A company may try to expand its business by opening branches as another establishment of the company in different locations. If the location of business activities is separated from the place of operation which is called head office while others are called branch offices.
Types of Branches:
1. Home Branch – When a branch is opened in the same country as that of the head office. This is further divided into two:
a) Dependent Branch: The branch that does not maintain a complete record of its transactions
b) Independent Branch: The branch that maintains a complete record of its transactions
2. Foreign Branch: When a branch is opened in a different country as that of the head office. Also, the accounts of the foreign branch will have to be converted into the home currency using the rate of exchange.
Methods of Accounting:
1. Final Debtors method
2. Debtors method
3. Stock and Debtors method
Advantages of Branch Accounting:
- It helps to ascertain the Profit & Loss of each Branch of the company
- It helps to know the debtors, Inventory and cash position of each branch along with their individual expenses incurred.
- Separate accounting of each branch helps to take decisions according to that particular branch requirements.
- By Separate branch accounting, it is easy to track the progress, growth and performance of each branch.
Disadvantages of Branch Accounting:
- Due to a separate account for each branch, it requires more manpower and cost of labour might go up.
- It requires a separate branch manager for each branch to handle the operation of the same.
- It requires separate infrastructure at each location or unit for its functionality
- More branches mean more cost involved.
- In this accounting system, there is a chance of delay in decision making because of too many involvements of authorities.