Why branches keep books, and the mirror accounts
A branch is a part of the business in another place. Many businesses let each branch keep its own books, so the manager can see the branch's own profit.
Both sets of books record the same dealings. So we use two linked accounts:
- In head office books: a Branch Account. It shows what the branch owes to head office (a debit balance).
- In branch books: a Head Office Account. It shows the same amount from the other side (a credit balance, as the branch holds head office's money).
Because they describe the same thing from two sides, their balances should be equal.
Recording head office–branch transactions
Rule: whatever head office gives the branch makes the Branch A/c go up (debit) and the branch's Head Office A/c go up (credit).
| Event | Head office books | Branch books |
|---|---|---|
| HO sends goods 50 | Branch A/c Dr 50; Goods sent to branch Cr 50 | Goods received from HO Dr 50; HO A/c Cr 50 |
| HO sends cash 20 | Branch A/c Dr 20; Cash Cr 20 | Cash Dr 20; HO A/c Cr 20 |
| Branch sends cash 15 back | Cash Dr 15; Branch A/c Cr 15 | HO A/c Dr 15; Cash Cr 15 |
| Branch pays HO expense 5 | Expense Dr 5; Branch A/c Cr 5 | HO A/c Dr 5; Cash Cr 5 |
Goods in transit and cash in transit
If HO has recorded a dispatch but the branch has not yet received it, the two accounts differ. The branch books the item on arrival: Goods in transit Dr, HO A/c Cr. Then both balances agree.
Inter-branch transactions
Branch 1 sends goods 10 to Branch 2. The two branches do not keep accounts with each other. They both deal with head office, as if the goods went from Branch 1 to head office and then to Branch 2.
- Branch 1 books: HO A/c Dr 10, Goods sent Cr 10.
- Branch 2 books: Goods received Dr 10, HO A/c Cr 10.
- Head office books: Branch 2 A/c Dr 10, Branch 1 A/c Cr 10.
This keeps one central record, and head office always knows what each branch owes.
Combining the financial statements
The owner wants one picture of the whole business. Steps:
- Make sure the Branch A/c and HO A/c agree (fix goods and cash in transit).
- Add the matching lines of head office and branch: sales, cost of goods, expenses, assets and debts.
- Cancel the two mirror accounts (Branch A/c and HO A/c). They are internal, not owed to outsiders.
- Cancel goods sent and received inside the business, so sales and purchases are not counted twice.
- If goods were sent at more than cost, remove the unrealised profit in unsold stock.
Combined profit = head office profit + branch profit (after these adjustments).
Key formulas and definitions
- Key terms: Branch A/c = head office view of branch (Dr)
- Head Office A/c = branch view of head office (Cr)
- Inter-branch deal = routed through head office
- Goods in transit = sent, not yet received
- Combined profit = HO profit + branch profit
- Mirror accounts cancel on combining
Worked examples
1. HO sends goods 80 and cash 20 to a branch. Show the entries at HO and the balance of Branch A/c.
HO books: Branch A/c Dr 100 (goods 80 + cash 20); Goods sent Cr 80; Cash Cr 20. Branch A/c balance = 100 Dr. Branch books: Goods Dr 80, Cash Dr 20, HO A/c Cr 100.
2. Branch A sends goods 30 to Branch B. Write the entry in each of the three sets of books.
Branch A: HO A/c Dr 30, Goods sent Cr 30. Branch B: Goods received Dr 30, HO A/c Cr 30. Head office: Branch B A/c Dr 30, Branch A A/c Cr 30.
3. Branch A/c at HO is 500 Dr. HO A/c at the branch is 440 Cr. A remittance of 60 sent by the branch is not yet received by HO. Reconcile.
Branch sent cash 60 that HO has not recorded. HO records on arrival: Cash Dr 60, Branch A/c Cr 60, so Branch A/c = 500 − 60 = 440. Now both show 440.
4. HO profit is 125 and branch profit is 75. The branch holds unsold goods bought at 130 from HO that cost HO 100. Find combined profit. (Remove unrealised profit.)
Unrealised profit in stock = 130 − 100 = 30. Combined profit = 125 + 75 − 30 = 170.
Common mistakes
- Giving the same side (debit) in both books. They are opposite: Branch A/c Dr at HO, HO A/c Cr at the branch.
- Making a direct account between two branches. Route it through head office.
- Forgetting goods in transit, so the two accounts never agree.
- Combining profits but leaving the Branch A/c and HO A/c in the combined balance sheet. They must cancel.