UNIT III
Departmental Accounting
PART A
Question Bank
Q1) How can Departmental Accounting be defined? (8 marks)
A1) 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 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.
Q2) State the purpose of Departmental Accounting. (5 marks)
A2) 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 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.
Q3) Explain the Department Accounting Methods and Techniques. (5 marks)
A3) 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.
- Where individual book sets are maintained:
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.
Q4) What are the Benefits of Department Accounting? (8 marks)
A4) 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.
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.
Q5 What is the Basis of Allocation of Common Expenditure among different Departments? ( 8 marks)
A5) 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.
Sr No | Expenses | Basis of Allocation |
1. | Rent, rates and taxes, repairs and maintenance, insurance of building | Floor area occupied by each department (if given) otherwise on time basis |
2. | Lighting and Heating expenses (e.g., energy expenses) | Consumption of energy by each department |
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 |
6. | Depreciation, insurance, repairs and Maintenance of capital assets | Value of assets of each department Otherwise on time basis |
7. | Administrative and other expenses, e.g., salaries of managers, directors, Common advertisement expenses, | 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 |
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:
- It can be a very subjective process.
- The best way to allocate costs based on maximum profit. In other words, the department that benefits most from cost must bear the most cost.
- This makes the allocation process very time consuming and costly.
- A better standard is to depreciate based on the book value of each department's assets.
- Asset insurance based on the book value of the asset.
Q5) What are the types of Departments? (5 marks)
A6) If a business consists of several independent activities, or is divided into several departments, for carrying on separate functions, its management is usually interested in finding out the working results of each department to ascertain their relative efficiencies. This can be made possible only if departmental accounts are prepared. Departmental accounts are of great help and assistance to the managements as they provide necessary information for controlling the business more intelligently and effectively. It is also helpful in readily identifying all types of wastages, e.g., wastage of material or of money; Also, attention is drawn to inadequacies or inefficiencies in the working of departments or units into which the business may be divided
Department type
There are two types of departments: subordinate departments and independent departments.
- Independent Department
Departments that function independently of each other and have very little movement between departments are called independent departments. Departments which work independently of each other and have negligible inter- department transfers.
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.
Q6) What are Inter Departmental Transfers? (5 marks)
A7)
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:
Q7) What journal entry is passed in order to eliminate unrealized gains? (5 marks)
A8) 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)
Q8) What is the Treatment of Expenses in Departmental Accounts? (8 marks)
A9) A business is often divided into a number of departments dealing in different types of goods or services. For example, a retail store might have separate departments for clothing and shoes. Departmental accounting allows the business to prepare departmental trading and profit and loss accounts in order that it can assess the profitability of each of these departments.
The advantages of departmental accounting are that the business is able to identify the financial performance of each of its departments. By making comparisons it can identify inefficient departments and make informed managerial decisions about their future. In addition, managers and staff can be given responsibility and motivated and rewarded on the basis of departmental performance.
Recording Departmental Transactions
Departmental transactions are recorded by adding additional columns to the book-keeping special journals or day books.
Typically, the special journals which need to have department columns added are the purchases journal, sales journal, purchase returns journal, sales returns journal and the cash book. Each journal book will have a separate column for each department, for example a retail store might have a column for clothing and shoes.
The journal totals for each department are then posted to the relevant accounts in the general ledger. The general ledger can have a separate ledger account for each department using a 5-digit chart of accounts or a single account with departmental columns.
Treatment of Expenses in Departmental Accounts
In departmental accounting expenses fall into two categories.
Direct Expenses
Expenses which can be directly attributed and allocated to a department such as wages relating to employees working in the department, or electricity costs which are separately metered. The identification and allocation of expenses in departmental accounts is relatively easy to deal with and the expenses are charged directly to that department. It is important to note that these expenses are under the control of the department manager.
Indirect Expenses
Expenses which are common to all departments such as general administrative wages, rent for premises, or advertising costs. These expenses are more difficult to deal with and need to be apportioned between the various departments using a suitable basis. These expenses are not under the control of the department manager.
