Departmental Accounting

Departmental Accounting refers to maintaining accounts for one or more branches or departments
of the company. Revenues and expenses of the department are recorded and reported separately.
The departmental accounts are then consolidated into accounts of the head office to prepare
financial statements of the company.

The departmental stores are the example of large-scale retail selling just under a single roof.
Different departments involve in different goods to be sold out. To calculate the net result of the
whole organization, full-fledged trading, and profit, and loss account are to prepare. But to evaluate
individual department, it will be creditworthy to prepare individual trading and profit and loss
account.

For example, a textile mill which is having head office and factory. Separate accounts are
maintained for production facilities and then the final results are sent to the head office which then
incorporates by the head office in their accounts. Maintenance of separate accounts for each
branch of a bank or financial institution also falls under the category of departmental accounting.
The bank then prepares its financial statement after consolidating accounts of all branches.

Where a big business with diverse trading activities conduct under the same roof the same usually
divide into several departments and each department deals with a particular kind of goods or
service. For example, a textile merchant may trade in cotton, woolen and jute fabrics. The overall
performance for this type of business depends, however, on departmental efficiency.
As a result, it is desirable to maintain accounts in such a manner that the result of each department
can be known—together with the result as a whole. The system of accounting follows for this; the
purpose knows as Departmental Accounts. This system of accounting helps the proprietors to:

 Compare the results among the different departments together with the previous results
thereof,
 Formulate policy to extend or to develop the enterprise in the proper line; and
 Reward the departmental managers based on departmental results.

Objectives of Departmental Accounting:

The main objectives of departmental accounting are:

 To check out an interdepartmental performance.

 To evaluate the performance of the department with the previous period result.
 The gross profit of each department can ascertain.
 Unprofitable departments will reveal.
 The result of operations can use to determine the remuneration of managers of each
department.
 The progress of each department can monitor for appropriate actions to take.
 To help the owner formulating the right policy for the future.
 To assist the management in deciding to drop or add a department.
  It helps in determining the commission of the department manager when it links to profit
achieved by their department.
 It can help the management in deciding which department should develop more and which
should close to maximize the profitability of the whole company.
 To provide detail information about the entire organization.
 To assist management for cost control.
 It also helps in allocating costs to various departments and therefore helps in better control
of the cost of the departments of the company.

Advantages of Departmental Accounting:

The most significant advantages of departmental accounts are:

 Individual results of each department can know which helps to compare the performances
among all the departments, i.e., the trading results can compare.
 Departmental accounts help to understand or locate the success, failure, rates of profit, etc.
 It helps the management to make a proper plan of action, policies to increase profit after
analyzing the results of the operation of various departments.
 Departmental accounting helps us to understand which department should be expanded
further or which one should close down as per the results of the operation.
 It also helps to encourage a healthy competitive spirit among the various departments which,
ultimately, helps to increase profits of the firm as a whole.
  For additions or alterations of various departments, departmental accounts help a lot as it
supplies the necessary information.
 As detailed information about the firm is available from departmental accounting the users of
accounting information, particularly, the auditors and investors widely benefit.
 Since departmental accounting presents separate departmental results, the Performance, of
a successful department encourages the management, employees and increases the
motivation of the staff as a whole.
 The percentage of gross profit on sales and stock turnover ratio of each department helps to
make a comparative study among all departments.

The difference between Departmental and Branch Accounting is as follows:

BASIS OF
DEPARTMENTAL ACCOUNTING BRANCH ACCOUNTING
DIFFERENCE

Departments are attached with the main Branches are separate from the main
LINKAGE
organization under a single roof. organization.

Departments are the results of fast human Branches are the outcomes of the tough
RESULTS OF
life. competition and expansion of the business.

GEOGRAPGICAL Departments are not geographically Branches are geographically separated.

 LOCATION separated.

The branches may be dependent or

TYPES There is no classification of departments.
independent.

ALLOCATION OF Allocation of departmental common There is no need of allocation of branch

EXPENSES expenses is a tough job. expenses.

In departmental accounts, no reconciliation

To find out the net result of organization the
RECONCILIATION is required because there is no central
reconciliation of different branch is a main job.
account division.

Departmental trading with their head

Branch trading is conducted in different parts
office is conducted under the same roof
TRADING of the country under the head office dealing
although each department deals with
with usually the same line of activity.
separate line of activity.

