Independent Branches and Foreign Branches

Independent Branches

Independent Branches are those which make purchases from outside, get goods from Head Office, supply goods to Head Office and fix the selling price by itself Thus an independent Branch enjoys a good amount of freedom like an American Son.

Characteristics of an Independent Branch:

1. Independent Branch keeps a complete set of books. Such Branch gets goods from Head Office and from outside parties. It has its own Bank Account. Thus, the Branch keeps frill system of accounting.
2. It prepares its own Trial Balance, Trading and Profit and Loss Account and Balance Sheet. Copies of these statements are sent to Head Office for incorporating in the Head Office Books.
3. The books contain an Account called “Head Office Account” or “Head Office Current Account” which is credited with everything received from the Head Office and debited with everything sent to Head Office. That is, all transactions relating to Head Office are recorded in this Account. The Head Office Current Account is thus a Proprietorship Account (i.e. Capital Account).

In-spite of the independent status, the Branch cannot function without resources, and the resources, specially at the initial stage, are provided by the Head Office. Thus, the investments made by the Head Office seen from the Head Office Account are a personal Account in nature.

Similarly, the Head Office in its books opens an Account “Branch Current” Account, which is also a running account between the Branch and the Head Office and incorporates all the transactions between Branch and the Head Office.

A special feature is that the Head Office Current Account in the books of Branch and Branch Current Account in the books of Head Office are maintained on a reciprocal basis.

The balance of these Accounts on any date will be equal to the difference between the assets and liabilities at the Branch on that date. The Branch Current Account in the Head Office books and Head Office Current Account in the Branch books show the same but opposite balance on a particular date.

4. There may be inter-branch transactions. That is, goods transferred by one Branch to another Branch of the same Head Office. Such entries have been explained later.
5. On receipt of the accounts and statements by the Head Office, the Head Office reconciles the balances, which is shown in Head Office Account in the Branch books with the Branch Account in Head Office books. Differences are reconciled. This is dealt with separately.

Accounting entries, in the book of Branch, for normal Transactions
1	Purchases made at branch	Purchase Account   To cash/Creditors Account	Dr.
2	Sales affected at Branch	Cash/Creditors Account   To Sales Account	Dr.
3	Payment of expenses at Branch	Expanses Account    To cash Account	Dr.
4	Any income received at Branch	Cash/Bank Account    To concerned income Account	Dr.

1. For goods supplied by head office to branch:

Branch book:

Goods supplied by head office A/C………Dr.

To Head office A/C

(Being receipt of goods)

Head office book:

Branch A/C…………..Dr.

To goods supplied to branch A/C

(Being goods sent to branch)

2. For cash remitted by head office to branch:

Branch book:

Cash A/C…………..Dr.

To head office A/C

( Being cash received)

Head office book:

Branch A/C ……………..Dr.

To cash A/C

(Being cash sent to branch)

3. For goods returned by branch:

Branch book:

Head office A/C…………Dr.

To goods supplied to head office A/C

(Being goods return to head office)

Head office book:

Goods supplied from branch A/C…………Dr.

To Branch A/C

(Being goods returned from branch)

4. For cash remitted by branch to head office:

Branch book:

Head office A/C………….Dr.

To cash

(Being cash sent to head office)

Head office book:

Cash A/C……………..Dr.

To Branch A/C

(Being cash received from branch)

5. For assets purchased by branch on behalf of head office:

Branch book:

Head office A/C ………………Dr.

To cash A/C

(Being purchase of assets)

Head office book:

Branch assets A/C………….Dr.

To branch A/C

(Being assets purchased by branch)

6. For depreciation charged:

Branch book:

Depreciation A/C ……………Dr.

To Head office A/C

(Being depreciation on branch fixed assets)

Head Office book:

Branch A/C……………….Dr.

To branch assets A/C

(Being depreciation of branch fixed assets)

7. For expenses incurred by head office

Branch book

Expenses A/C…………..Dr.

To head office A/C

(Being expenses incurred by head office)

Head office book:

Branch A/C………………….Dr.