Departmental Accounting Methods
A departmental accounting system can be operated in a number of ways depending on the level of complexity required and the time and resources available
Gross Profit Method
The simplest departmental accounting method is the gross profit method. This method calculates the gross profit of each department by analyzing transactions relating to sales, purchases and inventory.
Expenses of the business are then deducted from the total of the gross profits of all departments to arrive at the net profit for the business.
Using this method gross profit is shown by department and net profit is shown for the business as a whole.
Contribution Method
The contribution method adds a level of complexity to the gross profit method by additionally allocating expenses which can be directly associated with a department to determine a departmental contribution.
Indirect expenses of the business are then deducted from the total of the departmental contributions to arrive at the net profit of the business.
Net Profit Method
The net profit method is the most complex and time consuming of the departmental accounting methods as it analyses all transactions. Indirect expenses not directly associated with a department such as rent, need to be apportioned to each department using a suitable base.
Q9) Explain Departmental Accounting System with an example. (5 marks)
A10) A departmental accounting system is an accounting information system that records the activities and financial information about the department. Managers can use the financial information from the departmental accounting system to tell how profitable and efficient each department is.
Larger corporations can’t be properly accounted for with one single, centralized accounting system. That is why the corporation is divided into many different departments like the shipping and receiving department, sales department, and manufacturing department. Many companies also departmentalize based on products. Departmental stores have many types of stores under a single roof, for example one departmental store may have a cosmetic store, shoe store, stationery store, readymade departmental store, grocery stores, medicines, and many more.
It is essential to know the profit and loss account of each departmental store at the end of the accounting year. However, it can be done by maintaining the department wise Trading & Profit and Loss account.
Objectives of Departmental Accounting
Following are the main objectives of the departmental accounting −
- To know the financial position of each and every department separately, it is helpful to make a comparison.
- Calculate commission of the managers department wise.
- Evaluate performance, planning, and control.
Example
For instance, Microsoft has a Windows department, Xbox department, and Microsoft Office department.
Each one of these departments has its own accounting system to keep track of revenues and expenses. These accounting systems also provide useful efficiency ratios for management. Managers can use these ratios to evaluate the departments and consider merging departments or getting rid of some departments altogether.
Managers tend to look at whether the department is a cost center or profit center. Some departments that do not produce a profit are still worth keeping around because they share in the interdepartmental expenses like rent and utilities.
Following are the examples of some expenses, which are not directly related to any particular department may be divide as −
- Cartage Freight Inward Account − Above expenses may be divided according to purchase of each department.
- Depreciation − Depreciation may be divided according to the value of assets employed in each department.
- Repairs and Renewal Charges − Repair and renewal of the assets may be divided according to the value of the assets used by each department.
- Managerial Salary − Managerial salary should be divided according to the time spent by the manager in each department.
- Building Repair, Rents & Taxes, Building Insurance, etc. − All the expenses related to the building should be divided according to the floor space occupied by each department.
- Selling and Distribution Expenses − All the expenses relating to selling and distribution expenses should be divided according to the sales of each department, such as freight outward, travelling expenses of sales personals, salary and commission paid to salesmen, after sales services expenses, discount and bad debts, etc.
- Insurance of Plant & Machinery − The value of such Plant & Machinery in each department is the basis of the insurance.
- Employee/worker Insurance − Charges of a group insurance should be divided according to the direct wage expenses of each department.
- Power & Fuel − Power & fuel will be allocated according to the working hours and power of the machine (i.e., Hours worked x Horse power).