The profitability position of department is

The profitability of each branch is equally
PRFOITABILITY seen within the larger picture of a parent
important and seen separately.
organizational profits.
METHODS OF There are only two methods: Separate set There are various methods of preparation of
PREPARATION OF of books are maintained Separate set of accounts like Stock and debtors system Final
ACCOUNTS books are not maintained. accounts system Wholesale price system

The accounts maintained are;

The accounts maintained are: Branch stock
ACCOUNTS Departmental trading and profit and loss
account Branch adjustment account Branch
MAINTAINED account General profit and loss account
debtors account Branch account.
Balance sheet

FUNCTIONAL Functional division is possible in case of

It is not possible in case of branch.
DIVISION departmental concerns.

The chief executive who is to keep a

Control is Impracticable in case of a far off
constant watch over the department
CONTROL branch since it is not possible for the head
supervisor closely and supervises
office to keep instant watch.
effectively.

Departmental accounting presents the

RECONCILIATION Branch accounts present the trading results of
trading results of each individual
OF RESULTS each individual branches.
department.

Departmental accounting is practically a Branch accounts are a condensation of

NATURE
segment of accounts. accounts.
 These are comparatively less costly as a Branch accounts are costly to maintain as it
EXPENSIVE small team of accountants can be involves a big team of accountants to maintain
appointed to maintain the accounts. accounts for each branch.

Allocation of expenses:
There are many rules regarding allocation of expenses.

1. Allocation according to sales: Sales commission, advertisement expenses, salary of salesman

and sales expenses are allocated in the ratio of sales of various departments.
2. Allocation according to place: The expenses, whose benefit is derived by each department
according to its area allocated in the ratio of floor space occupied by each department. Examples
are rates and taxes.
3. Electricity charges: Electricity charges are divided in the ratio of number of points used in each
department, but voltage used in each department is also considered for this purpose.
4. Insurance of goods: Division of this expense is made on the basis of the stock of each
department.
 5. Electric power: If electric power is used for operating machines, consumption of power by
various machines is estimated and on the basis of this consumption allocation of electric power
charges is made. If each department has a separate meter, electric charges are allocated on the
basis of meter regarding of various departments.
6. Depreciation: Depreciation is allocated on the basis of the values of the plant of each
department.
7. Salary of factory manager: Salary of factory manager is divided in the ratio of time devoted by
this manager in each department.
8. Workmen’s compensation insurance: This insurance is allocated in the ratio of wages of each
department.
9. Insurance of premises: This insurance is apportionment in the ratio of premises occupied by
each department.
10. Repairs of machinery: Repairs of machinery can be allocated in the ratio of value of
machinery used in each department.
11. Premiums for loss of profits: Premiums paid for loss of profits policy can be allocated on
the basis of profit of each department of the immediately previous period.

Illustration 1:
The proprietor of a large retail store wished to ascertain approximately the net profit of the X, Y and Z departments
separately for the three months ended 31st March 2006. It is found impracticable actually to take stock on that date, but
an adequate system of departmental accounting is in use, and the normal rates of gross profit for the three departments
concerned are respectively 40%, 30% and 20% on turnover before charging the direct expenses. The indirect expenses are
charged in proportion to departmental turnover.

The following are the figures for the departments:

The total indirect expenses for the period (including those relating to other departments) were Rs. 5,400 on the total
turnover of Rs. 1, 08,000. Prepare a statement showing the approximate net profit, making a stock reserve of 10% for each
department on the estimated value on 31-3-2006
X = 20000

Y = 18000

Z = 16000

Total Sales of X, Y & Z department = 20000 + 18000 + 16000 = 54000

Total Turnover of all departments = 108000

Indirect expense of X, Y & Z = 5400 * 54000/108000 = 2700

20000 : 18000 : 16000

20:18:16

10:9:8 = 27

X = 2700 * 10/27 = 1000

Y = 2700*9/27 = 900

X Sales goods to Y = 15000

X = Sales

Y = purchase

Then record Sales of X in Cr. Side of trading A/c

And purchase of Y in Dr. side of trading A/c

 Trading and P & L A/c of Hindustan Electronics

(For the year ended 31 march 2008)

