3.1 Meaning of Departmental Accounting

Introduction

Department accounting refers to maintaining an account in one or more branches or departments of a company. Department revenues and expenses are written down and described separately. The department accounts are then integrated into the head office accounts and the company's financial statements are created.

A department store is an example of a large retail sale under one roof. Sold out products vary by department. To calculate the final result of the entire organization, prepare a full-scale transaction and income statement. However, it is credible to prepare individual transactions and income statements to evaluate individual departments.

For example, a textile factory that has its headquarters and factory. A separate account is maintained for each production facility, the final result is sent to the head office, and the head office incorporates it into the account. Maintaining a separate account for each branch of a bank or financial institution also falls into the departmental accounting category. The bank prepares the financial statements after consolidating the accounts of all the branches.

A departmental accounting system is an accounting information system that records activities and financial information about a department. Department accounting is essential for large and prosperous corporate organizations. Manage waste and misuse, reward employees in terms of profit and commission, and compare performance and progress by year, department, or similar type of company.

Meaning and Concept of Department Accounting

Meaning of department accounting:

When large companies with diverse trading activities are conducted under the same roof, the same thing is usually divided into multiple departments, and each department handles a specific type of goods or services. For example, textile merchants may trade cotton, wool, and jute fabrics. However, the overall performance of this type of business depends on the efficiency of the department.

As a result, it is desirable to maintain accounting in such a way that the results of each department can be seen along with the overall results. The accounting system follows this. The purpose is known as the department account. This accounting system helps owners to:

1. Compare the results between different departments with the previous results.

2. Develop policies to grow or develop your company on the right lines. And

3. Reward department managers based on department results.

Department Accounting Concept:

Divisionization allows large companies to determine areas where special attention needs to be paid to achieving their overall goals. Units or departments that require more funding and attention than others, and units or departments that are further contributing to achieving their goals, can be identified by proper division. The goal is basically to find the performance and ability of the unit or department to make adjustments to achieve the company's goals.

Each unit, department, or subsidiary is free to use some of the company's assets and responsibilities such as profit generation, revenue generation, or cost control. Overhead costs are allocated to departments when each department presents financial statements or when the company prepares financial statements for each department because the company bears the costs on behalf of all departments.

Department accounting is about final account preparation that considers department performance before overall performance. With this accounting system, departmental companies can easily conclude because they are very high-performing units, average or medium-performing units. Department accounting aims to separate several activities of the business to compare results and help owners / owners develop policies.

Purpose of Department Accounting:

The main objectives of Departmental Accounting are:

1. Check the performance between departments.

2. Evaluate department performance based on the results of the previous period.

3. You can grasp the gross profit of each department.

4. Unprofitable departments are revealed.

5. Operational results can be used to determine the compensation of managers in each department.

6. The progress of each department can be monitored for the appropriate action to be taken.

7. To help owners develop appropriate policies for the future.

8. To help administrators decide to remove or add departments.

9. Helps determine department manager fees if linked to the profits achieved by the department.

10. It helps management decide which departments should be further developed and which departments should be closed in order to maximize the profitability of the entire company.

11.It provides detailed information about the entire organization, and.

12. To assist in managing cost control.

13. It also helps you allocate costs to different departments and therefore helps you better manage the costs of your company's departments.

14. For companies with multiple products, it's much easier to manage and monitor multiple departments based on the products they sell than to manage them as a single business.

Department Accounting Methods and Techniques

The department's account is created so that all the information you need is available and the department's profits are right.

There are two ways:

They are as explained below.

This method keeps each department's account independent. The departmental results of all departments are collected and considered to find the final result of the organization.

2.  If all department accounts are kept together by column:

The department's transaction and profit and loss accounts are opened in a column format for each department, and you can see the individual results for the various departments, as well as the individual results for the various departments, as well as the individual columns for Total. However, the balance sheet is prepared in a combined format.

Also, to incorporate the purchase and sale of goods, use additional columns for each department to ledger the auxiliary books and nominal accounts as you reach the desired department's numbers to create the department's final account. Must be included in. If you have a large amount of cash purchases and cash sales, Cash Book also needs to maintain separate columns for cash purchases and cash sales in different departments.

Benefits of Department Accounting

The most important benefits of department accounts are:

1. You can see that the individual results of each department are useful for comparing the performance of all departments. In other words, you can compare transaction results.

2. Department accounts help you understand or identify successes, failures, rates of return, and more.

3. After analyzing the operational results of various departments, it helps management to formulate appropriate action plans and policies to increase profits.

4. Department accounting helps you understand which departments to expand and which departments to close, depending on the outcome of your business.

5. It also helps to promote a healthy competitive spirit between different departments and ultimately to increase the profits of the entire company.

6. For adding or changing different departments, the department account is very helpful as it provides the necessary information.

7. Detailed information about the company is available from departmental accounting, so users of accounting information, especially auditors and investors, will benefit widely.

8. Since department accounting presents individual department results, successful department performance encourages management, employees and motivates the entire staff.

9. Gross profit margin and inventory turnover for each department are useful for comparative studies across all departments.

Department Accounting Principles

To prepare the final account for your departmental business, you need the following:

In some cases, control accounts must rely on to determine the value of a creditor or debtor to a business. In any case, the total value for the entire business is summed, as the department value shows.

Key takeaways:

Basis of Allocation of Common Expenditure among different Departments

The basis for the distribution of common spending between different departments:

Expenses should be reasonably distributed to different departments when preparing the department's accounting.

Personally, Identifiable Expenses: Expenses incurred specifically for a particular department are billed directly, such as insurance premiums for shares held by that department.

Common Expenses: Common expenses that all departments share profits and can be accurately allocated are distributed among related departments based on fair standards that are considered appropriate according to the circumstances of the case.

