Lets say, a company headquartered in Delhi has stores in Mumbai, Kolkata, and Chennai. Each store sells goods, collects cash, and sends updates to Delhi. How do we track what each branch earned, what stock remains, or whether a branch is profitable?
That’s where Branch and Departmental Accounts step in – they bring clarity to scattered operations.
Source: Pixabay
What Are Branch Accounts?
A Branch is a physically separate unit of a business, generally located at a different place from the head office, carrying on similar business operations. Branch accounts record and control transactions of such branches to find out profitability and monitor performance.
Types of Branches
- Dependent Branch: Does not maintain a full set of books. All accounts are maintained by the Head Office. Branch usually sends daily/weekly/monthly reports of sales, expenses, and stock position.
- Independent Branch: Maintains its own set of books, prepares its own trial balance and final accounts, but ultimately sends accounts to the head office for consolidation.
Methods of Branch Accounting
a. Debtors Method
This is the simplest and most common method for small dependent branches. A single Branch Account is maintained in the books of the head office, which acts like a combined Trading and P&L account.
Branch Account Format (Debtors Method):
| Debit Side | Credit Side |
|---|---|
| Opening Stock | Cash Sales |
| Goods Sent to Branch | Credit Sales |
| Expenses Paid by H.O. | Closing Stock |
| Any Losses | Remittances to H.O. |
The balance represents Branch Profit (if credit side > debit side) or Branch Loss.
b. Stock and Debtors Method
This method is used when the head office wants tight control over branch stock and debtors. Separate accounts are maintained for Branch Stock, Branch Debtors, Branch Expenses, and Branch Adjustment.
Key Advantage: It helps detect stock shortages, pilferage, or abnormal losses quickly.
c. Final Accounts Method
Here, full trading and P&L account of the branch is prepared in the H.O. books. All branch expenses, stock, sales, and closing balances are taken to prepare branch-wise financial statements.
Dependent Branch Accounting
When branches are dependent, head office maintains the books. Branch only sends summary data: opening stock, goods received, cash collected, petty expenses, closing stock, etc. Based on this, head office prepares Branch Account (Debtors method) or full branch trading account (Final Accounts method).
Independent Branch Accounting
Independent branches maintain their own books, prepare trial balance and final accounts. At year-end, they send certified copies of trial balance to head office, which then prepares Head Office Account in branch books and vice versa to incorporate results in consolidated accounts.
Inter-Branch Transactions
Sometimes one branch supplies goods to another branch, or one branch collects money on behalf of another. These transactions must be recorded to avoid duplication and ensure correct branch profits.
Journal Entry (in H.O. books):
Branch A Account Dr. To Branch B Account (Being goods transferred from Branch B to Branch A)
Similar entries are passed for cash transfers, expenses paid on behalf of another branch, or adjustment of outstanding balances.
Branch Stock Sent at Invoice Price
Many head offices send goods to branches at invoice price (cost + loading) to keep profit margins secret from branch staff. In such cases, we must remove the loading from unsold stock (opening and closing) to find actual profit.
Illustration:
Goods sent to branch at 20% above cost. Opening stock at invoice price ₹1,20,000, closing stock at invoice price ₹1,80,000. Loading = 20/120 of invoice price.
Calculation:
- Opening Stock Loading = 1,20,000 × 20/120 = ₹20,000
- Closing Stock Loading = 1,80,000 × 20/120 = ₹30,000
Adjustments are made through Branch Adjustment Account or Stock Reserve Account to compute correct branch profit.
Departmental Accounts
When a business has several departments (e.g., Menswear, Womenswear, Kidswear), it prepares separate departmental accounts to assess the performance of each department.
Objectives of Departmental Accounts
- Compare performance of different departments.
- Identify profitable and unprofitable departments.
- Allocate expenses fairly among departments.
- Assist in managerial decision-making.
Departmental Trading and P&L Account Format
| Particulars | Dept. A | Dept. B | Total |
|---|---|---|---|
| Sales | xx | xx | xx |
| Opening Stock | xx | xx | xx |
| Purchases | xx | xx | xx |
| Less: Closing Stock | (xx) | (xx) | (xx) |
| Gross Profit | xx | xx | xx |
| Less: Departmental Expenses | xx | xx | xx |
| Net Profit | xx | xx | xx |
Key Point:
General expenses (e.g., rent, electricity) are allocated based on floor area, machine hours, sales ratio, etc. This ensures fair comparison between departments.
Journal Entries for Inter-Branch Transactions
These are exam favorites. Typical entries:
(1) For Goods Sent from H.O. to Branch: Branch Account Dr. To Goods Sent to Branch Account (2) For Goods Returned by Branch: Goods Sent to Branch Account Dr. To Branch Account (3) For Cash Received from Branch: Cash/Bank Account Dr. To Branch Account (4) For Inter-Branch Transfer: Branch A Account Dr. To Branch B Account
Quick Tips
- Always adjust stock reserve when goods are sent at invoice price.
- Memorize journal entries – they fetch easy marks.
- Understand difference between dependent and independent branches – theory questions often test this.
- Practice preparing combined Trading & P&L for branches and departments.