2. DEPARTMENTAL ACCOUNTING
Departmental Accounting refers to maintaining
accounts for one or more departments of the company.
Revenues and expenses of the department are recorded
and reported separately. The departments are then
consolidated into the accounts of the head office to
prepare the financial statements of the company.
A department is defined as a part with the special or
allocated duty/ function or area of activity.
3. Departmental accounts refer to the maintenance of
accounts of a business in a manner that makes it
possible to,. ascertain the operational results of
each activity, section or department by preparing
separate trading and profit & loss account for each
ane of them. In fact, departmental accounts are
nothing more than as many trading and profit &
loss accounts as there are the departments.
4. 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 head office which is then
incorporated by head office in their accounts.
Thus, a departmental accounting system is an
accounting information system that records the
activities and financial information about the
department.
5. BASIS OF
DIFFERENCE
DEPARTMENTAL
ACCOUNTING
BRANCH ACCOUNTING
LINKAGE
Departments are attached
with the main organization
under a single roof.
Branches are separate from the
main organization.
RESULTS OF
Departments are the results of
fast human life.
Branches are the outcomes of
the tough competition and
expansion of the business.
GEOGRAPGICA
L LOCATION
Departments are not
geographically separated.
Branches are geographically
separated.
6. TYPES
There is no classification of
departments.
The branches may be
dependent or independent.
ALLOCATION
OF EXPENSES
Allocation of departmental
common expenses is a tough
job.
There is no need of allocation
of branch expenses.
RECONCILIATI
ON
In departmental accounts, no
reconciliation is required
because there is no central
account division.
To find out the net result of
organization the reconciliation
of different branch is a main
job.
TRADING
Departmental trading with
their head office is conducted
under the same roof although
each department deals with
separate line of activity.
Branch trading is conducted in
different parts of the country
under the head office dealing
with usually the same line of
activity.
7. ADVANTAGES OF DEPARTMENTAL
ACCOUNTING
The main advantages of departmental accounting are as
follows:
Evaluation of performance : The performance of each
department can be evaluated separately on the basis of
trading results. An endeavour may be made to push up
the sales of that department which is earning maximum
profit.
Growth potential of each department : The growth
potential of a departments compared to others can be
evaluated.
8. Justification of capital outlay : It helps the
management to determine the justification of
capital outlay in each department.
Judgement of efficiency : It helps to calculate
stock turnover ratio of each department separately,
and thus the efficiency of each department can be
revealed.
9. Planning and control : Availability of separate
cost and profit figures for each department
facilitates better control. Thus effective planning
and control can be achieved on the basis of
departmental accounting information.
Policy formulation: Management policies towards
inventories extending credit, additional investment
etc. are facilitated.
10. BASIS OF ALLOCATION OF COMMON
EXPENDITURE AMONG DIFFERENT
DEPARTMENTS
Expenses should be allocated among different
departments on a rational basis while preparing
departmental accounts.
Individual Identifiable Expenses: Expenses incurred
specially for a particular department are charged directly
thereto, e.g., insurance charges of stock held by the
department.
11. Common Expenses : Common expenses, the
benefit of which is shared by all the departments
and which are capable of precise allocation are
distributed among the departments concerned on
some equitable basis considered suitable in the
circumstances of the case.
12. S.
No
Expenses Basis
1. Rent, rates and taxes,
repairsmaintenance,
insurance of building
Floor area occupied by
each department (if
given) other wise on time
basis
2. Lighting and Heating
expenses energy
expenses)
Consumption of energy
by each department
13. 3. Selling expenses, e.g., discount,
bad debts, selling commission,
freight outward, travelling sales
manager’s salary and other
costs
Sales of each department
4. Carriage inward/ Discount
received
Purchases of each department
5. Wages/Salaries Time devoted to each
department
14. 6. Depreciation, insurance,
repairsmaintenance of
capital assets
and Value of
assets
ofotherwise
on time basis
each department
7. Administrative and other expenses,
e.g., salaries of managers, directors,
commonadvertisement expenses, etc.
Time basis or equally among all
departments
8. Labour welfare expenses Number of employees in each
department
9. PF/ESI contributions Wages and salaries of each
department
15. TYPES OF DEPARTMENTS
There are two types of departments: Dependent and
Independent Departments.
1.Independent Departments
Departments which work independently of each other and
have negligible inter- department transfers are called
Independent Departments.
2.Dependent Departments
Departments which transfer goods from one department to
another department for further processing are called dependent
departments. Here, the output of one department becomes the
input for the other department.
16. INTER-DEPARTMENTAL TRANSFER AT
COST PRICE
The price at which one department supplies
goods to another department or when some
services are rendered by department to the
another department is known as Transfer Price.
It refers to the charge made for goods and
services sold internally. It may be market price
if one is available.
17. INTER-DEPARTMENTAL TRANSFER AT SALE
OR INVOICE PRICE
The goods may also be transferred from one department
to another at sale or invoice price. The department
which transfers the goods is known as Transferor
department and the department to which goods are
transferred is known as Transferee department. In this
case, the transferor department retains the normal profit
and does not allow the transferee department to increase
its profit at the cost of the transferor.