Note: There are certain costs and incomes, most of which are of economic nature and cannot be allocated on an appropriate basis. Therefore, they are recognized in the income statement, for example, interest on loans, gains on sales of investments.

Appropriateness of several allocation methods – Key points:

Department type

There are two types of departments: subordinate departments and independent departments.

Departments that function independently of each other and have very little movement between departments are called independent departments.

2.  Affiliation Department

The department that transfers goods from one department to another for further processing is called a subordinate department. Here, the output of one department becomes the input of the other department. These transfers can be made at a cost or at a pre-determined selling price. The price at which this is done is known as transfer pricing. These departments require unloading if the transfer pricing has a profit factor. We'll talk about how to eliminate unrealized profits later.

Key takeaways:

Inter Departmental Transfers

Whenever a product or service is offered by one department to another, those costs must be recorded separately, billed to the department that benefits from it, and credited to the department that provides the goods or services. There is. The total of these benefits (transfers between departments) must be disclosed in the department's income statement to distinguish them from other expenditure items.

Basics of Interdepartmental Transfer

Goods and services are typically billed by one department to another under one of three criteria:

(i) Cost,

(ii) Current market price,

(iii) Percentage of cost and agreed profit.

Elimination of Unrealized Profits

If profit is added to the inter-departmental transfer, the cargo contained in the unsold inventory at the end of the year is excluded before the final account is created, and the expected (internal) profit contained therein is excluded.

Stock Reserve

Unrealized gains on unsold shares at the end of the accounting period are eliminated by creating an appropriate stock reserve by debiting the income statement totals. The amount of reserve is calculated as follows:

Journal Entry

At the end of the fiscal year, the following journal entry is passed in order to eliminate unrealized gains (create a stock reserve).

Profit and Loss Account Dr.

To Stock Reserve

(Being a provision made for unrealised profit included in closing stock)

At the beginning of the next fiscal year, the aforementioned journal entry is cancelled as follows:

Stock Reserve   Dr.

To Profit and Loss Account

(Being provision for unrealised profit reversed)

Disclosure on Balance Sheet

The unsold closing price obtained from another department is displayed on the asset side of the balance sheet as follows.

(Excerpt from the Asset Side of the Balance Sheet)

Key takeaways:

Departmental Trading and Profit & Loss Account and Balance Sheet

1. From the following Trial Balance, prepare Departmental Trading and Profit and Loss Account for the year ended 31.12.2013 and a Balance Sheet as at the date in the books of Sri S. Maity:

The following information is also provided:

Rent and Lighting and Heating are to be allocated between Factory and Office in the ratio of 3:2. Rent, Lighting and Heating, Salaries and Depreciation are to be apportioned to A and B Depts. As 2:1. Other expenses and incomes are to be apportioned to A and B Depts. On suitable basis.

The following adjustments are to be made:

Rent Prepaid Rs 370; Lighting and Heating outstanding Rs 180; Depreciation of Furniture and Fittings @ 10% p.a. And Plant and Machinery @ 10% p.a.

The Stock at 31.12.2012: Dept. A Rs 2,748; Dept. B Rs 2,401.

A1.

In the books of Sri S. Maity

Departmental Trading and Profit & Loss Account for the year ended 31.12.2013

Dr.             Cr

Balance Sheet as at 31.12.2013

Workings:

Allocation of Expenses and Incomes

Q.2. The Trading and Profit & Loss Account of Bindas Ltd. For the year ended 31st March is as under :

Prepare Departmental Accounts for each of the three Departments A, B and C mentioned above after taking into consideration the following :

A2.

Departmental P&L Accounts for the year ended 31st March (Amount in Rs)

Dr.             Cr.

Note : Sundry Expenses are apportioned in the ratio of Turnover (5 : 4 : 1) i.e. 1,75,000 : 1,40,000 : 35,000.

Inter Departmental Transfer

Transfer made by one department to another may be recorded either:

At Cost Price

When transfers are made, Recipient Department should be debited at cost price and Transferring Department should be credited at Cost Price.

Q.3. Make an appropriate entry for inter transfer of goods from one department to another. Department A transferred goods for Rs 30,000 to Department B.

Solution:

In the Books of...

Journal

At Invoice Price i.e. Provision for unrealized Profit.

In case of goods transfer from one department to another, no problem arises if all goods are sold within the year. On the other hand, problem arises where all goods are not sold. Under the circumstances, appropriate adjustments must be made against the unsold stock for ascertaining the correct profit or loss. As such, provision to be made for both opening stock and closing stock. The entries for this purpose are:

For Opening Stock Reserve:

Opening Stock Reserve A/c Dr.

To General Profit and Loss A/c

For Closing Stock Reserve:

General Profit and Loss A/c Dr.

To Closing Stock Reserve A/c

Q.4. Department A sells goods to Department B at a profit of 25% on cost and to department C at 10% profit on cost. Department B sells goods to Department A and Department C at a profit of 15% and 20% on sales respectively. Dept. C charges 20% and 25% profit on cost and department A and department b respectively.

Department managers are entitled to 10% commission on net profit after eliminating unrealised profit on department sales being eliminated. Departmental profit after charging managers commission but before adjustment of unrealized profits are: Dept. A Rs 72,000; Dept. B Rs 54,000; and Dept. C Rs 36,000. Stock lying at different departments at the end of the year are:

Find out the correct departmental profit after charging manager’s commission.

A4.

Computation of correct Profit

Workings:

Computation of unrealized Profit on Stock

References:

1. Gupta R.L. And Radha swamy. M, Sultan Chand & Sons, New Delhi.
2. Shukla M. C. Grewal T. S and Gupta S.C., S. Chand & Sons. New Delhi.
3. Shukla S. M., Sahitya Bhawan Publication, Agra.