Branch accounting – understanding the basics


When a business, whether for profit or non-profit, grows or strategizes expansion, it usually opens more placements. Banks, coffee shops, supermarkets, department stores, restaurants, beauty salons, airlines and even government offices can operate in more than one place, domestic or foreign, to meet the needs of their customers or clientele.

Such additional placements can either take the form of one agency or to branch.

Branch or agency?

Depending on its goals, the company can use either a branch or an agency. Both are part of a central organization and while performing operations away from theirs home office, they are not a separate legal entity from the latter.

The main difference between the two lies in their degree of autonomy or independence. For example, a sales agency typically does not stock inventory, but only displays items, receives orders, and arranges delivery of the items. In other words, the agency merely acts on behalf of the Home Office (H.O.), with the latter handling the other aspects of operations, such as purchasing merchandise, advertising and providing credit.

However, the branch has a greater degree of autonomy and thus functions more independently of the home office than the agency, primarily in the following aspects:

  • Providing a wider range of services to customers or clients

  • Exercise of major management decision

  • Managing multiple aspects of business operations, such as inventory, fulfillment of customer orders, credit and collection

  • Maintaining a separate accounting system

Separate branch accounting system

Reflecting this greater degree of autonomy, the branch typically maintains its own separate accounting system, while the agency does not. In fact, it is the home office that records all agency transactions in the former accounting system.

Such maintenance of separate accounting material from the branch and the home office facilitates more effective control over operations and enables top management to better assess branch performance and make strategic business decisions for the company.

Accounting for branch operations

The accounting transactions recorded by the branch are generally of the following types:

  • External transactions or transactions with outside parties as a legal entity (e.g., customers, suppliers, creditors, utilities)

  • Internal transactions

    • within the branch

    • with other branches of the company

    • with home office

The registration of the branch of its external transactions and those in nature only affecting the branch (ie internal transactions within the branch) is carried out using the ordinary accounts and journal entries. In recording the branch’s transactions with H.O. however, it certainly is internal company accounts must be created and used. Similarly, branches between branches or transactions in the branch are settled or settled through H.O. using internal company accounts.

At the end of the accounting period, the branch prepares its own accounts based on the balance of its accounts, but only for internal reporting. These branch accounts still need to be combined with H.O. for external reporting, in such a way that the resulting reports reflect the financial condition of the company and results of operations as a unit.

Groups within the company

At the time of setting up the branch, the following typical internal corporate accounts are created in the account books or the registers for the branch and the home office:

  • Office books with accounts

    • “Home Office” account

  • Home office offices

    • “Investment in branch” account (one account for each branch)

The Group’s internal accounts “home office” and “investment in branch” are mutual accounts, which means they are inversely related to or facing each other. The “Home Office” account has a normal credit balance, while the “Investment in department” account has a normal debit balance. Whatever authorized transaction is registered in one account should also be registered in the other account. Provided that all transactions are recorded, both accounts must have the same or equal balance.

The account “Home Office” appears in the equity section of the branch balance sheet, while the account “Investment in branch” appears in the asset section of H.O. balance. When preparing the company’s accounts as a whole, these internal company accounts are eliminated as they relate to internal activities that do not concern the external users of the reports.

Ordinary internal corporate transactions

The following are the most common transactions between the branch and H.O. which are recorded by both using the above mentioned internal accounts:

  • Transfer of assets from H.O. to the branch and vice versa (e.g. cash, fixed assets, inventory)

  • Recognition of branch income or loss (after closing the income and expense accounts of the branch into its “Income Statement” account)

  • Registration of expenses incurred by the branch but billed to and paid by H.O. (e.g., purchasing office supplies by H.O. for the branch)

  • Allocation of expenses by H.O. which can be written off at the branch (e.g., the branch’s share of the cost of advertising that H.O. does for the company)

  • Inter-branch transactions (e.g. personal accounts of branch employees for collection, transfer of fixed assets, authorized expenses incurred by one branch employee of another branch)

Reconciling investments in branch and home office accounts

As discussed above, the “home office” and “departmental investment” accounts must be the same or equal. In reality, however, these two accounts are rarely on balance due to time differences and registration errors. Therefore, there is a need to periodically prepare a reconciliation of these two accounts to determine the poll items and record the necessary adjustments through appropriate journal entries in one or both of the books of the branch and H.O.

Branch accounting and business growth

New branches not only indicate that there is business growth, but can also propel further growth. In order for this growth to be sustained, the information provided by the branch’s accounting system must be complete, accurate and timely, so that top management can make the right business decisions at the right time. After all, “Many would say that the information provided by a business accounting system is the single most important source of information for financial decision makers” (Chalmers, Keryn, et al. “Accounting in Action.” Principles of financial accounting. 2nd Edition Queensland: John Wiley & Sons Australia, Ltd., 2010. 5. Print).