When an enterprise, whether with regard to profit or non-profit, grows or strategizes expansion, it usually opens additional locations. Banks, coffee stores, supermarkets, department stores, restaurants, beauty salons and spas, airlines, and even government offices may operate in more than one area, domestic or foreign, to cater to the needs of their customers or clients.
Such additional locations may possibly be in the form of an agency or even a branch.
Branch or Agency?
Based on its objectives, the enterprise might adopt the form of either a branch or an agency. Both are part of a central organization and while these people conduct operations away from their home workplace, they are not a separate legal entity in the latter.
The key difference between the 2 lies in their degree of autonomy or even independence. For instance, a sales agency typically does not stock inventory, but only displays merchandise, takes purchases and arranges for delivery from the merchandise. In other words, the agency simply acts on behalf of the home office (H. O. ), with the latter dealing with the other aspects of operations such as buy of merchandise, advertising, and allowing of credit.
The branch, however , has a greater degree of autonomy and therefore operates more independently of the home workplace than the agency, primarily in the subsequent aspects:
Provision of a wider selection of services to customers or clientele
Exercise of greater management decision-making
Handling of more aspects of company operations, such as stocking of inventory, filling of customers’ orders, credit and collection
Maintenance of a separate human resources system
Separate Branch Accounting System
Reflecting this greater degree of autonomy, the branch typically maintains its separate accounting system, while the agency does not. In fact , it is the home office which records all agency transactions within the former’s accounting system.
Such maintenance of separate accounting records by the department and the home office facilitates more effective control over operations and enables top management to better assess branch performance plus make strategic business decisions for your company.
Accounting for Branch Functions
The accounting transactions recorded from the branch are generally of the following forms:
External transactions or transactions with parties external to the company as a legal entity (e. g. customers, suppliers, creditors, utility companies)
within the branch
with other divisions of the company
with home office
It by the branch of its external transactions and those which by nature affect only the branch (i. e. internal transactions within the branch) is done using the normal accounts and journal entries. Nevertheless , in recording the branch’s transactions with the H. O., certain intra-company accounts will have to be created and utilized. Likewise, inter-branch transactions or transactions of the branch with another department are usually coursed or cleared through the H. O. using intra-company accounts.
At the end of the accounting period, the particular branch prepares its own financial statements based on the balances of its accounts, yet only for internal reporting purposes. These types of branch financial statements still have to be combined with those of the H. U. for external reporting purposes, in such a way that the resulting reports reflect the financial condition and results of operations of the company as a single entity.
At the time of the establishment of the branch, the following typical intra-company accounts are created in the books of balances or records of the branch plus home office:
Branch Books of Accounts
“Home Office” account
Home Office Publications of Accounts
“Investment in Branch” account (one account for each branch)
The intra-company accounts “Home Office” and “Investment in Branch” are usually reciprocal accounts, meaning they are inversely related to or opposite each other. The “Home Office” account has a normal credit balance, while the “Investment in Branch” account has a normal charge balance. Whatever authorized transaction is recorded in one account should also end up being recorded in the other account. Provided all transactions are recorded, both accounts should have the same or equivalent balance.
The “Home Office” accounts appears in the equity section of the branch balance sheet, while the “Investment in Branch” account is proven in the asset section of the L. O. balance sheet. However , within the preparation of the financial statements of the company as a whole, these intra-company balances are eliminated since they pertain to internal activities which do not worry the external users of the reviews.
Common Intra-company Transactions
The following are the most typical transactions between the branch and They would. O. which are recorded by both, using the intra-company accounts mentioned above:
Exchange of assets from H. O. to the branch and vice versa (e. g. cash, fixed resources, merchandise inventory)
Recognition of branch income or loss (after closing of revenue and expense accounts by the branch to its “Income Summary” account)
Recording of costs incurred by the branch but billed to and paid by the They would.
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O. (e. g. purchase associated with office supplies by the H. U. for the branch)
Allocation of expenditures by the H. O. which are chargeable to the branch (e. g. branch’s share of the cost of advertising carried out by H. O. for the company)
Inter-branch transactions (e. g. individual accounts of branch employees to get collection, transfers of fixed possessions, authorized expenses incurred by a department employee in another branch)
Getting back together of Investment in Branch plus Home Office Accounts
As discussed over, the balances of the “Home Office” and “Investment in Branch” balances should be equal or the same. In fact, however , because of timing differences and recording errors, these two accounts rarely balance. There is therefore a have to periodically prepare a reconciliation of these two accounts to determine the reconciling items plus record the necessary adjustments through suitable journal entries in either or both of the books of the branch and H. O.
Branch Sales and Company Growth
New divisions not only indicate that there is company development, but can also propel further development. For this growth to be sustained, the data provided by the branch’s accounting program must be complete, accurate and well-timed so that top management can make the ideal business decisions at the right time. After all, “Many would say the information provided by an entity’s accounting strategy is the most important single source of information regarding financial decision makers” (Chalmers, Keryn, et al. “Accounting in Action. inch Principles of Financial Accounting. 2nd ed. Queensland: John Wiley & Sons Australia, Ltd., 2010. 5. Print).