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LEARN HOW TO ACCOUNT FOR TRANSACTIONS HAPPENING IN A BRANCH

November 22, 2018

 

 

BRANCH ACCOUNTING FOR DEPENDENT BRANCHES

 

 

  • Here, what we aspire is, to record all the transactions happening at the branches of our company, located anywhere in India.  Branches located outside India are called Foreign Branches and are always considered independent.
     

  • Many type of transactions usually happen at the branch. The transactions could be with outsiders or it could be between the head office and branch.
     

  • Hence all the transactions have to be captured and accounted for. Finally, a profit or loss is determined.
     

  • Branches dependent on Head Office(HO), usually, do not maintain any books of accounts. Even the administration is controlled by HO.
     

  • All decisions including the day to day operations are controlled by a person from the HO. Thus HO knows every tiny bit of things happening at the branch
     

WHAT HAPPENS WHEN BRANCHES ARE DEPENDENT?

  • All goods are supplied by HO. Goods may also be purchased by branch from third parties.
     

  • Goods may be supplied at cost or selling price or invoice price  – Example if the cost of 1 kg of potato chip is Rs.50 for the HO, and say if the HO is transporting 20kgs of potato chips to its dependent branch, then, the total cost of goods supplied is Rs.50*20 = Rs.1000.
     

  • Branch office is not a different entity, it is just another arm of the Head Office, directly controlled by the HO. When branches become dependent, HO always has an eye over its branch and the branch is expected to report its daily transactions to the HO.
     

  • There are so many ways in which the HO can maintain, oversee and have control of operations at the branch.
     

  • For these dependent branches, expenses are met by HO and only petty cash is given to the branch manager to meet expenses. Usually it is very minimal and fixed.
     

  • For dependent branches, usually the recording and monitoring of transactions are done by the HO in one these 4 methods:
     

    • Debtors Method

    • Stock and Debtors Method

    • Final Account Method

    • Wholesale Branch Method.

      Lets try to understand briefly, how the transactions at the branch are accounted under each of the above methods: So here goes the accounting methods adopted by the HO.

       

ACCOUNTING METHODS ADOPTED BY HO TO RECORD TRANSACTIONS AT THE BRANCH:

 

Debtors Method:

  • Under debtors method, the HO keeps the recording the transactions. Usually this method s adopted, when the number of transactions are simple and limited.
     

  • Hence, only one account is maintained in the HO books, to monitor the branch. All assets, liabilities, daily transactions are recorded in the same account, All in one ( hence it will be a combination of personal account and nominal account). Hence this method is not suitable for larger branches having more number of transactions. It is always suited for smaller branches with less transactions.
     

  • What line items you have in the branch account? You will have opening balances and closing balances of all assets, all liabilities, record of all revenues, all expenses ( If you notice here, everything is recorded).
     

  • In this method, we are able to have a control of summary of transactions like Net Cash sales, Cash collected from debtors, Petty cash expenses, petty cash balance etc.
     

Stock and Debtors Method:

  • This method is bit detailed when compared to the debtors method. In case if the HO not only wants the cash sales, credit sales and cash paid by debtors, but also wants to know the returns from them, details on debts gone bad, discount given to customers and other information. Hence, it is more appropriate to open a separate account for it , that is, the debtors account as everything cannot be captured under one branch account.
     

  • By opening a separate bank account, the HO gets details of each and every transactions relating to a line item and will be able to exercise better control over it. This will be suitable if the transactions are varied in nature and are more in number.
     

  • Hence, while using the stock and debtors method, we open a separate account for debtors, expenses, petty cash, branch stock, goods sent to branch thereby diving into the details.
     

  • The advantages of this method is that,

    • It  is elaborate

    • Easy to understand and to have control of transactions (especially when they are huge in volume).

    • Both Gross profit and Net Profit earned can be ascertained unlike in debtors method where only the net profit is ascertained.
       

  • The balance of each branch cash, branch stock and branch expenses, branch debtors are then transferred to the HO P&L account and B/s.

 

 

 

 

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