PART B
Question Bank
Q10) 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: (8 marks)
Particulars | Dr. Rs. | Cr. Rs. |
Stock (1.1.2013): Dept. A Dept. B Purchases: Dept. A Dept. B Sales: Dept. A Dept. B Wages: Dept. A Dept. B Rent Salaries Lighting and Heating Discount Allowed Discount Received Advertising Carriage Inward Furniture and Fittings Plant and Machinery Sundry Debtors Sundry Creditors Capital Drawings Cash in hand Cash at Bank |
5,400 4,900
9,800 7,350
1,340 240 1,870 1,320 420 441
738 469 600 4,200 1,820
900 32 1,980 |
16,900 13,520
133
3,737 9,530 |
43,820 | 43,820 |
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
Particulars | Dept. A Rs | Dept. B Rs | Total Rs | Particulars | Dept. A Rs | Dept. B Rs | Total Rs |
To Opening Stock | 5,400 | 4,900 | 10,300 | By Sales To Closing Stock
By Gross Profit b/d
To Dis. Received (4 :3) To Net Loss | 16,900 | 13,520 | 30,420 |
To Purchase | 9,800 | 7,350 | 17,150 | 2,748 | 2,401 | 5,149 | |
To Wages | 1,340 | 240 | 1,580 |
|
|
| |
To Carriage Inwards (4:3) | 268 | 201 | 4691 |
|
|
| |
To Rent | 600 | 300 | 9006 |
|
|
| |
To Lighting and Heating | 240 | 120 | 3602 |
|
|
| |
To Gross Profit c/d | 2,000 | 2,810 | 4,810 |
|
|
| |
| 19,648 | 15,921 | 35,569 | 19,648 | 15,921 | 35,569 | |
To Rent |
400 |
200 |
6006 |
2,000 |
2,810 |
4,810 | |
To Advertisement | 410 | 328 | 7384 |
|
|
| |
To Salaries (2:1) | 880 | 440 | 1,3205 |
|
|
| |
To Lighting and Heating | 160 | 80 | 2402 | 76 | 57 | 1337 | |
To Discount Allowed |
|
|
| 339 | --- | --- | |
(on Sales) | 245 | 196 | 4413 |
|
|
| |
To Dep. On (2:1) |
|
|
|
|
|
| |
Plant & Machinery | 280 | 140 | 420 |
|
|
| |
Furniture & Fixture | 40 | 20 | 60 |
|
|
| |
To Net Profit | --- | 1,463 | 1,124 |
|
|
| |
| 2,415 | 2,867 | 4,943 | 2,415 | 2,867 | 4,943 |
Balance Sheet as at 31.12.2013
Liabilities | Amount Rs | Amount Rs | Assets | Amount Rs | Amount Rs |
Capital | 9,530 |
| Plant and Machinery | 4,200 |
|
Add: Net Profit | 1,124 |
| Less: Depreciation | 420 | 3,780 |
| 10,654 |
| Furniture and Fittings | 600 |
|
Less: Drawings | 900 | 9,754 | Less: Depreciation | 60 | 540 |
Sundry Creditors |
| 3,737 |
|
|
|
Outstanding Liabilities: |
|
| Closing Stock: |
|
|
Lighting and Heating |
| 180 | Dept. A | 2,748 |
|
|
|
| Dept. B | 2,401 | 5,149 |
|
|
| Sundry Debtors |
| 1,820 |
|
|
| Prepaid Rent |
| 370 |
|
|
| Cash at Bank |
| 1,980 |
|
|
| Cash in Hand |
| 32 |
|
| 13,671 |
|
| 13,671 |
Workings:
Allocation of Expenses and Incomes
Sl. No. | Expense/Income | Basis | Dept. A | Dept. B |
1 | Carriage Inward | Purchase (4:3) | =Rs 469 x 4/7 = Rs 268 | = Rs 469 x 3/7 = Rs 201 |
2 | Lighting & Heating (Rs 420 + Rs 180) Factory part = 600 x 3/5 Office part = 600 x 2/5 | Rs 600 (Given)
360 240 |
= Rs 360 x 2/3 = Rs 240 = Rs 240 x 2/3 = Rs 160 |
= Rs 360 x 1/3 = Rs 120 = Rs 240 x 1/3 = Rs 80 |
