What Is Branch Accounting?

What Is Branch Accounting?

Let me explain branch accounting directly: it's a bookkeeping system where you maintain separate accounts for each branch or operating location in your organization. You'll see this in geographically dispersed corporations, multinationals, and chain operators, as it gives you greater transparency into transactions, cash flows, and the overall financial position and performance of each branch.

Branch accounts can also mean records produced individually to show performance across different locations, with the actual accounting handled at corporate headquarters. But usually, when I talk about branch accounting, it refers to branches keeping their own books and then sending them to the head office to combine with other units.

How Branch Accounting Works

In branch accounting, treat each branch—defined as a geographically separate operating unit—as an individual profit or cost center. Each one has its own account where it records items like inventory, accounts receivable, wages, equipment, expenses such as rent and insurance, and petty cash.

Just like any double-entry bookkeeping system, the ledger tracks assets and liabilities, debits and credits, and ultimately profits and losses for a set period.

Technically, the branch account is a temporary or nominal ledger account that lasts for a designated accounting period. At the end of the period, the branch tallies its figures and arrives at ending balances, which you then transfer to the appropriate head office or head department accounts. The branch account ends with a zero balance until the next accounting period begins.

Branch Accounting Methods

You have several methods for keeping branch accounts, depending on the nature and complexity of your business and how autonomous the branch is. The most common ones are the debtor system, income statement system, stock and debtor system, and final accounts system.

Where Branch Accounting Applies

You can use branch accounting for a company's operating divisions, which often have more autonomy than branches, as long as the division isn't legally set up as a subsidiary. Remember, a branch isn't a separate legal entity, though it might be called an 'independent branch' if it keeps its own books.

Branch accounting doesn't apply to departments, which are usually in the same physical location, even if they have their own accounts. By contrast, a branch is in a different geographic location and operates as a separate entity.

Fast Fact

Branch accounting is a common practice for businesses that operate in different geographic locations.

History of Branch Accounting

Though it might seem tied to modern chain stores and franchises, branch accounting has deep roots. Venetian banks used a form of it as early as the 14th century. Ledgers from a firm of Venetian merchants around 1410 show efforts to account for overseas and home accounts. Luca Pacioli's 'Summa de Arithmetica' from 1494, the first accounting textbook, even devotes a chapter to it.

By the 17th century, German counting-houses and other businesses widely used branch accounting. Moravian settlements in the 13 original American colonies applied it to their books in the mid-1700s.

Advantages and Disadvantages of Branch Accounting

The main advantages of branch accounting are better accountability and control, as you can closely track profitability and efficiency for different locations.

On the downside, it may add expenses in terms of manpower, working hours, and infrastructure. You need a separate account coding structure for each operating unit, and it might be necessary to appoint branch accountants to ensure accurate reporting and compliance with head office procedures.

What Types of Businesses Use Branch Accounting?

Branch accounting is used in many industries, but it's common in corporations with geographically dispersed branches, such as business chains and multinational corporations.

What Are Some of the Methods Used in Branch Accounting?

Branch accounting methods vary based on business nature, complexity, and branch autonomy. Common ones include the debtor system, income statement system, stock and debtor system, and final accounts system.

Why Do Companies Use Branch Accounting?

Companies use branch accounting to closely track profitability and efficiency at each location, providing better financial accountability and control.

The Bottom Line

Branch accounting is a practical bookkeeping method for businesses with branches or geographically disparate locations. It keeps separate accounts for each to allow greater monitoring, transparency, and accountability over financial transactions and performance. It differs from departmental accounting because departments usually share the same physical location.