As a company grows and expands into new markets, it may be necessary to establish branches with some degree of autonomy in order to provide a better service to clients. The degree of autonomy granted to the managers of such branches by the head office and the accounting records maintained by these branches, differ considerably from one enterprise to the next.
The accounting system used to record branch transactions can also vary considerably from the centralised accounting system, where processing is done entirely by head office, to a basically decentralised accounting system, where most of the processing of the branch transactions is done by the branch itself. In other cases the accounting function can be shared, some of the data may be collected and processed by the branch while, other information is maintained by the head office. Whatever system is chosen, it must be designed to satisfy management's needs.
If the branch is big enough it may have a complete accounting system independent of that of the head office. These two extremes are referred to as situations where (1) branch accounts are kept by head office and (2) the branch keeps its own accounting books. In practise, accounting for branches usually falls somewhere between these extremes.
The decision as to whether a branch should do its own accounting is based on the extent of its transactions, its distance from head office, the degree of control that can or must be exercised, the ability and independence of the branch personnel and security considerations. The chief criterion, however, is always efficiency.
Where an organisation has branches, two types of entity can be distinguished. First, the undertaking can be considered as a separate entity. The financial result and position of the undertaking as a whole is the combined result and position of the head office and its branches.
It is important to distinguish between internal accounting transactions, that is, transactions between branches and between branches and the head office and external accounting transactions, that is, transactions with third parties. Internal transactions are eliminated in the combined financial statements of the enterprise as a whole, that is, the head office and its branches. If this is not done, there will be a duplication of the results of these transactions. Recording the internal transactions between branches and between each branch and head office is, however, essential for obtaining a complete accounting picture of the operating result of each branch. Therefore, mutual or internal purchases and inter-branch sales are recorded separately from external transactions.
Michael Russell Your Independent guide to Accounting
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