Branch Accounts Introduction, Meaning, Objectives

22/07/2020 2 By indiafreenotes

In order to increase the volume of profit, it is the primary aim of all business enterprises to increase their volume of sales. For this purpose, many firms open their shops in different parts of the locality/country. (The parent establishment is known as ‘Head Office’ and its offshoots are termed as ‘Branch’.)

Besides, if branches are opened, particularly in developed regions, both the local consumers and the firms are benefited.

Practically, it is an extension of an existing firm. It should be remembered that a branch has its separate existence but does not possess any separate legal entity. That is why, it is said that it is nearly an extension and a profit centre of an existing firm. Needless to say that all activities of the branches are controlled by the Head Office.

According to Sec. 2 (a) of the Companies Act, 1958, a branch (office) is defined as:

“(a) “any establishment described as a branch by the Company, or,

(b) Any establishment carrying on either the same or substantially the same activity as that carried on by the head office of the company, or

(c) Any establishment engaged in any production, processing or manufacture, but does not include any establishment specified in any order made by the Central Govt., u/s-8.

Similarly according to Sec. 8, the Central Govt., may, by order, declare that in the case of any company any establishment carrying on either the same or substantially the same activity as that carried on by the Head Office of the Company, or any establishment engaged in any production, Passing or manufacture shall not be treated as a branch office of the company for all or any of the purposes of the Act.

It has already been stated above that a branch is an extension and a profit centre of the Head Office. Consequently profit of the branch is to be ascertained periodically by the Head Officer this purpose proper accounting should be maintained both in the books of branch as well as in the books of Head Office.

As the activities of branches vary from branch to branch, system of branch accounting depends on their nature, type, size, locality i.e., area of operation etc.

Types of Branches:

There are different types of branches according to their nature and magnitude of operation, although all the branches are operated under the instruction of Head Office. As a result, the system of branch accounting is not the same in all the cases.

However, branches may be classified as:

 (i) Inland Branch (also known as Domestic Branch or Home Branch):

These branches are situated within the territory of the country. These branches do not maintain accounts under Double Entry System. They simply read out periodical statements to Head Office relating to goods received, goods sold, amounts returned, expenses, stock position (both at the beginning and at the end.)

These branches are not allowed to purchase goods from outside market. As all collections are directly remitted to Head Office, naturally, expenses of branches are met by Head Office. In other words, these branches are operated and controlled by Head Office.

Dependent Branch:

Dependent branches are those which do not maintain separate books of account and wholly depend on Head Office. The result of the operation, i.e., profit or loss, is ascertained by Head Office. In other words Head Office maintains and opens a Branch Account in its book in order to find out the result of the operation. Branches supply some related information to the Head Office, i.e., position of cash, debtors stocks, etc.

Independent Branch:

Independent branches are those which maintain complete system of accounting. This particularly happens when their sizes are very large due to various functional complexities. In short, they prepare their accounts independently, i.e., they also purchase and sell goods for cash and credit independently in addition to the goods that are supplied by the Head Office.

They may supply goods to Head Office, pay expenses and deposit cash in their own account like an independent unit. Thus, they maintain their own accounts under Double Account System. That is why they are called Independent Branch.

(ii) Foreign Branch:

These branches are located outside the country. They are operated in the foreign country which has a different currency and, as such, question of rate of exchange will arise. These branches may be of:

(i) Dependent Branch

(ii) Independent Branch depending on the method of accounting.

Objectives of Branch Accounts

(1) To know the profit or loss of each branch

(2) To know the financial position of each branch

(3) To control the activities of the branch

(4) To find out the requirement of goods or cash for each branch

(5) To provide concrete suggestions for the improvement in the working of different branches

(6) To compare the performance of one branch with that of another branch

(7) To meet the statutory requirements