Branching Out
When an enterprise, whether or not for revenue or non-revenue, grows or strategizes growth, it normally opens further areas. Banks, espresso outlets, supermarkets, department shops, eating places, magnificence salons, airways, and even authorities places of work might function in a couple of location, home or international, to cater to the wants of their prospects or clientele.
Such further areas might both be in the type of an company or a department.
Branch or Agency?
Depending on its goals, the enterprise might undertake the type of both a department or an company. Both are a part of a central group and whereas they conduct operations away from their residence workplace, they don’t seem to be a separate authorized entity from the latter.
The key distinction between the two lies of their diploma of autonomy or independence. For occasion, a gross sales company usually doesn’t inventory stock, however solely shows merchandise, takes orders and arranges for supply of the merchandise. In different phrases, the company merely acts on behalf of the residence workplace (H.O.), with the latter dealing with the different points of operations similar to buy of merchandise, promoting, and granting of credit score.
The department, nonetheless, has a better diploma of autonomy and thus operates extra independently of the residence workplace than the company, primarily in the following points:
- Provision of a wider vary of providers to prospects or clientele
- Exercise of better administration resolution-making
- Handling of extra points of enterprise operations, similar to stocking of stock, filling of shoppers’ orders, credit score and assortment
- Maintenance of a separate accounting system
Separate Branch Accounting System
Reflecting this better diploma of autonomy, the department usually maintains its personal separate accounting system, whereas the company doesn’t. In reality, it’s the residence workplace which data all company transactions in the former’s accounting system.
Such upkeep of separate accounting data by the department and the residence workplace facilitates more practical management over operations and permits high administration to raised assess department efficiency and make strategic enterprise selections for the firm.
Accounting for Branch Operations
The accounting transactions recorded by the department are typically of the following varieties:
- External transactions or transactions with events exterior to the firm as a authorized entity (e.g. prospects, suppliers, collectors, utility firms)
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Internal transactions
- inside the department
- with different branches of the firm
- with residence workplace
The recording by the department of its exterior transactions and people which by nature have an effect on solely the department (i.e. inside transactions inside the department) is completed utilizing the common accounts and journal entries. However, in recording the department’s transactions with the H.O., sure intra-firm accounts should be created and used. Likewise, inter-department transactions or transactions of the department with one other department are normally coursed or cleared by means of the H.O. utilizing intra-firm accounts.
At the finish of the accounting interval, the department prepares its personal monetary statements primarily based on the balances of its accounts, however just for inside reporting functions. These department monetary statements nonetheless need to be mixed with these of the H.O. for exterior reporting functions, in such a approach that the ensuing stories replicate the monetary situation and outcomes of operations of the firm as a single entity.
Intra-company Accounts
At the time of the institution of the department, the following typical intra-firm accounts are created in the books of accounts or data of the department and residential workplace:
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Branch Books of Accounts
- “Home Office” account
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Home Office Books of Accounts
- “Investment in Branch” account (one account for every department)
The intra-firm accounts “Home Office” and “Investment in Branch” are reciprocal accounts, that means they’re inversely associated to or reverse one another. The “Home Office” account has a standard credit score stability, whereas the “Investment in Branch” account has a standard debit stability. Whatever approved transaction is recorded in a single account also needs to be recorded in the different account. Provided all transactions are recorded, each accounts ought to have the identical or equal stability.
The “Home Office” account seems in the fairness part of the department stability sheet, whereas the “Investment in Branch” account is proven in the asset part of the H.O. stability sheet. However, in the preparation of the monetary statements of the firm as a complete, these intra-firm accounts are eradicated since they pertain to inside actions which don’t concern the exterior customers of the stories.
Common Intra-company Transactions
The following are the most typical transactions between the department and H.O. that are recorded by each, utilizing the intra-firm accounts talked about above:
- Transfer of property from H.O. to the department and vice versa (e.g. money, mounted property, merchandise stock)
- Recognition of department revenue or loss (after closing of income and expense accounts by the department to its “Income Summary” account)
- Recording of bills incurred by the department however billed to and paid by the H.O. (e.g. buy of workplace provides by the H.O. for the department)
- Allocation of bills by the H.O. that are chargeable to the department (e.g. department’s share of the value of promoting undertaken by H.O. for the firm)
- Inter-branch transactions (e.g. private accounts of department workers for assortment, transfers of mounted property, approved bills incurred by a department worker in one other department)
Reconciliation of Investment in Branch and Home Office Accounts
As mentioned above, the balances of the “Home Office” and “Investment in Branch” accounts ought to be equal or the identical. In actuality, nonetheless, due to timing variations and recording errors, these two accounts hardly ever stability. There is due to this fact a have to periodically put together a reconciliation of those two accounts to find out the reconciling gadgets and report the vital changes by means of applicable journal entries in both or each of the books of the department and H.O.
Branch Accounting and Company Growth
New branches not solely point out that there’s firm progress, however can even propel additional progress. For this progress to be sustained, the data offered by the department’s accounting system should be full, correct and well timed in order that high administration could make the proper enterprise selections at the proper time. After all, “Many would say the information provided by an entity’s accounting system is the most important single source of information for financial decision makers” (Chalmers, Keryn, et al. “Accounting in Action.” Principles of Financial Accounting. 2nd ed. Queensland: John Wiley & Sons Australia, Ltd., 2010. 5. Print).
