Branch Accounts-

A business entity may have  number of divisions. The divisions are known as departments if located under the same roof and branches if located at different places of the same town, country or world. For example, Cottage Emporium has various divisions like garments, furniture, gift items, jewellery, etc. They are located in the same building and so are called departments. E.g ABC Limited has got different functions working under same roof like marketing department, production department etc. Later it opened one unit in Punjab & One in Haryana along with one in Delhi. So, under one roof are departments and the one in Punjab, Haryana & in Delhi  are branches.

The main reasons of keeping branch accounts can be summarised as follows :

1. to find out the profit or loss of each branch for the accounting period:
2.  to ascertain the financial position of each branch at the end of the acc,ounting year; I .
3.  to incorporate the net effect of branch transactions and their assets and liabilities in a firm's final accounts;
4. to estimate requirements of cash and stock for each branch;
5.  to evaluate the progress and performance of each branch;
6.  to calculate the commission for payment to the managers, if based on profit of branch;
7. to assess the prospects for expansion of business in each branch; and
8.  to meet audit requirements.

From accounting point of view the branches can be divided into the following categories:

1) .Branches not keeping full system of accounting;

2) Branches keeping full system of accounting;

3) Foreign branches,

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The branches not keeping full system of accounting are also called dependent branches.

Such branches do not keep complete account books. They simply maintain reward of sales and prepare debtors accounts, if necessary. They are also required to maintain a stock register and furnish weekly or monthly statements giving complete information about stock position and movement of goods to the head office. This enables the head office to keep proper control over stock at branches.

The following are the various methods by which the head office usually keeps branch accounts in its books:

1. Debtors System:

This system is adopted generally for those branches which are fairly small in size. Under this system, the head office simply opens a Branch Account for each branch in which it records all transactions relating to the branch.  The Branch Account is prepared in such a manner that it also helps in ascertaining the branch profit or loss.

Goods may be invoiced to a branch at cost or at selling price (also called invoice price). Accordingly, there are two methods of preparing the Branch Account:

(i)Cost Price Method, and (ii) Invoice Price Method.

 Branch Account is a Nominal Account in nature.

Depreciation of fixed assets:

This is also not shown in the Branch Account because, as per practice, the closing balance of the fixed asset after deducting the amount of depreciation is shown on the credit side of the Branch Account. Thus you should note that while preparing the Branch Account for dependent branches, the following items will be ignored:

1) Petty Cash Expenses

2) Credit Sales

3) Sales Returns

4) Bad Debts

5) Discount Allowed to Debtors .

6) Shortage or Surplus of Stock

7) Depreciation

1.  Final accounting System:

Under this system, the head office prepares Trading and Profit and Loss Account in order to find out profit or loss of each branch and a Branch Account to find out the amount due to, or due from, that branch, In this case, the Branch Account simply acts as a personal account. The profit or loss of a dependent branch can also be worked out by preparing a Memorandum Branch Trading and Profit & Loss Account. This account is prepared  on the basis of cost of goods sent to the branch (not the invoice price). Apart from  the Branch Trading and Profit & Loss Account, the Head Office also maintains the Branch Account. But, under this system, the Branch Account is in the nature of a personal account which shows only the mutual transactions between the head office and the branch, The balance of Branch Account, therefore, represents the net assets of the branch.

1. Stock and debtors System:

 Under this system, the head office does not open any Branch Account. For each branch, it prepares a Branch Stock Account, a Branch Expenses Account, a Branch Adjustment Account and Goods sent to Branch Account in order to find out the profit or loss of each branch.

It maintains a few control accounts for recording the various branch transactions. These accounts usually are :

(i) Branch Stock Account,

 (ii) Branch Debtors Account,

 (iii) Branch Expenses Account,

 (iv) Branch Cash Account,

(v) Goods sent to Branch Account, and

(vi) Branch Fixed Assets Account.

 At the end of the accounting year, it prepares the Branch Adjustment Account and the Branch Profit & toss Account. This system is used only when goods are invoiced at , selling price which the branch is not allowed to vary.

