Final Account System is a method of maintaining accounts for branch operations where the head office prepares a complete set of financial statements for the branch. This system involves preparing the branch’s trading, profit and loss account, and balance sheet separately from those of the head office. It is used to ascertain the exact financial position and performance of the branch, offering a clear view of its profitability and operational efficiency.
Features of the Final Account System
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Separate Financial Statements
A trading and profit and loss account, along with a balance sheet, is prepared for the branch. These accounts are combined with the head office accounts for consolidated reporting.
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Operational Independence
The branch operates with considerable autonomy, often handling its own purchases, sales, and expenses. It is expected to maintain complete records locally.
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Profit and Loss Evaluation
The branch’s profitability is evaluated separately to assess its contribution to the organization’s overall performance.
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Stock Valuation
Closing stock at the branch is valued and reported to ensure accurate profit calculation.
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Debtor and Creditor Management
Branches maintain detailed records of debtors and creditors, ensuring accountability in credit transactions.
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Periodical Reporting
Branches periodically send financial data to the head office for consolidation and analysis.
- Comprehensive Control
The head office retains overall control while allowing the branch to operate independently within set guidelines.
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Adjustments for Inter-Branch Transactions
Transactions between the branch and head office or other branches are reconciled and eliminated in consolidated accounts.
Process of Preparing Final Accounts:
The preparation of final accounts under this system involves the following steps:
1. Trading Account
The branch trading account is prepared to determine the gross profit or loss. It includes:
- Opening stock: Goods available at the branch at the beginning of the period.
- Purchases and goods sent by the head office: Total stock supplied to the branch.
- Sales: Includes both cash and credit sales.
- Closing stock: Valued at cost or market price, whichever is lower.
2. Profit and Loss Account
The branch profit and loss account determines the net profit or loss. It includes:
- Gross profit: Carried down from the trading account.
- Expenses: Rent, salaries, transportation, and other operational costs.
- Other incomes: Interest or discounts earned by the branch.
3. Balance Sheet
The branch balance sheet showcases the financial position of the branch. It includes:
- Assets: Fixed assets, closing stock, debtors, and cash in hand.
- Liabilities: Branch payables and amounts owed to the head office.
illustrative Example
The following table illustrates the preparation of final accounts for a branch:
Particulars | Amount (₹) | Particulars | Amount (₹) |
---|---|---|---|
Branch Trading Account | – | – | – |
Opening Stock | 20,000 | Sales (Cash + Credit) | 1,00,000 |
Purchases | 50,000 | Closing Stock | 30,000 |
Goods Sent by Head Office | 40,000 | – | – |
Gross Profit c/d | 20,000 | Total | 1,10,000 |
Total | 1,30,000 | – | – |
– | – | – | – |
Branch Profit and Loss Account | – | – | – |
Rent and Utilities | 5,000 | Gross Profit b/d | 20,000 |
Salaries | 10,000 | – | – |
Transportation Costs | 2,000 | – | – |
Net Profit c/d | 3,000 | Total | 20,000 |
Total | 20,000 | – | – |
– | – | – | – |
Branch Balance Sheet | – | – | – |
Liabilities | – | Assets | – |
Creditors | 10,000 | Fixed Assets | 20,000 |
Head Office Account | 40,000 | Closing Stock | 30,000 |
– | – | Debtors | 15,000 |
– | – | Cash in Hand | 5,000 |
Total | 50,000 | Total | 70,000 |
Advantages of Final Account System
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Performance Analysis
Helps the head office assess the profitability and efficiency of each branch.
- Operational Clarity
Maintains detailed financial records for every branch, ensuring transparency.
- Stock and Debtor Management
Provides accurate stock valuation and control over debtors.
- Legal and Tax Compliance
Separate accounts simplify compliance with local regulations and taxation laws.
- Effective Control
Enables the head office to monitor branch operations without interfering with day-to-day activities.
Disadvantages of Final Account System
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Resource Intensive
Preparing detailed accounts for each branch requires significant time and effort.
- Complex Adjustments
Reconciling inter-branch transactions and head office adjustments can be challenging.
- Higher Costs
Maintaining comprehensive records increases administrative expenses.
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Dependence on Branch Reports
Accurate financial reporting relies heavily on timely and accurate data from the branch.
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