by Foreign branches refer to business operations of a company that are located in a different country. These branches carry out business activities under the same legal entity as the parent company but operate in a different currency. Accounting for foreign branches can be complex due to currency translation, differing tax regulations, and consolidation requirements. The method used for accounting can affect the financial statements of the parent company, which consolidates the branch’s accounts for financial reporting purposes.
In accounting for foreign branches, the following methods are commonly employed:
- Debtor System
- Stock and Debtors System
- Final Account System
- Branch Account System
Considerations in Accounting for Foreign Branches:
- Foreign Currency Transactions:
Transactions at the branch, including sales, purchases, and expenses, are generally recorded in the local currency of the branch. However, when consolidating the financial statements with the parent company, foreign currency amounts must be converted into the functional currency (usually the parent company’s currency). - Currency Translation:
The most significant aspect of accounting for foreign branches is currency translation. The method of currency translation depends on the financial reporting requirements. The primary methods of translation are:- Current Rate Method: Assets and liabilities are translated at the current exchange rate, while income and expenses are translated at the average exchange rate for the period.
- Temporal Method: Assets and liabilities are translated at historical rates, while income and expenses are translated at the current or average exchange rate.
These methods ensure that the financial statements of the parent company reflect the correct value of assets and liabilities, considering currency fluctuations.
Journal Entries for Various Branch Accounting Systems
| System | Transaction | Journal Entry | Explanation |
|---|---|---|---|
| Debtor System | Goods sent to the branch | Branch Account Dr To Goods Sent to Branch Account |
Records goods sent to the branch as an asset in the branch account. |
| Expenses incurred by the Head Office | Branch Account Dr
To Bank/Cash Account |
Recognizes expenses paid by the Head Office for the branch. | |
| Revenue from sales at the branch | Cash/Bank Account Dr
To Branch Account |
Records revenue collected at the branch and reduces the branch account balance. | |
| Closing stock at the branch | Branch Stock Account Dr
To Branch Account |
Captures the unsold stock held at the branch. | |
| Profit or loss on branch operations | Branch Account Dr (for profit)
To Profit and Loss Account OR Profit and Loss Account Dr To Branch Account (for loss) |
Transfers the branch’s profit or loss to the parent company’s Profit and Loss Account. | |
| Stock and Debtors System | Goods sent to the branch at cost | Branch Stock Account Dr
To Goods Sent to Branch Account |
Records inventory transferred to the branch at cost price. |
| Goods sold by the branch | Branch Debtors Account Dr
To Branch Sales Account |
Captures branch sales as receivables from customers. | |
| Expenses incurred by the branch | Branch Expenses Account Dr
To Bank Account |
Recognizes expenses paid by the branch. | |
| Cash received from branch customers | Cash/Bank Account Dr
To Branch Debtors Account |
Records payments received from branch customers. | |
| Closing stock at the branch | Branch Stock Account Dr
To Branch Account |
Adjusts for the unsold stock at the branch. | |
| Profit or loss from branch activities | Branch Profit and Loss Account Dr
To Profit and Loss Account (for profit) OR Profit and Loss Account Dr To Branch Profit and Loss Account (for loss) |
Transfers branch’s profit or loss to the Head Office accounts. | |
| Final Account System | Goods sent to the branch | Branch Adjustment Account Dr
To Goods Sent to Branch Account |
Adjusts the cost of goods sent to the branch. |
| Branch sales | Branch Debtors Account Dr
To Branch Sales Account |
Records sales made by the branch. | |
| Expenses paid by Head Office | Branch Profit and Loss Account Dr
To Bank Account |
Reflects expenses borne by the Head Office for the branch. | |
| Goods returned by branch | Goods Sent to Branch Account Dr
To Branch Account |
Adjusts for any goods returned by the branch. | |
| Closing stock at branch | Branch Stock Account Dr
To Branch Adjustment Account |
Reflects the value of stock held by the branch at the end of the period. | |
| Transfer of branch profit or loss | Branch Profit and Loss Account Dr
To Head Office Account (for profit) OR Head Office Account Dr To Branch Profit and Loss Account (for loss) |
Consolidates the branch’s financial results into the Head Office accounts. | |
| Branch Account System | Goods sent to the branch | Branch Account Dr
To Goods Sent to Branch Account |
Records goods transferred to the branch. |
| Sales made by the branch | Branch Debtors Account Dr
To Branch Sales Account |
Captures revenue generated by the branch. | |
| Cash received from branch customers | Cash/Bank Account Dr
To Branch Debtors Account |
Reflects payments received from branch customers. | |
| Expenses incurred at the branch | Branch Expenses Account Dr
To Bank Account |
Accounts for expenses incurred by the branch. | |
| Closing stock at the branch | Branch Stock Account Dr
To Branch Account |
Records unsold inventory at the branch. | |
| Settlement of balance with Head Office | Branch Account Dr (for Head Office expenses paid)
To Head Office Account OR Head Office Account Dr (for branch remittance) To Branch Account |
Adjusts mutual settlements between the branch and Head Office for revenue and expenses. |
