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Departmental Accounts: by Dr. Pranabananda Rath Consultant & Visiting Faculty

Departmental accounts are prepared to separately track the profit and loss of different divisions or departments within a business. This allows managers to evaluate the performance of each department, helps with planning and control, and identifies growth opportunities. There are two main methods for departmental accounting - the columnar basis uses one set of books to record accounts for all departments, while the independent basis maintains separate accounts for each department. Expenses must be properly allocated among departments to determine the profit or loss of each. Interdepartmental transfers of goods between departments also require adjustments to eliminate unrealized profit on unsold inventory.

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Anamika Vatsa
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280 views16 pages

Departmental Accounts: by Dr. Pranabananda Rath Consultant & Visiting Faculty

Departmental accounts are prepared to separately track the profit and loss of different divisions or departments within a business. This allows managers to evaluate the performance of each department, helps with planning and control, and identifies growth opportunities. There are two main methods for departmental accounting - the columnar basis uses one set of books to record accounts for all departments, while the independent basis maintains separate accounts for each department. Expenses must be properly allocated among departments to determine the profit or loss of each. Interdepartmental transfers of goods between departments also require adjustments to eliminate unrealized profit on unsold inventory.

Uploaded by

Anamika Vatsa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Departmental Accounts

By
Dr. Pranabananda Rath
Consultant & Visiting Faculty
Why

When all the division of a business unit


are located under one roof and it is
described to ascertain the profit and loss
of each department separately, the
departmental accounts are prepared.
Departmental Accounting

 Departmental Accounts are accounts relating to the


several departments or sections of a business drawn
up with a view to ascertaining their individual
performances.
 In order to carryout business more efficiently, a
businessman divides his store into many sections, each
section is called a Department. In order to ascertain
the profit or loss made by each department, it is
desirable to prepare separate Trading and Profit and
Loss Account for each department
 The preparation of such Trading and Profit and Loss
Account separately for each department enables to
compare the results of trading activities.
Objectives

 To have comparison of the financial result of a


particular department & also with other departments.

 To help in formulating the various policy to expand or


diversification of the business.

 To allow departmental managers’ commission on the


basis of profit of their department.

 To allocate the various expenditure among different


department in their agreed ratio.

 It helps management to maintain the business


integrity.
Classification of Department

*Operating Departments – Perform an


organization’s main functions
• Production
• Selling
*Service Departments – Provide
support to operating departments
• Payroll
• Human Resources
• Accounting
Advantages of Departmental Accounting

Evaluation of Performance

Planning & Control

Growth Potential of Each Department

Justification of Capital Outlay

Monitoring the Various Expenses

Judgment of Efficiency
Methods of Departmental Accounting

Methods
Columnar Basis
Independent Basis
Columnar Basis

In this method, there is a single set of books. All


accounts of all the departments are maintained
together, but in a columnar or tabular form. In
order to enable the preparation of departmental
trading and profit and loss accounts, various
subsidiary books, such as purchases, sales, returns
books, are prepared in a columnar form and this
shows the record, in detail, for each department.
Independent Basis

In this method, accounts of each department are


maintained separately. Each department prepares
Trading and Profit and Loss Account. Finally, the
profit or loss of each department is transferred to
the (General) Profit and Loss Account for all the
departments. The independent departmental
book-keeping is an expensive one.
Distribution of Expenses

Normally, all direct expenses are charged to the


respective departments, in case of indirect or
general expenses, proper allocation among the
departments must be made in order to ascertain
the profit and loss made by each department.
Each department is charged with proper business
expenses. If the basis for such allocation is not
specially mentioned, then the basis of allocation
of different departments are as follows:
Allocation of Expenses
Sl.No Expenses Basis
1 Rent, rates & taxes, repairs & Floor area occupied by each
maintenance, insurance of department, otherwise on
building time basis
2 Lighting & heating expenses Consumption of energy
(energy)
3 Selling expenses: discount, bad Sale of each department
debt, commission, freight
outward, travelling.
4 Carriage inward/ discount Purchase of each department
received
5 Wages & Salaries Time devoted to each
department
6 Depreciation, insurance, repairs & Value of assets of each
maintenance of capital assets department, otherwise on
time basis.
Sl.No Expenses Basis
7 Administrative & other expenses: Time basis or equally
salaries to manager, directors, among all
common advertisement expenses departments
8 Labour welfare expenses, Canteen Number of employees
& recreation. in each department
9 PF/ESI Contribution Wages and Salaries of
each department

Note: There are few expenses and income, most being of financial nature,
which can not be found a suitable basis of apportioned, they are
recognized in the combined P/L A/C like: interest on loan, Profit or loss on
sale of investment , audit fee, bank charges & share transfer expenses
etc.
Types of
Departments

Independent Dependent

Work
Have inter
independently,
departmental
have negligible
transfers
transfers
Interdepartmental Transfer

Goods are often supplied from one Department to


another – Inter-Departmental transfer. Such
transfer must be credited to Supplying Department
and debited to Receiving Department. If the
transfers are made at cost price, then it can be
treated as mere transfer. No further adjustment is
needed.
If the transfers of goods are made at selling price,
then a profit is earned by the supplying department
of the same organization. When the goods,
transferred from one department to anther, still
remain unsold with the transferee department, at
the end of the accounting period, there arises a
necessity to eliminate the unrealized profit on such
stock on hand. This is because, so much of issuing
department’s profit (notional) remain unrealized
from the viewpoint of the firm as a whole. The
reserve will be equal to the profit included in respect
of unsold goods at the end of closing.
Entries

General Profit and Loss Account Dr.


To Stock Reserve
In certain cases, the transferee department may have some stock in
the beginning of the account­ing period, against which stock reserve
was already created in the previous year, will also be trans­ferred to
General Profit and Loss Account by means of Journal entry:
Stock Reserve Account Dr.
To General Profit and Loss Account
Alternatively, a single journal entry can be passed for the unrealized
profit on the basis of the difference between unrealized profit included
in opening and closing stock.

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