3 | Discount Allowed | = Sales | = Rs 441 x (16900/30420) = Rs 245 | = Rs 441 x (13520/30420) = Rs 196 |
4 | Advertisement | = Sales | = Rs 738 x (16900/30420) = Rs 410 | = Rs 738 x (13520/30420) = Rs 328 |
5 | Salaries | 2 : 1 | = Rs 1,320 x (2/3) = Rs 880 | = Rs 1,320 x (1/3) = Rs 440 |
6 | Rent Rs 1,500 = (Rs 1,870 – Rs 370) Factory part = 1,500 x 3/5 = 900 Office part = 1,500 x 2/5 =600 | 2 : 1
2 : 1 |
= Rs 900 x (2/3) = Rs 600 = Rs 600 x (2/3) = Rs 400 |
= Rs 900 x (1/3) = Rs 300 = Rs 600 x (1/3) = Rs 200 |
7 | Discount Received | Purchase (4:3) | = Rs 133 x (4/7) = Rs 76 | = Rs 133 x (3/7) = Rs 57 |
Q11) The Trading and Profit & Loss Account of Bindas Ltd. For the year ended 31st March is as under : ( 8 marks)
Particulars | Amount Rs | Particulars | Amount Rs | ||
Purchases |
|
| Sales |
|
|
Transistors | (A) | 1,60,000 | Transistors | (A) | 1,75,000 |
Tape Recorders | (B) | 1,25,000 | Tape Recorders | (B) | 1,40,000 |
Spare parts for Servicing and |
|
| Servicing and Repair Jobs | (C) | 35,000 |
Repair Job | (C) | 80,000 | Stock on 31st March |
|
|
|
|
| Transistors | (A) | 60,100 |
Salaries and wages |
| 48,000 | Tape Recorders | (B) | 20,300 |
Rent |
| 10,800 | Spare parts for servicing & |
|
|
Sundry Expenses |
| 11,000 | Repair jobs | (C) | 44,600 |
Net Profit |
| 40,200 |
|
|
|
|
| 4,75,000 |
|
| 4,75,000 |
Prepare Departmental Accounts for each of the three Departments A, B and C mentioned above after taking into consideration the following :
- Transistors and Tape Recorders are sold at the Showroom. Servicing and Repairs are carried out at the Workshop.
- Salaries and wages comprise as follows: Showroom 3/4th and Workshop 1/4th
- It was decided to allocate the Showroom Salaries and Wages in ratio 1:2 between Departments A and B.
- Workshop Rent is Rs 500 per month. Showroom Rent is to be divided equally between Departments A and B.
- Sundry Expenses are to be allocated on the basis of the turnover of each Department.
A2.
Departmental P&L Accounts for the year ended 31st March (Amount in Rs)
Dr. Cr.
Particulars | A Rs | B Rs | C Rs | Particulars | A Rs | B Rs | C Rs |
To Purchases |
| 1,25,000 | — | By Sales | 1,75,000 | 1,40,000 | — |
To Spares | — | — | 80,000 | By Services | — | — | 35,000 |
To Salary & Wages | 12,000 | 24,000 | 12,000 | By Closing Stock | 60,100 | 20,300 | 44,600 |
To Rent | 2,400 | 2,400 | 6,000 | By Net Loss | — | — | 19,500 |
To Sundry Expenses* | 5,500 | 4,400 | 1,100 |
|
|
|
|
To Net Profit | 55,200 | 4,500 |
|
|
|
|
|
| 2,35,100 | 1,60,300 | 99,100 |
| 2,35,100 | 1,60,300 | 99,100 |
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; and
- At Invoice Price i.e., Market Based Price.
At Cost Price
When transfers are made, Recipient Department should be debited at cost price and Transferring Department should be credited at Cost Price.
Q12) 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. ( 5 marks)
Solution:
In the Books of...
