Department Accounting – Understanding the Basics

Branching Out

When an enterprise, whether to get profit or non-profit, grows or strategizes expansion, it usually opens additional locations. Banks, coffee shops, supermarkets, department stores, restaurants, beauty hair salons and spas, airlines, and even government offices may operate in more than one place, domestic or foreign, to cater to the needs of their customers or clientele.

Such additional locations may possibly be in the form of an agency or even a branch.

Branch or Agency?

Depending on its objectives, the enterprise may adopt the form of either a branch or an agency. Both are portion of a central organization and while they conduct operations away from their home workplace, they are not a separate legal entity in the latter.

The key difference between the two lies in their degree of autonomy or even independence. For instance, a sales agency typically does not stock inventory, yet only displays merchandise, takes purchases and arranges for delivery of the merchandise. In other words, the agency simply acts on behalf of the home office (H. O. ), with the latter dealing with the other aspects of operations such as purchase of merchandise, advertising, and granting of credit.

The branch, however , has a greater degree of autonomy and thus operates more independently of the home office than the agency, primarily in the subsequent aspects:

Provision of a wider range of services to customers or customers
Exercise of greater management decision-making
Handling of more aspects of business operations, such as stocking of inventory, filling of customers’ orders, credit and collection
Maintenance of a separate data processing system
Separate Branch Accounting Program

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

Such repair of separate accounting records by the department and the home office facilitates more effective control of operations and enables top management to better assess branch performance plus make strategic business decisions for that company.

Accounting for Branch Operations

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

External transactions or transactions with parties external to the company as being a legal entity (e. g. clients, suppliers, creditors, utility companies)
Inner transactions
within the branch
with other limbs of the company
with home office

It by the branch of its external dealings and those which by nature affect only the branch (i. e. internal dealings within the branch) is done using the regular accounts and journal entries. However , in recording the branch’s dealings with the H. O., certain intra-company accounts will have to be created and utilized. Likewise, inter-branch transactions or dealings of the branch with another department are usually coursed or cleared with the H. O. using intra-company balances.

At the end of the accounting period, the particular branch prepares its own financial statements based on the balances of its accounts, but only for internal reporting purposes. These branch financial statements still have to become combined with those of the H. O. for external reporting purposes, in a way that the resulting reports reflect the financial condition and results of operations of the company as a single entity.

Intra-company Accounts

At the time of the establishment of the branch, the following typical intra-company balances are created in the books of accounts or records of the branch plus home office:

Branch Books of Accounts
“Home Office” account

Home Office Textbooks of Accounts
“Investment in Branch” account (one account for each branch)

The intra-company accounts “Home Office” and “Investment in Branch” are usually reciprocal accounts, meaning they are inversely related to or opposite each other. The “Home Office” account has a regular credit balance, while the “Investment in Branch” account has a normal charge balance. Whatever authorized transaction is recorded in one account should also become recorded in the other account. Supplied all transactions are recorded, each accounts should have the same or similar balance.

The “Home Office” account appears in the equity section of the particular branch balance sheet, while the “Investment in Branch” account is shown in the asset section of the L. If you want to find out more information about stop by our website.
O. balance sheet. However , in the preparation of the financial statements of the company as a whole, these intra-company accounts are eliminated since they pertain in order to internal activities which do not issue the external users of the reviews.

Common Intra-company Transactions

The following are the most common transactions between the branch and L. O. which are recorded by each, using the intra-company accounts mentioned above:

Transfer of assets from H. Um. to the branch and vice versa (e. g. cash, fixed assets, merchandise inventory)
Recognition of branch income or loss (after shutting of revenue and expense balances by the branch to its “Income Summary” account)
Recording of costs incurred by the branch but billed to and paid by the They would. O. (e. g. purchase of office supplies by the H. Um. for the branch)
Allocation of costs by the H. O. which are chargeable to the branch (e. g. branch’s share of the cost of advertising performed by H. O. for the company)
Inter-branch transactions (e. g. individual accounts of branch employees to get collection, transfers of fixed property, authorized expenses incurred by a branch employee in another branch)
Getting back together of Investment in Branch and Home Office Accounts

As discussed above, the balances of the “Home Office” and “Investment in Branch” balances should be equal or the same. In fact, however , because of timing differences plus recording errors, these two accounts rarely balance. There is therefore a need to periodically prepare a reconciliation of these two accounts to determine the reconciling items and record the necessary adjustments through suitable journal entries in either or both of the books of the department and H. O.

Branch Data processing and Company Growth

New twigs not only indicate that there is company growth, but can also propel further development. For this growth to be sustained, the info provided by the branch’s accounting program must be complete, accurate and timely so that top management can make the ideal business decisions at the right period. After all, “Many would say the data provided by an entity’s accounting strategy is the most important single source of information for financial decision makers” (Chalmers, Keryn, et al. “Accounting in Action. inch Principles of Financial Accounting. second ed. Queensland: John Wiley and Sons Australia, Ltd., 2010. 5. Print).