Branch Accounting – Understanding the Basics
Branch or Agency?
Depending on its objectives, the enterprise may adopt the form of either a branch or an agency. Both are part of a central organization and while they conduct operations away from their home office, they are not a separate legal entity from the latter.
The key difference between the two lies in their degree of autonomy or independence. For instance, a sales agency typically does not stock inventory, but only displays merchandise, takes orders and arranges for delivery of the merchandise. In other words, the agency merely acts on behalf of the home office (H.O.), with the latter handling the other aspects of operations such as purchase of merchandise, advertising, and granting of credit.
The branch, however, has a greater degree of autonomy and thus operates more independently of the home office than the agency, primarily in the following aspects:
- Provision of a wider range of services to customers or clientele
- Exercise of greater management decision-making
- Handling of more aspects of business operations, such as stocking of inventory, filling of customers’ orders, credit and collection
- Maintenance of a separate accounting system
Branch Accounting System
A business is often separated into a number of different branches each of which is treated as its own profit center. Branch accounting allows the business to prepare branch trading and profit and loss accounts in order that it can assess the profitability of each of these branches.
The advantages of branch accounting are that the business is able to identify the financial performance of each of its branches. By making comparisons it can identify inefficient branches and make informed managerial decisions about their future. In addition managers and staff can be given responsibility and motivated and rewarded on the basis of branch performance.
It should be noted that branches differ from departments in that they are operated from different locations; for example a retail business might have branches in different cities. In contrast departments are usually operated from the same location.
Types of Accounting / Branches of Accounting
As a result of economic, industrial, and technological developments, different specialized fields in accounting have emerged.
The famous branches or types of accounting include: financial accounting, managerial accounting, cost accounting, auditing, taxation, AIS, fiduciary, and forensic accounting.
- Financial Accounting
Financial accounting involves recording and classifying business transactions, and preparing and presenting financial statements to be used by internal and external users.
In the preparation of financial statements, strict compliance with generally accepted accounting principles or GAAP is observed. Financial accounting is primarily concerned in processing historical data.
- Managerial Accounting
Managerial or management accounting focuses on providing information for use by internal users, the management. This branch deals with the needs of the management rather than strict compliance with generally accepted accounting principles.
Managerial accounting involves financial analysis, budgeting and forecasting, cost analysis, evaluation of business decisions, and similar areas.
- Cost Accounting
Often times considered as a subset of management accounting, cost accounting refers to the recording, presentation, and analysis of manufacturing costs. Cost accounting is very useful in manufacturing businesses since they have the most complicated costing process.
Cost accountants also analyze actual costs versus budgets or standards to help determine future courses of action regarding the company’s cost management.
External auditing refers to the examination of financial statements by an independent party with the purpose of expressing an opinion as to fairness of presentation and compliance with GAAP. Internal auditing focuses on evaluating the adequacy of a company’s internal control structure by testing segregation of duties, policies and procedures, degrees of authorization, and other controls implemented by management.
- Tax Accounting
Tax accounting helps clients follow rules set by tax authorities. It includes tax planning and preparation of tax returns. It also involves determination of income tax and other taxes, tax advisory services such as ways to minimize taxes legally, evaluation of the consequences of tax decisions, and other tax-related matters.
- Accounting Information Systems
Accounting information systems (AIS) involves the development, installation, implementation, and monitoring of accounting procedures and systems used in the accounting process. It includes the employment of business forms, accounting personnel direction, and software management.
- Fiduciary Accounting
Fiduciary accounting involves handling of accounts managed by a person entrusted with the custody and management of property of or for the benefit of another person. Examples of fiduciary accounting include trust accounting, receivership, and estate accounting.
- Forensic Accounting
Forensic accounting involves court and litigation cases, fraud investigation, claims and dispute resolution, and other areas that involve legal matters. This is one of the popular trends in accounting today.
Types of Branches
Branches can be classified into two types.
- 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:
- Debtors System.
- Stock and Debtors system.
- Final Accounting System.
- Wholesale Branch system.
- 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 the case except that in 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, for cash in transit and other adjustments as may be necessary.
5 Accounting Principles
Accounting principles are essential rules and concepts that govern the field of accounting, and guides the accounting process should record, analyze, verify and report the financial position of the business.
Accounting principles are the foundation of accounting according to GAAP.
These principles are used in every step of the accounting process for the proper representation of the financial position of the business.
5 principles of accounting are;
- Revenue Recognition Principle,
- Historical Cost Principle,
- Matching Principle,
- Full Disclosure Principle, and
- Objectivity Principle.