Question 1. Explain the different systems of maintaining the accounts of a dependent branch. How is profit ascertained under each system? Discuss.
A dependent branch is one that is completely controlled by the headquarters in terms of its policies and administration.
In such a circumstance, the headquarters keeps the branch’s financial records and determines the branch’s profit or loss. As its name suggests, it depends on the headquarters for all its functions and has limited discretionary authority. It does not have a separate bank account for its transactions; instead, it uses the bank account of the headquarters.
Accounting Systems for a Dependent Branch
The accounting system selected by the head office for a branch will depend on the branch’s size and the level of control the main office will exert. The following are the many ways that the headquarters often maintains branch accounts in its books:
According to this method, the relationship between the branch and the headquarters is similar to that between a debtor and a creditor. The head office views its branch as a debtor, and the branch views the head office as a creditor. The branch sells the items at a profit and delivers the money to the head office’s creditor after receiving the commodities on credit from its debtors or clients (Branch) (head office).
This system is generally adopted for those branches which are relatively small in size. Under this system, the head office opens a Branch Account for each branch in which it records all transactions relating to the branch. The Branch Account is prepared so that it also helps ascertain the branch’s profit or loss.
Final Accounts System
Under this system, the head office prepares a Trading and Profit and Loss Account to find out the profit or loss of each branch and a Branch Account to find out the amount due to, or due from, that branch; in this case, the Branch Account simply acts as a personal account.
The Final Accounts System involves several steps. First, the branch prepares its own trading and profit and loss accounts, which show the branch’s income and expenses for a given period. Then, the branch prepares a balance sheet, which shows its assets, liabilities, and equity at the end of the period.
Once the branch’s accounts are complete, they are sent to the parent company, which combines them with its own accounts. The parent company adjusts the branch’s accounts to eliminate any intercompany transactions and to reflect any necessary adjustments for consolidation purposes. The combined accounts are then used to prepare the final accounts of the entire company.
Stock and Debtors System
The stock and debtors system is based on the principle that a dependent branch operates as a separate entity within the larger company. The system works by tracking the inventory and accounts receivable of the branch separately from those of the company as a whole.
The stock component of the system involves keeping track of the inventory levels of the branch. This includes recording the purchase of inventory, sales of inventory, and any stock transfers between the branch and the company. By keeping track of the inventory levels, the branch can ensure that it has the necessary stock to meet customer demand and avoid stockouts or overstocks.
The debtors component of the system involves managing the accounts receivable of the branch. This includes recording customer invoices, payments received, and any outstanding balances. By managing its accounts receivable, the branch can ensure that it is collecting payment for goods or services provided to its customers.
The stock and debtors system is typically managed using specialized accounting software that allows for easy inventory and accounts receivable tracking. This software may also include features such as automated invoicing, payment reminders, and inventory management tools.
Under this system, the head office does not open any ‘Branch Account. For each branch, it prepares a Branch Stock Account, a Branch Expenses Account, a Branch Adjustment Account, and Goods sent to the Branch Account to find out the profit or loss of each branch.