Accounting for Inter-branch Transactions (bank A branch to another

bank A branch)
i. Transactions among branches are called inter-branch transactions.
ii. These transactions may occur with or without instructions from H.O.
iii. Inter-branch transactions may be recorded in two methods:
a. It is recorded directly by maintaining current account of a branch in another branchs book.
b. It is recorded indirectly by all branches by making entries though H.O. Account.
The settlement of funds between the service branch and the branch concerned represents the
transfer of funds to the branch level. The payment process is completed only when the funds
are debited from the drawer's account and credited to the payee's account.
More often than not, Accountants have to address the issue of evolving accountal procedure for
settling financial transactions relating to transfer of goods or raw materials or staff advances or
providing services etc between Branches of a Company, in cases where Branches maintain
Accounts. Initially such Inter Branch Transactions (IBTs) used to be settled by Checks or Drafts.
This procedure of settling IBTs amongst all Branches owned by the same Company resulted in
unnecessarily locking of precious funds without any productive use. Hence financial transactions
are settled amongst Branches not by exchanging USD but by Debit Advices or Notes and Credit
Advices or Notes as the case may be designed for internal use only in the Company. Accountal
procedure that is generally adopted for journalizing Debit Advices and Credit Advices is
illustrated below with an example relating to Staff Advance.
Suppose an Executive has drawn an Advance of $1200 while working at Branch-A. After
affecting recovery of seven monthly installments, the Executive is transferred to work at Branch-
B. So there arises a need to transfer the outstanding debit balance of $500 from the books of
account of Branch-A to Branch-B. In this case, IBT originates from Branch-A; so it is called
'Originating Branch'. Branch-B responds to the IBT; so it is called 'Responding Branch'.
As soon as the Executive is transferred, Originating Branch (Branch-A) has to issue a Debit
Advice for $500 and journalize issuance by debiting IBT Account and crediting Staff Advance
Account. After incorporating Entry, debit balance in Staff Advance Account gets cleared. Debit
balance in IBT Account continues to remain in its books of account and this is cleared at
Consolidation Center level only.
On receipt of Debit Advice, Responding Branch (Branch-B) has to journalize acceptance of
Debit Advice by debiting Staff Advance Account and crediting IBT Account. Branch-B has to
clear debit in Staff Advance over a period of five months as and when monthly installments are
recovered from the Executive (or by issuing another Debit Advice, if the Executive is transferred
to Branch-C). Credit balance in IBT Account continues to remain in its books of account and this
is cleared at Consolidation Center level only.
At the Company's Head Office level or even at a lower level where Accounts of Branches are
consolidated, Staff Advance Account carries only debit balance of $500 (for the particular
Executive in our illustration). $ 500 Debit to IBT Account originated from Brach-A
is matched with Credit to IBT Account for like amount responded by Branch-B. So ultimately,
'Nil' balance would be struck in IBT Account at Consolidation Center level. This is ideal but
seldom happens because at any point of time, few IBTs remain 'in transit'. So at Consolidation
Center level, one should precisely identify the IBTs which are pending for clearance for closer
examination in case of abnormal delays. This is important especially in case of Companies
having several Branches and thousands of IBTs taking place.
Most important point to be carefully noted is that primary responsibility for clearance of IBTs
has to be cast not on Responding Branches but Originating Branches. This is because when an
Originating Branch "issues" Debit Advice, its issuance is incorporated in its books of account; so
it cannot deny issuance. Hence at any point of time, if it comes to surface that an Originating
Branch has issued Debit Advice irresponsibly or without sufficient cause etc., one can hold it
responsible whereas in case of Responding Branch, it is difficult to fix responsibility since there
is always scope for Responding Branch to deny receipt of Debit Advice for obvious reasons.
Interbank Deposits (bank A to bank B)
Any deposit that is held by one bank for another bank. In most cases, the bank for which the
deposit is being held is referred to as the correspondent bank. The interbank deposit arrangement
requires that both banks hold a "due to account" for the other.
Special terms apply when the correspondent bank is a foreign bank. In this case, the due to
account is a "nostro" account for the bank holding the deposit. It is referred to as a "vostro"
account for the foreign correspondent bank.