by The debtor’s system is the simplest and most common method used for preparing accounts of a dependent branch. In this system, the head office maintains one Branch Account to record all transactions related to the branch. The account works like a combined trading and profit and loss account of the branch. All items such as opening stock, goods sent to branch, cash and credit sales, expenses paid by the head office and closing stock are recorded in this account. The balance of the Branch Account shows the profit or loss made by the branch. This method is easy to use and is suitable for small branches where the head office controls all major activities.
How the Debtor’s System Works:
In the Debtor’s System, the Head Office opens one single account for the branch called the Branch Debtor Account. This account records all items related to the branch. Goods sent to the branch, cash received from branch sales, and closing balances are recorded through this account. The system treats the branch like a debtor who owes money to the Head Office. At the end, the balance in this account shows the profit or loss of the branch.
The Head Office sends goods, petty cash, and other resources to the branch, and all these items are entered in the Branch Debtor Account. The branch mainly reports sales, cash collections, expenses, and stock details back to the Head Office. The Head Office does not maintain full branch books. Instead, it collects information from the branch and prepares the branch result through the Branch Debtor Account. This system helps maintain control on branches with minimum bookkeeping.
Characteristics of Debtor’s System:
- Single Combined Account
In the Debtor’s System, the Head Office keeps only one combined account for the branch called the Branch Debtor Account. This single account captures all important items like goods supplied to the branch, cash and credit sales made by the branch, expenses paid, and stock details. The Head Office does not prepare separate accounts for purchases, sales, expenses or assets of the branch. All information is brought into one place, which makes the system simple to maintain and easy to understand. This feature is most suitable for small branches with limited transactions.
- Branch Treated as a Debtor
In this system, the Head Office treats the branch just like a debtor. When the Head Office sends goods or cash to the branch, it is considered as an amount due from the branch. When the branch sends cash from sales to the Head Office, it reduces the balance. This treatment helps the Head Office easily calculate how much value is still with the branch and how much the branch owes. This also helps in preparing the final branch result without maintaining full books at the branch level.
- No Complete Branch Books
The Debtor’s System does not require complete and detailed books at the branch. The branch only keeps basic records like sales, cash collections, small expenses, and stock details. All main accounting work is done by the Head Office. This reduces the workload of the branch and makes control easier for the Head Office. Since the branch does not prepare its own final accounts, this system works best for branches that are smaller in size and only handle limited activities like selling goods sent from the Head Office.
- Easy Profit Calculation
The system helps the Head Office calculate branch profit without maintaining many accounts. At the end of the period, the balance of the Branch Debtor Account shows whether the branch earned a profit or suffered a loss. The Head Office compares the total debits and credits of the account, including opening stock, goods sent, expenses, sales, and closing stock. Because everything is recorded in one place, finding the profit becomes simple and quick. This is one reason why small business owners often prefer the Debtor’s System for their branches.