To profit and loss A/C

(Being expenses incurred for branch)

Foreign Branches

Foreign branches are independent branches which are operating in foreign countries.

Accounting in respect of Foreign Branches:

Accounting in respect of foreign branches is done in the books of the branch as well as in the books of the Head Office.

Accounting at Branch:

As the foreign branch is an independent branch, it keeps a complete set of books on the double entry system, prepares all the necessary accounts including the account of the Head Office, prepares its own trial balance, Trading and Profit and Loss Account and Balance Sheet. In short, the accounting procedure adopted at a foreign branch is exactly the same as that adopted at an independent domestic branch.

Accounting at the Head Office:

The trial balance received by the Head Office from the foreign branch is in foreign currency. Therefore, before incorporating the items in the trial balance of the foreign branch, the Head Office is required to convert the various items in the trial balance into the currency of the Head Office. Thereafter, it has to incorporate the items in the Converted Branch Trial Balance in its books, prepare the Branch Trading and Profit and Loss account and Balance Sheet and Branch Account.

Rates at which the items in the trial balance of a foreign branch should be converted:

It is true that the items in the trial balance of a foreign branch should be converted into the currency of the Head Office. But the question is at what rates the various items in the trial balance of a foreign branch should be converted. The following points should be borne in mind while converting the items in the Trial Balance of a foreign branch:

1. If the rate of exchange is not subject to wide and frequent fluctuations, all the items in the trial balance (other than remittances and Head Office Account) can be converted at a fixed rate of exchange.
2. If the rate of exchange is subject to wide and frequent fluctuations, then, different rates should be adopted for different items. They are:
3. Opening stock should be converted at the opening rate of exchange (i.e, the rate of exchange prevailing at the beginning of the accounting year).
4. Closing stock should be converted at the closing rate of exchange (i.e., the rate of exchange prevailing on the last day of the accounting year).
5. All the other revenue items (i.e., expenses and incomes, except depreciation on fixed assets and reserve for bad debts, should be converted at the average rate for the year. (In this context, it may be noted that according to the recommendation of the Institute of Chartered Accountants, in the year in which the local currency is devalued, the revenue items should be converted at the closing rate, and not at the average rate.)

Depreciation on fixed assets should be converted at the same rate at which the converted fixed asset is converted

1. Fixed assets should be taken at the same figure at which they (i.e., branch fixed asset) appear in the books of Head Office.

If that figure is not given, the fixed assets should be converted at the rate of exchange prevailing on the date on which the fixed assets were acquired. If that rate is not given, then, the fixed assets should be converted at the opening rate of exchange.

If additions to fixed assets are made on various dates, average date of exchange for the period should be adopted.

1. Fixed liabilities should be converted at the rate of exchange prevailing on the date on which they were contracted. If that rate is not given, then, they should be converted at the opening rate of exchange.
2. All current assets and current liabilities should be converted at the closing rate of exchange.
3. Remittances appearing in the branch trial balance are converted at the actual rates at which they were effected. If they are not given, they should be converted, i.e., taken, at the same figure at which they appear in the Head Office books.
4. Head Office account is converted, i.e., taken at the same figure at which Branch Account appears in the Head Office books,
5. Goods received from Head Office should be converted, i.e., taken, at the same figure at which goods sent to branch appear in the head office books. If that figure is not given, then, the goods received from Head Office should be converted at the average rate of exchange, as it is a revenue item.

However, it should be noted that the converted Trial Balance, generally, does not tally. This is because the different items in the branch trial balance are converted at different rates. The difference in tial balance is taken as Difference in Exchange and is entered in the Profit and Loss Account, either on the debit side or on the credit side.depending upon its nature, if the difference is small. On the other hand, if the difference is fairly large, it is taken as Exchange Fluctuations Account or Exchange Suspense Account and is shown in the Balance Sheet either as an asset or as a liability, depending upon the nature, and is carried forward to be set off against future differences.

After having converted the Branch Trial Balance into head office currency, the Head Office will incorporte the items in the branch trial balance in its books and prepare the Branch Trading and Profit and Loss Account and Balance Sheet and the Combined Trading and Profit and Loss Account and the Balance Sheet, as required.