When an enterprise, whether for profit or non-profit, grows or strategizes expansion, it usually opens additional locations. Banks, coffee shops, supermarkets, department stores, restaurants, beauty salons, airlines, and even government offices may operate in more than one location, domestic or foreign, to cater to the needs of their customers or clientele.
Such additional locations may either be in the form of an agency or a branch.
Branch or Agency?
Depending on its objectives, the enterprise may adopt the form of either a branch or an agency. Both are part of a central organization and while they conduct operations away from their home office, they are not a separate legal entity from the latter.
The key difference between the two lies in their degree of autonomy or independence. For instance, a sales agency typically does not stock inventory, but only displays merchandise, takes orders and arranges for delivery of the merchandise. 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 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 following aspects:
- Provision of a wider range of services to customers or clientele
- 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 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 which records all agency transactions in the former’s accounting system.
Such maintenance of separate accounting records by 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 parties external to the company as a legal entity (e.g. customers, suppliers, creditors, utility companies)
- Internal transactions
- within the branch
- with other branches of the company
- with home office
The recording by the branch of its external transactions and those which by nature affect only the branch (i.e. internal transactions within the branch) is done using the regular accounts and journal entries. However, in recording the branch’s transactions with the H.O., certain intra-company accounts will have to be created and used. Likewise, inter-branch transactions or transactions of the branch with another branch are usually coursed or cleared through the H.O. using intra-company accounts.
At the end of the accounting period, the 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 be combined with those of the H.O. for external reporting purposes, in such a way that the resulting reports reflect the financial condition and results of operations of the company as a single entity.
At the time of the establishment of the branch, the following typical intra-company accounts are created in the books of accounts or records of the branch and home office:
- Branch Books of Accounts
- “Home Office” account
- Branch Books of Accounts
- Home Office Books of Accounts
- “Investment in Branch” account (one account for each branch)
- Home Office Books of Accounts
The intra-company accounts “Home Office” and “Investment in Branch” are reciprocal accounts, meaning they are inversely related to or opposite each other. The “Home Office” account has a normal credit balance, while the “Investment in Branch” account has a normal debit balance. Whatever authorized transaction is recorded in one account should also be recorded in the other account. Provided all transactions are recorded, both accounts should have the same or equal balance.
The “Home Office” account appears in the equity section of the branch balance sheet, while the “Investment in Branch” account is shown in the asset section of the H.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 to internal activities which do not concern the external users of the reports.
Common Intra-company Transactions
The following are the most common transactions between the branch and H.O. which are recorded by both, using the intra-company accounts mentioned above:
- Transfer of assets from H.O. to the branch and vice versa (e.g. cash, fixed assets, merchandise inventory)
- Recognition of branch income or loss (after closing of revenue and expense accounts by the branch to its “Income Summary” account)
- Recording of expenses incurred by the branch but billed to and paid by the H.O. (e.g. purchase of office supplies by the H.O. for the branch)
- Allocation of expenses by the H.O. which are chargeable to the branch (e.g. branch’s share of the cost of advertising undertaken by H.O. for the company)
- Inter-branch transactions (e.g. personal accounts of branch employees for collection, transfers of fixed assets, authorized expenses incurred by a branch employee in another branch)
Reconciliation of Investment in Branch and Home Office Accounts
As discussed above, the balances of the “Home Office” and “Investment in Branch” accounts should be equal or the same. In reality, however, because of timing differences and 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 appropriate journal entries in either or both of the books of the branch and H.O.