8 Different Types of Branch Accounting (Explained)

Businesses often operate in multiple locations or branches, each functioning as a distinct unit with its own financial transactions and operations. This complexity gives rise to the necessity of effective branch accounting, a system that ensures accurate record-keeping, financial transparency, and efficient decision-making.

Branch Accounts have for their purpose the recording of the transaction of branches, Whether they relate to dealing with the head office, with outsiders, or to dealing with different branches of the same concern. Thus, As a general statement, it may be the side where a section of a business is segregated physically from the main section it is a branch.

Branch accounting refers to the practice of maintaining separate accounting records for individual branches of an organization while consolidating their financial data into the parent company’s accounts.

In other words, if the location of activities is separated from the main place of operation, that may be said to be ahead office and a branch.

Different Types of Branch Accounting

Branches can be classified into two types:

1. Dependent Branches:

The term dependent branch means a branch that does not maintain its own set of books. All records have to be maintained by the head office in case of a dependent branch.

Thus, The head office may keep accounts of the branch according to any of the following methods:

1. Debtors System.
2. Stock and Debtors system.
3. Final Accounting System.
4. Wholesale Branch system.

2. Independent Branch:

An independent branch means a branch, which maintains its own set of books.

Such a branch can either be a home branch or a foreign branch.

The method of according is the same in both cases except that in the case of a foreign branch, The trial balance sent by the foreign branch is to be converted into the currency of the country of the Head Office.

(A). Home Branch

Such a branch keeps a complete set of its books. It may also purchase goods from outside parties besides receiving goods from the head office.

It prepares its own trial balance and final accounts and sends its copies to the head office for their incorporation in the head office books.

Thus, It maintains a head office account in its books this is of the nature of a personal account.

(B). Foreign Branch

In the case of a foreign branch, the accounting procedure is the same as in the case of a Home Branch.

On receipt of the trial balance from the foreign branch, the head office will scrutinize it and pass necessary entries for goods in transit, cash in transit, and other adjustments as may be necessary.

The trial balance of the foreign branch will have to be converted into home currency in the following manner.

3. Centralized Branch Accounting:

Centralized branch accounting is a common approach where all accounting activities, including record-keeping and financial reporting, are managed by the parent company at a central location.

Each branch conducts its operations independently but sends its financial data to the central office for consolidation. This method offers several benefits, such as consistent reporting standards, centralized control, and reduced duplication of tasks.

Advantages:

• Uniformity: Centralized branch accounting ensures uniformity in financial reporting across all branches, as they follow a standardized set of procedures and reporting formats.
• Control: The central office maintains greater control over financial activities, enabling quicker decision-making, resource allocation, and risk management.
• Cost-Efficiency: Resources can be allocated more efficiently, as tasks like hiring specialized accountants can be centralized, reducing costs for individual branches.

Challenges:

• Communication Delays: The need to transmit financial data to the central office can result in communication delays, potentially hindering real-time decision-making.
• Lack of Local Autonomy: Branch managers might feel disempowered due to limited autonomy in financial matters, which could impact their motivation and accountability.

4. Decentralized Branch Accounting:

In contrast to centralized accounting, decentralized branch accounting assigns a considerable degree of financial autonomy to individual branches.

Each branch maintains its own accounting records, prepares financial statements, and handles its finances independently. However, these branch-level records are later consolidated at the central office for a holistic view of the organization’s financial health.

Advantages:

• Local Autonomy: Branch managers have greater control over financial decisions, allowing them to tailor strategies to their specific market conditions and needs.
• Quick Decision-Making: Decentralized branches can respond rapidly to changing market conditions, adapting their financial strategies without waiting for central approval.
• Motivation: Branch managers are more accountable for their financial performance, as their decisions have a direct impact on their branch’s results.

Challenges:

• Inconsistency in Reporting: Because each branch follows its own accounting practices, there might be inconsistencies in financial reporting, making consolidation and comparison challenging.
• Risk of Inefficiencies: Duplication of tasks, such as hiring separate accounting personnel for each branch, can result in inefficiencies and increased costs.
• Standardization Issues: Ensuring compliance with standardized accounting principles and procedures might be challenging across multiple branches.

5. Foreign Branch Accounting:

When a company operates branches in different countries, foreign branch accounting comes into play. This type of branch accounting involves dealing with currency exchange rates, international taxation, and compliance with diverse accounting standards.

Advantages:

• Global Reach: Foreign branches provide access to international markets and customer bases, potentially leading to increased revenue streams.
• Diversification: Operating in multiple countries can help mitigate risks associated with economic downturns in a single market.

Challenges:

• Currency Fluctuations: Exchange rate fluctuations can impact the translation of financial data from foreign branches into the parent company’s reporting currency, affecting reported results.
• Regulatory Complexities: Different countries have varied accounting and taxation regulations, requiring a deep understanding of local compliance requirements.
• Cultural and Language Barriers: Communication and understanding issues can arise due to cultural and language differences, affecting efficient financial management.

