Branch accounting definition
/What is Branch Accounting?
Branch accounting involves separately tracking business transactions for each operating unit of a business. By doing so, you can see the financial results, financial position, and cash flows of each operating unit. This information is quite useful for evaluating performance. It is most commonly found in organizations that have a number of geographically dispersed locations.
Types of Branch Accounting
Branch accounting typically involves two main types, which are dependent branch accounting and independent branch accounting. These concepts are explained further below.
Dependent Branch Accounting
In dependent branch accounting, an operating entity has a minimal accounting staff, if any. In this arrangement, most of the accounting is handled by another entity where a comprehensive accounting department is maintained. All transactions pertaining to the dependent branch are sent to the central accounting location for processing. This can be quite a cost-effective arrangement, since it allows a business to concentrate its accounting staff for maximum efficiency of transaction processing. At most, a dependent branch might have a few people at the bookkeeper level, who handle local transactions that are more effective to process on the spot.
Independent Branch Accounting
Independent branch accounting is a system in which a branch maintains its own complete set of accounting records, operating almost like a separate business unit. The branch is responsible for recording all financial transactions, including sales, purchases, expenses, assets, and liabilities, and it prepares its own trial balance and financial statements. This autonomy allows the branch to manage its operations more efficiently, especially if it is located in a different region or country where local regulations or currency differences apply. Periodically, the branch submits its financial reports to the head office, which consolidates them into the overall company accounts for a complete financial picture. Independent branch accounting is typically used by larger organizations with multiple locations that require decentralized management and greater operational control.
Disadvantages of Branch Accounting
Branch accounting can result in a large chart of accounts, since a separate account coding structure must be maintained for each operating unit. Since the chart of accounts must be maintained, branch accounting can require extra staff to be added to the accounting department. Consequently, it should only be used if management intends to take concrete actions as a result of the information produced by the system.