Branch Account – SS3 Financial Accounting Lesson Note (Second Term)

A branch is a part of an organisation that operates with some degree of independence, usually in a different place from the head office. Branch accounts record the dealings between the head office and its branches. The method used depends on the transactions between them and on whether the head office or the branch keeps the records.

Behavioural objectives

By the end of the lesson, students should be able to:

1. Differentiate between departmental and branch account.
2. Mention and explain the types of branch.
3. State the importance of branch account.

Instructional techniques

• Identification
• Explanation
• Questions and answers
• Demonstration
• Videos from source

Instructional materials

• Videos
• Loudspeaker
• Textbook
• Pictures

What is a branch?

A branch of an organisation, whether business or non-business, can be defined as a part of the organisation operating with some degree of independence. For example, a business may have its head office in one city with several branches in different parts of the country. A branch is created where a section of a business is separated physically from the main section. In other words, if the location of activities is separate from the main place of operation, a relationship is created between the branches and the head office.

The method of accounting for branches depends on the dealings and transactions between the head office and the branches. A branch may be a small retail shop managed by one person, selling only goods sent by the head office. It may also be a foreign branch located thousands of kilometres away from the head office, buying the materials it needs, manufacturing and distributing products in its area, and controlled only to a very small degree by the head office.

What are the types of branch?

For accounting purposes, branches may be divided into three classes:

• Branches for which the whole of the accounting records are kept by the head office.
• Branches which maintain separate accounting records.
• Foreign branches.

How does the head office account for a branch when it keeps the accounts?

This method is used basically when the branches are regarded as sales departments, receiving all the goods they deal in from the head office, which the branch manager must account for. The head office does all the buying and the branch only sells. The branches receive goods from the head office at selling price, and each branch must produce the cash or stock to cover the value of the goods received.

Branch managers are kept under check through reports sent to the head office at regular intervals. The reports give details of goods received and returned to the head office, cash sales, credit sales, cash received from debtors, stock, expenses and debtors.

What are the pricing methods?

A head office can use three pricing methods to charge goods to the branches:

1. Cost price
2. Cost plus a percentage
3. Selling price

Cost price method

The cost price method can be used where goods are perishable or where selling prices are difficult to determine because of fluctuations. The method charges out goods sent to the branch at cost price, and the opening and closing stocks are also taken at cost price.

The major disadvantage of this method is that it lacks the check on the trading activities of the branch which the selling price method imposes.

Cost plus a percentage method

This is regarded as the most effective method of charging goods to the branch. Goods are sent to branches at cost plus a fixed percentage. The head office keeps accounts which disclose the gross profit or loss of the branch. Where the cost plus a percentage at which the goods are charged equals the selling price, the head office also has stock control. In that case, the total goods received by the branch from the head office must equal sales, plus returns to the head office, plus the branch closing stock.

Under the cost plus method, the head office keeps:

1. Branch stock accounts.
2. Goods sent to the branch account.
3. Branch stock adjustment account.

Two methods are used to record and present the accounting entries under the cost plus percentage method:

1. Branch stock adjustment method.
2. Memorandum or double-column method.

Branch stock adjustment method

Using this method, the following accounts are prepared:

• Branch stock account: This account records goods sent to the branch by the head office at the invoice price.
• Branch stock adjustment account: This account records the amount of loading added to the cost of the goods sent to the branch. It is used to ascertain the actual gross profit of the branch.
• Goods sent to the branch account: This account is recorded at the cost price of the goods sent.
• Debtors account: This account records transactions of the debtors.

At the end of the period, the goods sent to the branch account is closed by transferring its balance to the head office purchases account. This transfer relieves the head office trading account of the need to charge for these goods, since they have been fully accounted for in the branch stock account and the branch stock adjustment account. The balance on the adjustment account is transferred to the profit and loss account.

Selling price method

Sometimes the head office sends goods to the branches at selling prices, that is, at the actual prices at which the branches are to sell them. Most proprietary goods are charged and sent to branches using this method.

The method aims to provide adequate checks on branch managers and staff, so that all goods sent to them are fully accounted for.

The head office maintains the following accounts for the branch:

• Branch stock account
• Goods sent to branch account
• Total debtors account
• Expenses account

At balancing time, the balance on the branch stock account represents the closing stock of the branch at selling prices.

How are branches that keep separate account records handled?

At times it is considered expedient for a branch to keep complete financial records at the branch. This may be because:

• The branch is located far from the headquarters.
• Of the nature of the activities of the branch.
• The size of the branch makes it economical for the accounts to be prepared there.

To record the transactions, the connection between the branch and the head office is shown through these accounts:

• Head office current account or head office account
• Branch current account or branch account

At any time, the branch account in the head office books shows the indebtedness of the branch to the head office. The relationship between the head office and the branch is that of debtor and creditor. This is shown by the debit balance of the branch account in the head office books and a corresponding credit balance of the head office account in the branch books.

The current accounts are used for all transactions that supply resources to the branch, as well as transactions involving withdrawals of resources from the branch.

Whatever profit the branch earns does not belong to the branch. It is credited to the head office current account, and any loss is debited to the account. Ultimately, the head office debits the branch current account and credits the profit and loss account.

What are foreign branches?

Foreign branches arise whenever a business has part of its trading and manufacturing activities carried out by one or more branches located in other countries. Separate accounting records are maintained at such a branch, as described earlier.

The features of a foreign branch are:

• The branch account in the head office books is ruled with two columns: one in foreign currency and the other in local currency (i.e. Naira).
• The entries in the foreign currency are memoranda in nature and are necessary for reconciliation with the head office account.
• The branch forwards to the head office a copy of its trading and profit and loss account, its balance sheet and a detailed copy of the head office account.
• The branch assets, liabilities and revenue items are converted at the applicable rate between the country of the branch and the head office.

Evaluation

1. Differentiate between branch and department.
2. Mention and explain the types of branch.
3. State the importance of the branch.

Classwork: As in evaluation. The teacher commends the students positively.

Assignment

1. List the three pricing methods a head office can use to charge goods to its branches.
2. State the disadvantage of the cost price method.
3. List the features of a foreign branch.