Journal
Date | Particulars | L/F | Debit Rs | Credit Rs |
| Department Trading (B) A/c Dr. To Department Trading (A) A/c (Goods are transferred to Department B from Department A.) |
| 30,000 |
30,000 |
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
Q13) 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: (8 marks)
Particulars | Department A Rs | Department B Rs | Department C Rs |
Transfer from Department A Transfer from Department B Transfer from Department C | --- 28,000 12,000 | 30,000 --- 10,000 | 22,000 24,000 --- |
Find out the correct departmental profit after charging manager’s commission.
A4)
Computation of correct Profit
Particulars | Department A Rs | Department B Rs | Department C Rs |
Profit after charging manager’s commission. Add back: Manager’s Commission @ 1/9th | 72,000 8,000 | 54,000 6,000 | 36,000 4,000 |
Less: Unrealised Profit on stock | 80,000 8,000 | 60,000 9,000 | 40,000 4,000* |
Profit before charging Manager’s Commission Less: Manager’s Commission @10% Correct Profit after charging commission | 72,000 7,200 | 51,000 5,100 | 36,000 3,600 |
64,800 | 45,900 | 32,400 |
Workings:
Computation of unrealized Profit on Stock
Particulars | Department A Rs | Department B Rs | Department C Rs | Total Rs |
Department - A | --- | 30,000 x 1/5 = Rs 6,000 | 22,000 x 1/11 = Rs 2,000 | 8,000 |
Department - B | 28,000 x 15/100 = Rs 4,200 | --- | 24,000 x 20/100 = Rs 4,800 | 9,000 |
Department - C | 12,000 x 1/6 = Rs 2,000 | 10,000 x 1/5 = Rs 2,000 | --- | 4,000 |
Q14) Snow White Ltd has two departments — Cloth and Readymade Clothes. Ready Made Clothes are made by the Firm itself out of cloth supplied by the Cloth Department at its usual selling price. From the following figures, prepare Departmental Trading and Profit and Loss Accounts for the year ended 31st March 2013. ( 12 marks)
Particulars | Cloth Department (Rs) | Readymade Clothes (Rs) |
Opening Stock on 1st April, 2012 Purchases Sales Transfer to Readymade Clothes Department Expenses - Manufacturing Selling Closing Stock on 31st March, 2013 | 3,00,000 20,00,000 22,00,000 3,00,000 — 20,000 2,00,000 | 50,000 15,000 4,50,000 — 60,000 6,000 60,000 |
The Stock in the Readymade Clothes Department may be considered as consisting of 75% Cloth and 25% other expenses. The Cloth Department earned Gross Profit at the rate of 15% during the year 2011-12.
General Expenses of the business as a whole came to Rs 1,10,000.
A5)
Departmental Trading and Profit and Loss A/c for the year ended 31st March 2013
Dr. Cr.
Particulars | Cloth (Rs) | RM (Rs) | Total (Rs) | Particulars | Cloth (Rs) | RM (Rs) | Total (Rs) |
To Opg. Stock | 3,00,000 | 50,000 | 3,50,000 | By Sales | 22,00,000 | 4,50,000 | 26,50,000 |
To Purchases | 20,00,000 | 15,000 | 20,15,000 | By Tfr. To RM | 3,00,000 | — | 3,00,000 |
To Tfr from | — | 3,00,000 | 3,00,000 | By Closing | 2,00,000 | 60,000 | 2,60,000 |
Cloth Dept. |
|
|
| Stock |
|
|
|
To Mfg. Exps. |
| 60,000 | 60,000 |
|
|
|
|
To Gross Profit | 4,00,000 | 85,000 | 4,85,000 |
|
|
|
|
| 27,00,000 | 10,000 | 32,10,000 |
| 27,00,000 | 5,10,000 | 32,10,000 |
To Selling Exp. | 20,000 | 6,000 | 26,000 |
| 4,00,000 | 85,000 | 4,85,000 |
