The owners or the management may desire to ascertain the trading results of each department and the overall result of the organization. The method of accounting which is followed to obtain such results is known as departmental accounting.
2. INTRODUCTION
An organization may produce or buy and sell several products or
perform different services under the same roof or from the same premises.
The modern practice is to divide the organization into independent
departments, each of which may deal in a particular class of goods or render a
specialized type of service. Thus division of organization in to independent
departments is known as departmentation.
3. MEANING OF DEPARTMENTAL ACCOUNTING
The owners or the management may desire to ascertain the trading
results of each department and the overall result of the organization. The
method of accounting which is followed to obtain such results is known as
departmental accounting.
4. OBJECTIVES FOR PREPARING
DEPARTMENTALACCOUNTS
Accounts which reveal expenses, incomes, sales, stocks, gross profit
and net profit separately for each department are needed.
(1). To compare the results of each department with the results of previous
years and ascertain the trend.
(2). To know the comparative results of different departments in the same
year.
(3). To assess the position of stocks in each department.
(4). To identify areas of weakness for cost central and improvement of
efficiency.
(5). To decode upon expansion, discontinuation and investment policies.
5. ADVANTAGES OF DEPARTMENTAL
ACCOUNTING
Calculation of profit: Gross profit and net profit can be ascertained for each
department on a reliable basis by preparing the final accounts in columnar form
Comparison: The results of different departments can be compared in terms of Profit,
expenses, and return on investment etc. which will be useful to improve further.
Individual responsibility: Individual who is responsible for improved results or
decline in performance can be identified. Promotions and other extra benefits can be
provided on the basis of efficiency of individual concerned in a particular department.
6. CONT…
Identification of poor performance: Areas of poor performance can be identified for
implementing remedial measures. If possible, they can be improved to earn some
profit or they may be permitted to close immediately to avoid further losses.
Wise decisions: Decision to expand or discontinuance and diversify profitable lines
of business becomes easier. It can be possible only by way of referring the final
accounts of last few years.
Helps the management: Management policies towards inventories extending credit,
additional investments etc are facilitated. They may concentrate on those departments
which give maximum profit.
7. DISADVANTAGES OF
DEPARTMENTAL ACCOUNTING
Apportionment of expenses between or amongst various department is difficult due
to which exact profit cannot be ascertained.
There are certain expenses which cannot be allocated on some equitable basis such
as debenture interest, dividend, share transfer fees, general office expenses, income
tax, etc., and thus should not be apportioned.
Separate accounts for each department are maintained which increases the
accounting charges.
8. DIFFERENCE BETWEEN DEPARTMENTS
AND BRANCHES
DEPARTMENT
1.All the departments are located within single
premises.
2.All the accounting records are centralized and
maintained within the same premises for all the
departments.
3.All adjustment and reconciliation of accounts does
not arise in departmental accounts.
4. The problem of conversion of foreign currency into
home currency does not arise.
BRANCHES
1.Branches are located in different geographical areas,
physically separated from the head office and one another.
2. Branches are located in different geographical areas,
physically separated from the head office and one another.
3. In case of independent branch some adjustments and
reconciliation of H.O and the branch accounts are required to
be done at the end of the year.
4. The problem of conversion of foreign currency into home
currency does arise.
9. METHODS AND TECHNIQUES OF
DEPARTMENTALACCOUNTING
(1) Trading And Profit And Loss A/C
(2) Maintenance Of Records
(3) Departmentalization of expenses
(4) Inter-Departmental Transfers
(5) Stock Reserve
10. (1) TRADING AND PROFIT AND LOSS
A/C:
When accounts are finalized, departmental, trading and profit and
loss account is prepared in columnar form to find gross profit and net profit
of each department. A general profit and loss account is also prepared to
find the overall profit (or) loss of the firm. The balance sheet is common and
shows the position of the business as a whole.
11. (2) MAINTENANCE OF RECORDS:
Firms with huge turnover and large number of transactions can
maintain separate subsidiary books for each department. In the ledger
separate accounts are opened for sales, purchase, wages, cash etc. of
each department. Closing stock can be separately ascertained at the
time of stock taking.
12. (3) DEPARTMENTALIZATION OF EXPENSES:
In order to find out profit (or) loss of each department apart from sales, purchases, returns and
stocks, various expenses must be charged to the departments appropriately. Business expenses are
usually divided into two types:
• Direct Expenses-Expenses which can be directly identified with or incurred for particular
departments are called direct expenses. Ex. Wages
• Indirect Expenses :Expenses which cannot be identified with a particular department but incurred for
their common benefit are called indirect expenses. Indirect expenses are further sub-divided into:
(a).Expenses which cannot be apportioned
(b).Expenses which can be apportioned
13. (4) INTER-DEPARTMENTAL TRANSFERS
Goods may be transferred from one department to another. Similarly, services of one department may be
used by another department. In such cases, the transfer may be made at cost price or at usual selling price.
(a) Inter-Departmental transfer at cost price:
For the department which receives the transfer, it is like a purchase or expenditure. The trading account of
the receiving department is debited with the value of the transfer. The department which makes the transfer, it is like a
sale or an income. The trading account of transferring department must be credited with the amount of transfer.
(b) Inter-Departmental transfer at selling price (or) Loaded price:
When goods or services are transferred at a price above cost, the receiving department must be debited with
the amount of transfer in the departmental trading account and the transferring department must be credited in the
department must be credited in the departmental trading account with the same amount.
14. (5)STOCK RESERVE:
If a part of the goods transferred is still in the closing stock of
the receiving department at the time of finalization of accounts,
provision must be made for unrealized profit in the stock of the
receiving department.
15. BASIS ALLOCATION OF COMMON EXPENSES TO
DIFFERENT DEPARTMENTS
EXPENSES BASIS OF APPORTIONMENT
1.All Expense relating to building like Rent and Rates, taxes, Repairs to
buildings, Maintenance of Premises, Building insurance, Depreciation
etc.
Floor area (or) Space occupied by each department.
2. Selling expenses like sales commission, salesmen’s salaries,
advertising, bad debts, carriage outwards etc.
Sales (or) Turnover ratio of each departments.
3. Depreciation, Renewals and Repairs of fixed assets. Value of Assets in each department.
4. Lighting and Heating Light points or floor area occupied in each department.
5. Carriage Inward Purchase Value.
6. Insurance Premium:
(i) Insurance premium for stock
(ii) Insurance premium for premises
(iii)Insurance premium for workmen’s Compensation.
(i) Value of stock
(ii) Area Occupied
(iii) Wages of each department.
7. Power Horse power of the machines and the working time in hours
(Or) days.
8. Advertisement Advertisement space
9. Workmen’s amenities and welfare expenses. Number of workers in each department.
10. ESI, PF etc. payable by employer Wages of each department.
11. Factory manager’s salary Time devoted to each department.