What it means
A branch is not a separate company. It is part of the same legal entity as the head office, so its results must eventually be combined with the head office accounts.
Branch accounting gives managers a clear picture of each location before that combination happens. There are two broad ways to keep the records.
In the simple method, the head office keeps all the books and treats the branch as one account that shows what was sent and what was earned. In the fuller method, each branch keeps its own books, and a pair of reciprocal accounts, one at the branch and one at the head office, record the dealings between them.
Typical branch transactions include goods sent from head office, cash remitted back, expenses paid by the branch and stock left at the period end. The head office often charges goods to the branch at cost or at a marked-up transfer price.
If a mark-up is used, the unrealised profit in unsold branch stock must be removed when preparing the combined accounts. Why does this matter?
Managers need to know whether a particular shop or region is making money. Without branch accounts, a profitable location can hide the losses of a weak one, and decisions about opening, closing or investing become guesswork.
Foreign branches add complications. Their records are kept in another currency, so they must be translated into the head office currency, and exchange differences arise.
Tax rules may also treat a foreign branch as a taxable presence in that country. Finally, internal checks are essential.
The balance on the head office's branch account should agree with the branch's head office account, and any difference points to goods or cash in transit.
In practice
Real-world examples
Example 1
A clothing retailer has six shops, and each one reports sales, expenses and stock to head office every month. The finance team prepares a profit figure for every shop. It closes the weakest one after two years of losses. The saved rent and wages improve the profit of the whole chain.
Example 2
A regional bank opens a branch in a new city. The head office provides capital and the branch keeps its own ledger, with reciprocal accounts for money sent and received. At month end the two balances are matched and a small timing difference is cleared.
Example 3
A European manufacturer opens a sales branch in another country and records its results in the local currency. The group accountant translates the figures into the home currency and shows the exchange difference separately. The tax team also checks whether the branch creates a local tax liability.
Think of it
Branch accounting keeps separate books for each location-tracking how each branch performs.
Formula
Calculation
Branch profit = Branch sales + Closing stock - Opening stock - Goods sent to branch - Branch expenses
Suppose a head office sends goods costing $80,000 to a new branch during the year. The branch sells goods for $110,000, incurs expenses of $15,000, and has closing stock of $10,000. There is no opening stock.
Branch profit = 110,000 + 10,000 - 0 - 80,000 - 15,000 = $25,000.
The profit is then added to the head office results when the whole business accounts are prepared.Case study
Seen in the real world
Oakmont Hardware is a fictional chain with a head office and four branches. For years the owner looked only at the total profit and believed all branches were performing evenly. A new finance manager introduced separate branch accounts.
The first set of figures showed that one branch earned an illustrative profit of $60,000 while another lost $18,000 because of high rent and slow stock turnover. The owner had not known, since the total hid the difference.
Armed with this data, the company renegotiated the lease on the weak branch and moved some stock to the stronger ones. Within a year the weak branch had moved close to break-even. The owner now reviews a one-page branch summary at every monthly meeting, with sales, expenses, stock and profit for each location side by side.
Watch out
Common mistakes
- Treating a branch as a separate company. It belongs to the same legal entity, so its results must be combined with those of the head office.
- Forgetting unrealised profit in branch stock. If goods are sent at a mark-up, the extra profit is not earned until the goods are sold.
- Leaving the head office and branch balances unreconciled. A mismatch usually means goods or cash in transit or a recording error.
Questions
People also ask
How is a branch different from a subsidiary?
A branch is part of the same legal entity, while a subsidiary is a separate company owned by a parent.
Why use a transfer price?
It lets the head office measure branch performance fairly, and it matters for tax when branches are in different countries.
Do small firms need branch accounting?
Yes, if they trade from more than one location and want to know which location makes money.
Watch