To Profit c/d | 3,80,000 | 79,000 | 4,59,000 | By Gross Profit |
|
|
|
4,00,000 | 85,000 | 4,85,000 | 4,00,000 | 85,000 | 4,85,000 | ||
|
|
|
| By Profit b/d |
|
| 4,59,000 |
To Gen. Exp. To Stock Reserve | 1,10,000 1,575 |
|
| ||||
(See Note below) To Net profit | 3,47,425 |
|
| ||||
4,59,000 | 4,59,000 |
Note 1: Stock Reserve to be additionally provided is 7,200 – 5,625 = Rs 1,575; calculated as under :
Particulars | On Opening Stock | On Closing Stock |
Rate of GP on Sales in Cloth Dept Element of Cloth Stock in Readymade Clothes Stock Reserve required to be maintained | Given = 15% 75% of 50,000 = 37,500 37,500 × 15% = 5,625 | 4,00,000 ÷ 25,00,000 = 16% 75% of 60,000 = 45,000 45,000 × 16% = 7,200 |
Note 2: In this case, it is possible to ascertain the Reserve already created against Unrealised Profit in the Opening Stock. In the absence of information, the Reserve should be calculated on the difference in the Opening and Closing Stocks i.e. Rs 10,000 in this question. Since the Closing Stock has increased, the Reserve calculated would be debited to P&L A/c. In case of decrease in Stocks, the Reserve would be credited to P&L A/c.
Q15) A & Co. Has two departments P & Q. Department P sells goods to department Q at normal selling prices. From the following particulars, prepare departmental Trading & PL account for the year ended 31.03.2018 and also ascertain the net profit to be transferred to Balance Sheet: (8 marks)
Particulars | Department P (Rs) | Department Q (Rs) |
Opening stock | 5,00,000 | NIL |
Purchases | 28,00,000 | 3,00,000 |
Goods from P | NIL | 8,00,000 |
Wages | 3,50,000 | 2,00,000 |
Travelling expenses | 20,000 | 1,60,000 |
Closing stock at cost to the department | 8,00,000 | 2,09,000 |
Sales | 30,00,000 | 2,00,0000 |
Printing & Stationery | 30,000 | 25,000 |
The following expenses incurred for both the departments were not apportioned between the departments:
Salaries Rs 33,000, advertisement expenses Rs 1,20,000, General expenses Rs 5,00,000, Depreciation is to be charged @30% on the machinery worth Rs 96,000.
The advertisement expenses of the departments are to be apportioned in the turnover ratio. Salaries and depreciation are to be apportioned in the ratio 2:1 and 1:3 respectively. General expenses are to be apportioned in the ratio 3:1.
A6)
A & CO.
Departmental Trading and P/L Account for the year ended 31.03.2018
Dr. Cr.
Particulars | Deptt. P (Rs) | Deptt. Q (Rs) | Total (Rs) | Particulars | Deptt. P (Rs) | Deptt. Q (Rs) | Total (Rs) |
To Opening Stock |
| Nil | 5,00,000 | By Sales | 30,00,000 | 20,00,000 | 50,00,000 |
To Purchases | 28,00,000 | 3,00,000 | 31,00,000 | By Goods Transferred to Q | 8,00,000 |
|
|
To Goods from P |
| 8,00,000 |
| By Closing Stock | 8,00,000 | 2,09,000 | 10,09,000 |
To Wages | 3,50,000 | 2,00,000 | 5,50,000 |
|
|
|
|
To Gross Profit c/d | 9,50,000 | 9,09,000 | 18,59,000 |
|
|
|
|
| 46,00,000 | 22,09,000 | 60,09,000 |
| 46,00,000 | 22,09,000 | 60,09,000 |
To Travelling Expenses | 20,000 | 1,60,000 | 1,80,000 | By Gross Profit b/d | 9,50,000 | 9,09,000 | 18,59,000 |
To Printing & Stationery | 30,000 | 25,000 | 55,000 |
|
|
|
|
To Salaries (2:1) | 2,20,000 | 1,10,000 | 3,30,000 |