Department Accounting-

Departmental accounts refer to the maintenance of accounts of a business in a manner that makes it possible to ascertain the operational results of each activity, section or department by preparing separate trading and profit & loss account for each one of them. In fact, departmental accounts are nothing more than as many trading and profit & loss accounts as there are the departments.

The main purpose of preparing departmental accounts is to ascertain the financial performance of each section or department. This is considered necessary

 1) to identify the departments which are inefficient and which need better attention; different departments;

2) to control wastage or misuse of resources in different departments;

 3) to compare the performance of different departments, and also of their own with those of the previous years;

 4) to evaluate the contribution of the departmental employees, compensate them suitably by way of commission on departmental profit and motivate them for still better results;

 5) to formulate suitable policies with regard to future business planning for expansion; and

6) to consolidate all operations on more profitable lines which may involve closing down of unprofitable sections and improving the activities of departments which generate' satisfactory profits. Thus, in case of organisations that are engaged in vicious lines of business, the preparation of departmental accounts is almost a financial necessity and a managerial responsibility.

Importance of Departmental Accounts –

The Profit and Loss Account for the organisation as a whole does not reveal effectively the true operational results of different departments within the organisation. In any manufacturing unit, while some departments may be running  in profit, others may suffer a loss. The net result, however, may still be a position of profit and this profit becomes an indicator of successful performance of the entire business. But, in reality, the actual profit of the business could be higher than the one shown by the books of account provided we were able to check the working of weaker departments. A system of departmental accounts, therefore, has the following advantages :

1) It facilitates better control of operations.

2) It fixes responsibility of the departmental managers.

3) It improves the overall efficiency of the business.

4) It shows the profit or loss position of the business in more direct and specific manner.

5) It helps formulation of policies suitable to further expansion.

 6) It rewards departmental managers on the basis of their achievement and results.

7) It offers an opportunity to compare departmental results.

Allocation of expenses-

Whether we maintain separate books of account for different departments or provide additional columns in subsidiary books, the main problem in ascertaining the profit or loss for each department relates to the allocation of business expenses to various departments. There are some expenses which are specifically incurred for a particular department such as salary payable to departmental staff or electricity charges if separate meters have been installed for each department. These can be directly  attributed to the departments concerned and present no problem. The real problem, however, relates to the apportionment of business expenses that are incurred for the business as a whole e.g., advertisement expenses, salary of managers, labour welfare expenses that are incurred for the business as a whole. These are called common (combined) expenses and have to be apportioned among various departments on some rational basis.

Based on the nature of each expense and what obtains in practice, it could be any one of the following bases.

a) Amount of wages incurred by each department;

 b) Number of workers in each department;

 c) Floor area occupied by each department;

 d) Production hours of each department;

e) Sales made by each department;

 f) Capital value of assets held by each department; and

g) Technical estimate

There are however some expenses that cannot be allocated or apportioned to different departments on any suitable basis such as audit fees, director's fees, interest on loan, etc. These need not be taken into account for ascertaining the profit or loss of different departments but may be charged to combined General Profit & Loss Account. Thus, for purposes of departmental accounts, three broad principles of allocating the expenses emerge. These are as follows :

1) Expenses which are directly attributable to a particular department should be charged to that department.

 2) Expenses which are common should be apportioned among different department on some suitable basis.

3) Expenses which are difficult to apportion among different departments on some suitable basis may be charged to General Profit & Loss Account of the business.

Inter- departmental transfers-

The inter-departmental transfer of goods or services may be done either

(a) at Cost Price, or

 (b) at Selling Price.

When goods or services are supplied from one department to another at cost price, the corresponding entries to record the transfer will be made at cost price. This does not involve any adjustment at any stage. However, when goods or services are supplied to another department at selling price, the transfer has to be recorded at a selling price called transfer price. This obviously includes cost as well as profit, In such a situation, if the department to whom goods or services are transferred at selling price has an unsold on unused stock at the end of the accounting period, this involves an element of unrealised profit. This needs an adjustment which will be made by creating a stock reserve with the help of the following journal entry :

 General Profit & Loss A/c Dr. ,

 To Stock Reserve

It may be noted that the unrealised profit is equal to the mount of difference between the selling price and the cost price of the unsold/unused stock.

- When a partnership is dissolved then dissolution account is prepared. **