Particular TransistorsTap R R (Z) Particular TransistorsTap R R (Z)

(X) (Y) (X) (Y)

To Purchases 160000 125000 80000 By Sales 175000 140000 35000

To Gross Profit c/d 75100 35300 - By Closing Stock 60100 20300 44600

BY gross Loss c/d - - 400

235100 160300 80000 235100 160300 80000
To Gross Loss b/d - - 400 By Gross profit b/d 75100 35300 -

To Salary and Wages 12000 24000 12000 By net loss - - 19500

To rent 2400 2400 6000

To sundry expenses 5500 4400 1100

To net profit 55200 4500 -

75100 35300 19500 75100 35300 19500
Working Note:

Salary and Wages = 48000

Showroom = ¾ = 48000 *3/4 = 36000

Factory = ¼ = 48000 * ¼ = 12000

1:2 ratio of salary and wages of X and Y department

X = 36000* 1/3 = 12000

Y = 36000 * 2/3 = 24000

2. Rent = 10800

Factory rent = 500 p.m

= 500 *12 = 6000

Showroom rent = 10800 -6000 = 4800

Rent of showroom distributed equally in X and Y department

X = 4800/2 = 2400

Y = 4800/ 2 = 2400
3. Sundry expenses = 11000

Sales of X, Y and Z department

175000 : 140000:35000

175 : 140 : 35

5:4:1

X = 11000 = 5/10 = 5500

Y = 11000 = 4/10 = 4400

Z = 11000 = 1/10 = 1100

 Departmental Trading and P&L a/c

(For the year ending 2008)

Particular A B C Particular A B C
To opening stock 10000 5000 3000 By sales 200000 150000 100000
To purchase 100000 80000 60000 By Transfer 15000 9000 3000
To Transfer 9000 10000 8000 By closing stock 3000 2000 1000
To gross profit c/d 99000 66000 33000

218000 161000 104000 218000 161000 104000

To rent, rates and In 5000 2500 2500 By gross profit b/d 99000 66000 33000
To salaries 10000 6000 4000
To Advertisement 6667 5000 3333
To discount 2667 2000 1333
To other expenses 6222 4667 3111
To General expenses 10000 10000 10000
To net profit 58444 35833 8723
 99000 66000 33000 99000 66000 33000

Working Note:

1. Inter department sales

A B C
10000 6000 3000
5000 3000
15000 9000 3000

2. Inter department Purchase

A B C
6000 10000 5000

3000 3000

9000 10000 8000

3. Rent, Rates and insurance = 10000
A=½
B=¼
Total = 1
Total space occupied by A and B dept = ½ + ¼ = ¾
C dept = 1 – ¾ = ¼
Ratio = ½: ¼:1/4 = 2:1:1
A = 10000 * 2/4 = 5000
B = 10000* ¼ = 2500 = C

4. Salaries = 20000 Ratio = 5:3:2

A = 20000 * 5/10 = 10000
B = 20000 * 3/10 = 6000
C = 20000 * 2/10 = 4000

5. External Sales ratio = 200000 : 150000 :100000

= 20:15:10 = 4:3:2
 Departmental Trading A/c

Particular Engine Repairs Particular Engine Repairs

To opening stock 2000 800 By sales 12000 10000
To Purchase 8000 5000 By closing stock 2100 950
To wages and exp 1500 2000
To gross profit 2600 3150
14100 10950 14100 10950
 General Profit and Loss A/c

Particular Amt Particular Amt

To salary 500 By gross profit b/d
To Rent and Taxes 300 Engine 2600
To Fuel and Light 50 Repairs 3150 5750
To Insurance 140
To LIC Premium 35
To Bank Intt and Com 20
To office exp 120
To Discount 250
To intt on Loan 25
To Intt on capital
A 25
B 25 50
To net profit 4260
5750 5750
 Balance Sheet
(As on 31 March 2008)

Liabilities Amt Assets Amt

Creditors 2200 Debtors 4000
Loan (500 + 25) 525 Office Furniture 150
Capital 1000 Cash in Hand 25
Intt on Capital 50 Cash at Bank 1230
Net profit 4260 Closing Stock 2100
5310 950
(-) Drawings (1320) 3990 Life policy 325
(Surrender Value)
LIC Surrender value 25
Suspense 2040

8780 8780