|
|
|
|
To Advertisement Expenses (3:2) | 72,000 | 48,000 | 1,20,000 |
|
|
|
|
To General Expenses (3:1) | 3,75,000 | 1,25,000 | 5,00,000 |
|
|
|
|
To Depreciation (1:3) | 7,200 | 21,600 | 28,800 |
|
|
|
|
To Net Profit c/d | 2,25,800 | 4,19,400 | 6,45,200 |
|
|
|
|
| 9,50,000 | 9,09,000 | 18,59,000 |
| 9,50,000 | 9,09,000 | 18,59,000 |
|
|
|
| By Net Profit b/d |
|
| 6,45,200 |
To Provision for unrealised profit on closing stock (note 2) |
|
| 38,000 |
|
|
|
|
To Capital A/c (net profit transferred) |
|
| 6,07,200 |
|
|
|
|
Working notes:
1. Gross profit ratio of department P = 9,50,000/(30,00,000 + 8,00,000)×100 = 25%
2. Proportionate P department’s stock in department Q
(Purchase from department P/total purchases of department Q)*total stock of department Q
= Rs (8,00,000/11,00,000) × Rs 2,09,000 = Rs 1,52,000
Unrealised profit = 25% of Rs1,52,000 = Rs 38,000
Q16) Samudra & Co, a Partnership Firm has three departments viz. K, L, M which are under the charge of the Partners B, C and D respectively. The following Consolidated P&L Account is given below : ( 8 marks)
Dr. Profit and Loss Account Cr.
Particulars | Amount Rs | Particulars | Amount Rs |
To Opening Stocks (Note 1) | 81,890 | By Sales (Note 7) | 4,00,000 |
To Purchases (Note 2) | 2,65,700 | By Closing Stocks (Note 8) | 89,000 |
To Salaries and Wages | 48,000 | By Discounts Received (Note10) | 800 |
(Note 3) |
|
|
|
To Rent Expenses (Note 4) | 10,800 |
|
|
To Selling Expenses (Note 5) | 14,400 |
|
|
To Discount Allowed (Note 5) | 1,200 |
|
|
To Depreciation (Note 6) | 750 |
|
|
To Net Profit for the year | 67,060 |
|
|
| 4,89,800 |
| 4,89,800 |
From the above Account and the following additional information, prepare the Departmental P&L Accounts for the year ended 31st March, 2013.
- Break up of Opening Stock Department wise is: K - Rs 37,890; L - Rs 24,000 and M - Rs 20,000.
- Total Purchases were as under: K - Rs 1,40,700; L - Rs 80,600; M - Rs 44,400.
- Salaries and Wages include Rs 12,000 wages of Department M. The balance Salaries should be apportioned to the three departments as 4:4:1.
- Rent is to be apportioned in the ratio of floor space which is as 2:2:5.
- Selling Expenses and Discount Allowed are to be apportioned in the ratio of Turnover.
- Depreciation on assets should be equally charged to the three departments.
- Sales made by the three departments were: K - Rs 1,80,000; L - Rs 1,30,000 and M - Rs 90,000.
- Break up of Closing Stock Department wise is: K - Rs 45,100; L - Rs 22,300 and M - Rs 21,600. The Closing Stock of Department M includes Rs 5,700 goods transferred from Department K. However, Opening Stock does not include any goods transferred from other departments.
- Departments K and L sold goods worth Rs 10,700 and Rs 600 respectively to Department M.
- Discounts received are traceable to Departments K, L and M as Rs 400; Rs 250 and Rs 150 respectively.
- Partners are to share the profits as under: (a) 75% of the Profits of Departments K, L and M to the respective Partner in Charge, (b) Balance Profits to be credited as 2:1:1.
A7)
- Departmental P&L Accounts for the year ended 31st March, 2013
Dr. Cr.
