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Branch Accounts: Meaning, Definition, Types (Explained)

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Branch Accounts have for their purpose the recording of the transaction of branches, Whether they relate to dealing with the head office, with outsiders, or to dealing with different branches of the same concern.

Branch Accounts Meaning Definition Types
Branch Accounts Meaning Definition Types

Thus, As a general statement, it may be the side that where a section of a business is segregated physically from the main section it is a branch.

In other words, if the location of activities is separated from the main place of operation, that may be said to be ahead office and a branch.

Types of Branches

Branches can be classified into two types.

1. Dependent Branches

The term dependent branch means a branch that does not maintain its own set of books. All records have to be maintained by the head office in case of a dependent branch.

Thus, The head office may keep accounts of the branch according to any of the following methods:

  1. Debtors System.
  2. Stock and Debtors system.
  3. Final Accounting System.
  4. Wholesale Branch system.

2. Independent Branch

An independent branch means a branch, which maintains its own set of books. Such a branch can either be a home branch or a foreign branch.

Related: Departmental Stores Accounts: Explanation, Importance (Explained).

The method of according is the same in both the case except that in case of a foreign branch, The trial balance sent by the foreign branch is to be converted into the currency of the country of the Head Office.

(A). Home Branch

Such a branch keeps a complete set of its books. It may also purchase goods from outside parties besides receiving goods from the head office.

It prepares its own trial balance and final accounts and sends its copies to the head office for their incorporation in the head office books. Thus, It maintains a head office account in its books this is of the nature of a personal account.

(B). Foreign Branch

In the case of a foreign branch, the accounting procedure is the same as in the case of a Home Branch.

On receipt of the trial balance from the foreign branch, the head office will scrutinize it and pass necessary entries for goods in transit, for cash in transit and other adjustments as may be necessary.

The trial balance of the foreign branch will have to be converted into home currency in the following manner.

Related: 12 Important Tools and Techniques of Management Accounting.

In Case of Widely Fluctuating or Fairly Constant Rate of Exchange

In case of the exchange rate between the two countries is fairly constant, a fixed rate may be adopted for the convention of branch balance in the home currency.

In such a case, all balance appearing in the Trial balance is converted at a fixed rate with the following exceptions:

  • Remittances from the head office to the branch will be converted at the rate at which there were effected from the head office and remittances from the Branch to the Head office will be converted at the rate at which they have been actually received.
  • The balance in the Head Office Account in the branch book will be converted into the home currency in an amount equal to the amount appearing in the branch account in the head office books.
  • Goods from the Head Office to the Branch will be converted at the value usually available in the home currency in the head office books.

Moderately Fluctuating Rate of Exchange

In case there are moderate fluctuations in the rate of exchange, the following rules may be followed for the conversion of branch accounts Trial balance in the Home currency.

1. Fixed Assets

The fixed assets may be converted at the rate ruling on and any of the following dates:

  1. At the date of the contract.
  2. The date of delivery.
  3. At the date of payment.
  4. At the date of remittance of remittances for the purpose.

2. Fixed Liabilities

There may be converted at the prevailing on any of the following dates

  1. At the date of the contract.
  2. When liability had arisen.

3. Transfer of Goods

Any of the following dates may be adopted:

  1. At the date of receipt.
  2. The date of dispatch.
  3. At the date of the customer would be debited.

4. Current Assets and Liabilities

They are converted at the rate ruling on the date of the end of the accounting period.

5. Remittances

Remittances from the Head Office to the branch or from the Branch to the Head Office should be converted at the rates at the time when the remittances were sent to the branch or received by the Head Office as the case may be.

6. Revenue Items

These will be converted at the average rate ruling over the whole period except for the following:

Depreciation: It should be converted at the rate at which the fixed assets to which it relates has been converted.

Provision for bad Debts: It should be converted at the rates as applicable to debtors.

Opening and Closing Stock: Opening stock should be converted at the prevailing at the beginning of the accounting year.

The closing stock should be converted at the prevailing at the end of the accounting year.

However, the head office men decide to adopt a fixed rate for the conversion of goods from the Head office or from the branch to the head office. In such cases, they should be converted at a fixed rate.

Related: 15 Essential Elements of Control Process in Management (Explained)

7. Head Office Account

this can be taken equivalent to the amount appearing in the Branch Accounts in the head office books:

Method of Currency Conversion

The Branch Accounts Trial can be converted into the Head office of currency according to any of Two Methods:

1. Detailed Conversion

In the case of this method, each item of the Branch Accounts Trial Balance has converted into the Head Office Currency accordingly to the rates applicable to different items.

2. Abridged Conversion

In the case of this method, the profit, and loss account of the branch is prepared in the Branch Currency.

Thus, the amount of Net profit or Net loss as shown by the profit and loss account is converted into the Head Office Currency at the average rate of exchange.

Now you Know Branch Accounts Meaning Definition Types.

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