Branch

When a business, whether for-profit or not-for-profit, grows or plans to expand, it usually opens additional locations. Banks, coffee shops, supermarkets, department stores, restaurants, beauty salons, airlines and even government offices can operate in more than one location, national or foreign, to serve the needs of their clients or clientele.

Such additional locations may be in the form of a agency or a branch.

Branch or agency?

Depending on its objectives, the company can take the form of a branch or agency. Both are part of a central organization and while conducting operations outside their home Office, are not a separate legal entity from the latter.

The key difference between the two lies in their degree of autonomy or independence. For example, a sales agency generally does not store inventory, but only displays merchandise, takes orders, and arranges for the delivery of merchandise. In other words, the agency simply acts on behalf of the central office (HO), and the latter is in charge of the other aspects of the operations, such as the purchase of merchandise, advertising and the granting of credit.

However, the branch has a greater degree of autonomy and therefore operates more independently from the central office than from the agency, mainly in the following aspects:

• Provision of a wider range of services to clients or clientele.

• Exercise of greater managerial decision making

• Handling more aspects of business operations, such as inventory storage, customer order filling, credit, and collections.

• Maintaining an independent accounting system

Independent branch accounting system

Reflecting this greater degree of autonomy, the branch often maintains its own independent accounting system, while the agency does not. In fact, it is the central office that records all the agency’s transactions in the agency’s accounting system.

This maintenance of separate accounting records by the branch and the central office facilitates more effective control over operations and enables top management to better evaluate the performance of the branch and make strategic business decisions for the company.

Branch Operations Accounting

The accounting transactions recorded by the branch are generally of the following types:

• External transactions or transactions with parties external to the company as a legal entity (for example, customers, suppliers, creditors, utility companies)

• Internal transactions

  • inside the branch

  • with other branches of the company

  • with home office

The recording by the branch of its external transactions and those that by nature affect only the branch (that is, internal transactions within the branch) is done using the regular accounts and journal entries. However, when recording the branch’s transactions with the HO, certain intra-company accounts it will have to be created and used. In addition, inter-branch transactions or branch transactions with another branch are generally processed or cleared through the central office using intra-company accounts.

At the end of the accounting period, the branch prepares its own financial statements based on its account balances, but only for internal reporting purposes. These branch financial statements still need to be combined with those of the head office for external reporting purposes, so that the resulting reports reflect the financial condition and results of operations of the company as a single entity.

Intra-company accounts

At the time of the establishment of the branch, the following typical accounts are created within the company in the ledgers or records of the branch and the head office:

• Account book branches

  • “Home Office” account

• Account books of the Ministry of the Interior

  • “Investment in branch” account (one account for each branch)

The intra-company accounts “Ministry of the Interior” and “Investment in a branch” are reciprocal accounts, which means that they are inversely related or opposite to each other. The “Ministry of the Interior” account has a normal credit balance, while the “Investment in the branch” account has a normal debit balance. Any authorized transactions that are posted to one account must also be posted to the other account. As long as all transactions are posted, both accounts must have the same or the same balance.

The “Home Office” account appears in the equity section of the branch’s balance sheet, while the “Branch Investment” account appears in the assets section of the HO’s balance sheet. However, when preparing the financial statements of the company as a whole, these intra-company accounts are eliminated as they correspond to internal activities that do not concern the external users of the reports.

Common transactions within the company

The following are the most common transactions between the branch and the HO that are recorded by both, using the intra-company accounts mentioned above:

• Transfer of assets from HO to branch and vice versa (for example, cash, fixed assets, merchandise inventory)

• Recognition of branch income or loss (after closing the branch income and expense accounts in your “Income Summary” account)

• Record of expenses incurred by the branch but invoiced and paid by the central office (for example, purchase of office supplies by the central office for the branch)

• Allocation of expenses by the HO that are borne by the branch (for example, the branch’s participation in the cost of advertising carried out by HO for the company)

• Transactions between branches (for example, personal accounts of branch employees for collection, transfers of fixed assets, authorized expenses incurred by a branch employee at another branch)

Reconciliation of investments in branch and head office accounts

As mentioned above, the balances of the accounts “Ministry of the Interior” and “Investment in branches” must be the same or the same. However, in reality, due to timing differences and registration errors, these two accounts rarely balance. Therefore, it is necessary to periodically prepare a reconciliation of these two accounts to determine the reconciling items and record the necessary adjustments through appropriate journal entries in one or both books of the branch and the head office.

Branch Accounting and Business Growth

New branches not only indicate that the company is growing, but they can also drive further growth. For this growth to be sustained, the information provided by the branch’s accounting system must be complete, accurate and timely so that senior management can make the right business decisions at the right time. After all, “Many would say that the information provided by an entity’s accounting system is the most important source of information for financial decision-makers” (Chalmers, Keryn, et al. “Accounting in Action.” Financial accounting principles. 2nd ed. Queensland: John Wiley & Sons Australia, Ltd., 2010. 5. Print).