BRANCH ACCOUNTS

1.0 INTRODUCTION

A branch can be defined as a small part of the business operating with some degree of independence. A company may have the head office in Lagos with branches in different part of the country, for example: Kano, Abuja, Enugu, Ibadan, etc branches.

Branch accounts take into consideration the entries of transactions in the books of an organization with different branches. Since the goods are brought by the head office and sent to the branches, there must be proper accountability. The system of accounting to be employed will depend on the nature of trade, location and degree of control exercise by the head office. The head office must be duly furnished with the transactions of the business through the presentation of financial results.

This Unit concentrates on accounting treatments of the transactions involving companies with local branches only. The local branches are expected to be keeping proper records of all their transactions with different parties, not only with the head office. Some companies even request their local branches to be preparing financial statements which are to be sent to the head office for ‘absorption’. But basically, branches have to regularly communicate with the head office in respect of sales of goods, related expenses, etc.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

1. appreciate the meaning of branch account 
2. explain the pricing method involving local branches 
3. appreciate instances where head office keeps the accounts and where 
4. the branches keep separate accounts 
5. understand the accounting treatment of transactions involving local branch 

3.0 MAIN CONTENT

Branch Accounting System

Divisions of Branch Accounting

Branch accounting can be divided into two different types namely:

1.  Where the Head Office keeps the accounts 
2. Where the Branches keep separate accounts. 

Where the Head Office Keeps the Accounts

The purpose behind the accounts is not merely to record transactions so that changes in assets, liabilities or capital can be calculated but also to

attempt, wherever possible, to keep a check by remote control as to whether or not the firm is being defrauded of goods or cash. For a firm with different branches this is obviously of utmost importance.

The head office does all the buying and the branch simply does the selling. Here the accounting for the branches is done by the head office. This is common in large-retail chain store. The branches will receive goods from the head office at selling price and the branches, as a matter of necessity, must produce the stock or cash to cover the value of goods received. The branch manager should be mandated to forward to head office at weekly or other intervals giving details of goods received and return to head office, cash and credit sales, cash received from debtors, expenses, stock, debtors and cash at the end of the period.

3.1.3 Pricing Method

There are three different pricing methods which are used for charging goods to branches: (i) at cost price; (ii) at cost plus a percentage; and (iii) at selling price.

 At Cost Price

The head office can charge goods out to branches at cost price. This method is good when the goods are of perishable nature or there are difficulties in determining the selling price. The exact result of operation can be ascertained when the cost price is used. It is disadvantageous because the check imposed by selling price system is not available. 

 At Selling Price Method

Goods can also be charged to the branch at selling price. The price will be fixed by the head office. The method is usually adopted when the goods are sold at specific price, for example proprietary articles. This method is not good for perishable goods. The advantage is that the head office can keep an effective check on the stock issued to the branch. 

At Cost Plus a Percentage

This is the most effective method of charging goods to the branch. Under this pricing method, the goods will be charged to the branches at cost plus a fixed percentage. This method can provide a reasonably reliable check upon the cash and stock at the branch and the gross profit will be disclosed by the accounts. The branch stock account, goods sent to branch account and branch stock adjustments accounts will be maintained.

Accounting Entries

Two methods of accounting can be used:

1. Double column method otherwise called memorandum column 
2. Branch adjustment method 

 Sending Goods at Cost Price

When a company sends goods to its branch (es) for sales using the cost price method, the accounts to be affected in the head office books and the accounting entries to be made therein are as follows:

3.1.5 Double Column Method or Memorandum

Method Under this system, there is no need to prepare separate branch stock account and branch adjustments account. The two accounts can be combined into memorandum or double column account. The branch stock account will be ruled with two columns. One column records transaction at cost and the other column at invoiced price. The entries in the invoice price form no part of the double entry, but are memoranda just for checking of stock. The following accounts are prepared:

1.  Branch stock accounts with double column 
2.  Goods sent to branch account 
3. Profit and loss account 

3.1.6 Branch Adjustment Account Method

The fully integrated system introduces the idea that gross profit earned by a firm can be calculated to profit margins. Goods sent to the branch are shown at cost price in an account for that purpose, while the Branch Stock Account is shown at selling price. To show one entry at selling price and the other at cost would mean that debit amounts would not equal credit amounts, thus violating double entry principles. To rectify this Branch Adjustment Account is opened and the profit loading on the goods is recorded to preserve the quality of amounts of debit and credit entries. The Branch Stock Account by being entirely concerned with the selling prices acts as a control upon stock deficiencies, while the Branches Adjustment Accounts shows the amount of gross profit earned during the period.

3.2 Where the Branches Keep Separate Accounts

It is sometimes convenient that a branch should do its own accounting. The reasons may be the branch is situated far from the headquarters: the nature of the activities of the branch or that the size of the branch is such that it is economical for it to prepare its own accounts.

A branch cannot operate on its own without funds, as it is the parent firm that provides these in the first instance. The firm will want to know how much money it has invested in each branch and from this the idea

of Branch and Head Office Current Accounts would come up! The relationship between the branch and the head office is seen as that of a debtor/creditor identity. The current accounts are Media where the branch is shown as debtor in the head office records, while the head office is shown as a creditor in the branch records. This is purely for expediency, because as the branch and the head office both belong to the same firm it is apparent that a firm cannot owe money to itself.

The current accounts are used for those transactions that are concerned with supplying resources to the branch or in retrieving resources from there. For such transactions full double entry records are needed both in the branch records and also in the head office records, i.e. each item will be recorded twice in each set of records. Some transactions will, however, concern the branch only, and these will merely need two entries in the branch records and none in the head office records.

5.0 SUMMARY

In this Unit, readers have been taken through the meaning of branch accounting, emphasizing on local branch where transactions take place within the same country. The divisions of branch accounting and the pricing methods are also highlighted to enable the reader understand branch accounting system and how to prepare branch accounts for proper records keeping and financial statements preparation for businesses that have local branches.