Dependent branches are the branches that do not keep their records but all the records are maintained by head office. It is a branch that is dependent upon the Head Office mainly for “Goods and Cash”. They are not authorized to act solely without the prior permission of the head office. The activities of branch are controlled by head office and usually, it carries on the same functions as of the enterprise. All the plans, policies, rules and regulations of these branches are totally formulated and executed by the head office. When the policies and administration of a branch are totally controlled by the head office, who also maintains its accounts, the branch is called a dependent branch. In other words, all the functions of the dependent branch are totally controlled by the head office. Books of accounts relating to such a branch also will be maintained by Head Office. All major expenses of the branch are paid, as far as possibles by the Head Office.
Under the dependent branch, two types of branches are included, which is termed as service branch and retail branch.
- Service Branch: All the branches which are booking or executing orders on behalf of the head office are called service branches. These are the branches that are busy in executing all the orders for the sake of head office.
- Retail Branch: Retail branches are also dependent branches, but they are concerned with the head office for selling goods, produced by the head office itself or purchased from outside in a bulky position and are sent to the retail selling branches for selling them out as like.
Features of Dependent Branch:
- The branch receives goods from Head Office. Only those goods supplied by the Head office will be dealt (sold) by branch.
- Goods may be supplied to Head office at Cost price/Invoice price
- Cash sales and collection from debtors are periodically remitted to the Head office.
- Branch expenses like salary, rent, etc. are paid/met by the Head office.
- The head office separately sends cash to the branch for meeting expenses.
The accounts of the dependent branch are maintained by the Head Office in any one of the following ways;
- Debtors System
- Stock and Debtors System
- Final Account System
- Wholesale Branch System
1. Debtors System:
Under this system the Head Office opens one Branch Account to record various transactions with the Branch. Branch Account is maintained in the form of a Debtor Account. In the books of the Head Office, Branch Account is debited with the goods supplied and all expenses met by Head Office and credited with all remittances and returns, similar to Customers Account.
Therefore, the system can be called Debtors System or One Account System. The excess of the credit over its debit represents a profit or vice-versa, and is transferred to General Profit and Loss Account of Head Office. Branch Account is prepared in the books of Head Office and is a Nominal Account.
2. Stock and Debtors System:
Under the Debtors System, the profit or Joss can be found out by preparing a Branch Account in the books of Head Office. The Branch Account has been treated as a customer, a personal account in an impersonal name. This type of accounting treatment works well in small Branches. When authorised to make credit sales also, the Debtors System proves inadequate. A detail of credit sales remains unaccounted in this system. To overcome this, Stock and Debtors System has been devised.
Under Stock and Debtors System, the Head Office maintains several accounts relating to each Branch.
The following are the accounts to record the branch transactions:
(A) When Goods are Supplied at Cost:
- Branch Stock Account (Real Account):
This account is a record of transactions relating to goods and discloses the gross profit or loss of a branch. Head Office can have effective control over the Branch stock.
- Branch Debtors Account (Personal Account):
This account is maintained to keep the transactions relating to Branch Debtors.
- Branch Expense Account (Nominal Account):
This account discloses all branch expenses and losses incurred by the Branch.
- Branch Profit and Loss Account (Nominal Account):
This account incorporates the gross profit from Branch Stock Account and expenses from Branch Expense Account. Its balance represents the net results.
- Goods Sent to Branch Account is prepared to know the goods supplied to and returns received from the Branch.
- Branch Cash Account reveals all the cash transactions with Branch.
(B) When Goods are Supplied at Invoice Price:
- Branch Stock Account:
This account is maintained to record the transactions of goods at invoice price. This account will not disclose profit or loss, but discloses shortage, surplus or closing stock of goods.
- Branch Adjustment Account:
This account is kept for finding out gross profit made at the Branch. All loadings in the goods sent to the Branch, Opening Balance, Closing Balance, Returns from the Branch, apart from shortages and surpluses etc., are recorded in this account.
- Branch Debtors Account,
- Branch Expense Account,
- Goods Sent to Branch Account, and
- Branch Profit and Loss Account are explained above.
3. Final Account System (Branch Trading and Profit and Loss Account):
The profit or loss of a dependent Branch can also be known by preparing a Memorandum Branch Trading and Profit and Loss Account. This Account is usually prepared in cost price. Besides the final accounts, Branch Account is also to be prepared. This Branch Account is different from the Branch Account prepared under the Debtors System.
The Branch Account, appearing under Debtors System, is a nominal account. But the Branch Account, appearing under Final Account System, is a personal Account. Generally the Branch Account, under this system, will have debit balance.
There are many producers, now-a-days, who have their own retail shop (Branch). It deals in both retail and wholesale transactions. The profit rates earned by Branches differ between the retail sale and wholesale. Here, it is necessary to account the additional profit made by a Branch through retail trading over the wholesale trading. Wholesale price is always less than retail price.
For instance, the cost of a product is Rs 100, the wholesale price is Rs 140 and the retail price is Rs 160. If the Branch sells the product, the profit will be Rs 60; but the real profit earned by the Branch is Rs 20 (Rs 160 – 140), which is the contribution of Branch. The profit of Rs 40 (Rs 140 – Rs 100) would have been made by the Head Office by selling on wholesale basis to others.
Under this situation, to find out the real profit earned by a Branch, the Head Office charges the Branch with wholesale price. This facilitates the Head Office to know the retail profit earned by a Branch. In other words, the difference between the wholesale price and selling price is the pure profit on retailing.
The Head Office sends the goods to Branch at wholesale price and in case all the goods have been sold, there is no problem. If not, the unsold goods lying with the Branch will be at invoice price and in such case adjustment for the unrealized profit of the Head Office Trading Account must be made through Branch Stock Reserve Account in order to find out true profit of the concern as a whole.