Head Office and Branches Accounting PDF

## Head office and branches ### Specific Outcomes - Distinguish between the main accounting methods for branch accounting, namely independent keeping of records at the branch (decentralised) and where the branch does not keep records (centralised). - Recognise the transactions in connection with the...

## Head office and branches ### Specific Outcomes - Distinguish between the main accounting methods for branch accounting, namely independent keeping of records at the branch (decentralised) and where the branch does not keep records (centralised). - Recognise the transactions in connection with the head office and branches according to both methods. - Reconcile the account of the branch in the ledger of the head office with the account of the head office in the ledger of the branch. ### 19.1 Introduction It often happens that the owner of an entity wants to extend the activities of her entity. To implement this, there must be a demand for the product in the town, city or area where the entity is situated. If it seems that there is not a demand for more of the specific product in her area, she should start with a similar entity in another town/area. In such cases the original entity will be the head office and the new entity, say a shop in another town, will be the branch. It is important to note that the branch is not an independent entity but, in practice, nothing more than an extension of the head office. ### 19.2 Accounting treatment of branches Two methods exist according to which the records of branches can be kept: - centralised - decentralised The two methods will be discussed and explained with the aid of examples. #### 19.2.1 Centralised method According to this method, all inventories are purchased by the head office. Merchandise required by the branch is dispatched by the head office to the branch, at cost or at selling price. The centralised purchases by the head office have the advantage that administrative expenses decrease and purchase prices are lower due to the larger amounts purchased. The only accounts that could be kept by the branch in its records are the bank and the petty cash accounts. The head office will keep the following accounts in connection with branch transactions in its records: Goods to branch account, branch inventories account, branch gross profit account and branch profit or loss account. All the VAT entries will, with the application of this method, be recognised in the head office's VAT output and VAT input account. #### 19.2.2 Decentralised method According to the decentralised method, the branch is independent, and therefore must keep a complete set of financial records, exercise control over its inventories and prepare a trial balance. Inventories are almost always transferred at cost from the head office to the branch.