6. Departmental Branch Accounting:

Departmental branch accounting involves treating each department within a branch as a separate accounting unit. This method provides insights into the financial performance of individual departments, enabling better resource allocation and performance assessment.

Advantages:

• Granular Insights: By tracking department-specific financial data, management can identify areas of strength and weakness within the organization.
• Resource Allocation: Efficient allocation of resources becomes possible as management can direct funds to departments with the highest potential for growth.

Challenges:

• Complexity: Maintaining separate accounting records for each department within a branch can be complex and time-consuming.
• Interdepartmental Transactions: Balancing transactions between departments might lead to complications and discrepancies in financial reporting.

7. Retail Branch Accounting:

Retail branch accounting is primarily relevant for businesses operating in the retail sector with multiple store locations. This type of branch accounting focuses on managing sales, inventory, and cash transactions specific to each store.

Advantages:

• Inventory Management: Retail branch accounting helps optimize inventory levels by tracking sales and demand patterns for different store locations.
• Profit Analysis: By assessing the profitability of individual stores, management can make informed decisions about expansion, closure, or remodeling.

Challenges:

• Data Volume: With numerous transactions occurring daily, managing and reconciling sales, inventory, and cash data from various branches can be overwhelming.
• Employee Training: Ensuring that employees at each store follow consistent accounting practices can be challenging.

8. Online Branch Accounting:

In the digital age, online businesses often have virtual branches in the form of e-commerce websites or online platforms. Online branch accounting involves managing transactions and financial data associated with these digital storefronts.

Advantages:

• Global Reach: Online branches can cater to a worldwide customer base, providing an opportunity for rapid expansion.
• Real-Time Tracking: Online transactions can be tracked in real-time, allowing for immediate insights into sales and financial performance.

Challenges:

• Cybersecurity: Online branches are vulnerable to cybersecurity threats, making it essential to invest in robust security measures to protect financial data.
• Technology Upkeep: Managing and updating online platforms requires consistent technological investments and expertise.

In Case of Widely Fluctuating or Fairly Constant Rate of Exchange

In case the exchange rate between the two countries is fairly constant, a fixed rate may be adopted for the convention of branch balance in the home currency.

In such a case, all balance appearing in the Trial balance is converted at a fixed rate with the following exceptions:

• Remittances from the head office to the branch will be converted at the rate at which there were effected from the head office and remittances from the Branch to the Head office will be converted at the rate at which they have been actually received.
• The balance in the Head Office Account in the branch book will be converted into the home currency in an amount equal to the amount appearing in the branch account in the head office books.
• Goods from the Head Office to the Branch will be converted at the value usually available in the home currency in the head office books.

Moderately Fluctuating Rate of Exchange

In case there are moderate fluctuations in the rate of exchange, the following rules may be followed for the conversion of the branch account’s Trial balance into the Home currency.

1. Fixed Assets

The fixed assets may be converted at the rate ruling on any of the following dates:

1. At the date of the contract.
2. The date of delivery.
3. At the date of payment.
4. At the date of remittance of remittances for the purpose.

2. Fixed Liabilities

There may be converted at the prevailing on any of the following dates

1. At the date of the contract.
2. When liability arose.

3. Transfer of Goods

Any of the following dates may be adopted:

1. At the date of receipt.
2. The date of dispatch.
3. At the date, the customer would be debited.

4. Current Assets and Liabilities

They are converted at the rate ruling on the date of the end of the accounting period.

5. Remittances

Remittances from the Head Office to the branch or from the Branch to the Head Office should be converted at the rates at the time when the remittances were sent to the branch or received by the Head Office as the case may be.

6. Revenue Items

These will be converted at the average rate ruling over the whole period except for the following:

1. Depreciation: It should be converted at the rate at which the fixed assets to which it relates have been converted.
2. Provision for bad Debts: They should be converted at the rates applicable to debtors.
3. Opening and Closing Stock: Opening stock should be converted at the prevailing at the beginning of the accounting year.

The closing stock should be converted at the prevailing at the end of the accounting year.

However, the head office men decided to adopt a fixed rate for the conversion of goods from the Head office or from the branch to the head office. In such cases, they should be converted at a fixed rate.

7. Head Office Account

This can be taken as equivalent to the amount appearing in the Branch Accounts in the head office books.

Method of Currency Conversion

The Branch Accounts Trial can be converted into the Head office of currency according to any of Two Methods:

1. Detailed Conversion

In the case of this method, each item of the Branch Accounts Trial Balance has been converted into the Head Office Currency according to the rates applicable to different items.

2. Abridged Conversion

In the case of this method, the profit, and loss account of the branch is prepared in the Branch Currency.

Thus, the amount of Net profit or Net loss as shown by the profit and loss account is converted into the Head Office Currency at the average rate of exchange.