1.

2 OBJECTIVES OF BRANCH ACCOUNTS

A business firm establishes branches for marketing the products or services. The parent firm
(head office) is always interested to know the trading results of its branches. For this purpose,
branch accounts are kept. The main purposes of branch accounts are as follows:
(i) Branch accounts helps to know the profit or loss of each branch.
(ii) It enables the head office to know the financial position of each branch.
(iii) It shows the requirements of goods or cash for each branch.
(iv) Branch account is the basis and helps the head office to control the activities of
branch.
(v) Suggestions and improvements are based on the branch accounts.

1.3 ACCOUNTING SYSTEMS

The home office must decide how to account for the activities and transactions of the branches.
Accounting systems can be categorized as either centralized or decentralized.

1.3.1 Centralized Accounting

Under a centralized accounting system, a branch does not maintain a separate general ledger in
which to record the transaction. Instead, it sends source documents on sales, purchases, and
payroll to the home office. Branches usually deposit cash receipts in local bank accounts, which
the home office draws upon. When the home office receives source documents, it reconciles
sales information with bank deposits, reviews and processes invoices for payment, and prepares
payroll checks and related payroll related records.

Centralized accounting systems are usually practical when the operations of the branches do not
involve complex manufacturing operations or extensive retailing or service activities.

1.3.2 Decentralized Accounting

Under a decentralized accounting system, a branch maintains a separate general ledger in which
to record its transactions. Thus, the branch is a separate accounting entity, even though it is not a
separate legal entity. It prepares its own journal entries and financial statements, submitting the
latter to the head office, usually on a monthly basis.

Decentralized accounting systems are common for branches that have complex manufacturing
operations or extensive retailing operations involving significant credit sales.