accounting processes:
1. Dependant Branch
These branches do not have separate accounts. Hence, the head office collectively manages the profit and loss statements as well as the balance sheet of the branch. The branch only supports a few pieces of information like cash accounting, debtors accounting, and inventory.
2. Independent Branch
These branches are independent, maintain separate books of accounts, and do their own accounting. The branches keep their profit & loss statements and balance sheets separate from their head office. Hence, the head office is also kept as a separate entity in this case.
Application Of Branch Accounting
According to Investopedia,
“Branch accounting can also be used for a company’s operating divisions, which usually have more autonomy than branches, as long as the division is not set up legally as a subsidiary company. A branch is not a separate legal entity, although it can (somewhat confusingly) be referred to as an “independent branch” because it keeps its own accounting books.”
However, there is a difference between branch accounting and departmental accounting. Although departments have their own accounts, they still operate from the same geographical location. A branch is, on the other hand, geographically separate from the main office of the company.
What Are The Pros And Cons Of Branch Accounting?
The following are some of the major pros and cons of branch accounting:
Pros Of Branch Accounting
Here are the major pros of branch accounting that will benefit you:
- helps better ascertain the profit & loss.
- knowing the inventory, cash position, expenses, wages, rent, salaries, etc., of each branch.
- helps in making decisions as per branch requirements.
- East tracking of progress and performance.
Cons Of Branch Accounting
Here are a few cons of branch accounting that you must be aware of:
- Need for more workforce.
- Need an individual branch manager.
- Increases the expenses of the company.
- Delay in decision-making.
- Chance of mismanagement due to decentralized operation.
Hope this article was helpful for you in getting a better idea of what branch accounting is and how it works for businesses. This is basically a bookkeeping system where each branch or operating location of a company keeps its own accounts. It is technically a temporary or nominal ledger that lasts for a designated accounting period.
Businesses resort to branch accounting because it provides better control and accountability since the company can better track each location’s profitability and efficiency. Do you have any more information to add regarding branch accounting? Share your thoughts and ideas with us in the comments section below.