Particulars | K (Rs) | L (Rs) | M (Rs) | Particulars | K (Rs) | L (Rs) | M (Rs) |
To Opening Stock |
| 24,000 | 20,000 | By Sales | 1,80,000 | 1,30,000 | 90,000 |
To Purchases | 1,40,700 | 80,600 | 44,400 | By Transfer | 10,700 | 600 | — |
To Inter-Dept Trf | — | — | 11,300 | By Closing Stock | 45,100 | 22,300 | 21,600 |
To Wages | — | — | 12,000 |
|
|
|
|
To Gross Profit c/d | 57,210 | 48,300 | 23,900 |
|
|
|
|
| 2,35,800 | 1,52,900 | 1,11,600 |
|
|
|
|
To Salaries (4:4:1) | 16,000 | 16,000 | 4,000 |
| 2,35,800 | 1,52,900 | 1,11,600 |
To Rent (2:2:5) | 2,400 | 2,400 | 6,000 | By Gross Profit b/d | 57,210 | 48,300 | 23,900 |
To Selling Exp | 6,480 | 4,680 | 3,240 | By Discounts |
|
|
|
To Disc. (18:13:9) | 540 | 390 | 270 | Received |
|
|
|
To Depreciation | 250 | 250 | 250 |
| 400 | 250 | 150 |
To Net Profit c/d | 31,940 | 24,830 | 10,290 |
|
|
|
|
| 57,610 | 48,550 | 24,050 |
| 57,610 | 48,550 | 24,050 |
2. Computation of Stock Reserve
From the above profits, Stock Reserve should be eliminated on the Closing Stock.
- GP Rate in Department K = (57,210 x 100)/1,90,700 = 30%.
- Stock Reserve = 30% on Rs 5,700 = Rs 1,710.
3. Profit and Loss Appropriation Account
Dr. Cr.
Particulars | Amount Rs | Particulars | Amount Rs | |
To Stock Reserve |
| 1,710 | By Profit b/d | 67,060 |
To Profits transferred to Capital: |
|
| (31,940 + 24,830 + 10,290) |
|
B : 75% of 31,940 | 23,955 |
|
|
|
C : 75% of 24,830 | 18,623 |
|
|
|
D : 75% of 10,290 | 7,718 | 50,296 |
|
|
To balance profits trfd in 2: 1: 1 |
|
|
|
|
B : 50% of 15,054 | 7,527 |
|
|
|
C : 25% of 15,054 | 3,763 |
|
|
|
D : 25% of 15,054 | 3,764 |
|
|
|
(bal.fig) |
| 15,054 |
|
|
|
| 67,060 |
| 67,060 |
Q17) Pooma Ltd. Has 2 departments M & S. From the following particulars, prepare Departmental Trading Account & Consolidated Trading Account for the year ended 31st March, 2013. (12 marks)
Particulars | M (Rs) | S (Rs) |
Opening Stock Purchases Carriage Inwards Wages Sales (excluding inter departmental transfers) Purchased Goods transferred By S to M By M to S Finished Goods transferred By S to M By M to S Return of Finished Goods By M to S By S to M Closing Stock Purchased Goods Finished Goods | 20,000 92,000 2,000 12,000 1,40,000
10,000 —
35,000 —
10,000 —
4,500 24,000 | 12,000 68,000 2,000 8,000 1,12,000
— 8,000
— 40,000
— 7,000
6,000 14,000 |
Purchased Goods have been transferred at their respective departmental Purchase Cost & Finished Goods at Departmental Market Price. 20% of Finished Stock (Closing) at each Department represented Finished Goods received from the other Department.
A8)
- Departmental Trading, Profit & Loss Account for the year ended 31st March, 2013
Dr. Cr.
Particulars | M (Rs) | S (Rs) | Particulars | M (Rs) | S (Rs) |
To Opening Stock |
| 12,000 | By Sales | 140,000 | 112,000 |
To Purchases | 92,000 | 68,000 | By Transfer: |
|
|
To Transfer : |
|
| Purchased Goods | 8,000 | 10,000 |
Purchased Goods | 10,000 | 8,000 | Finished Goods | 35,000 | 40,000 |
Finished Goods | 40,000 | 35,000 | By Closing Stock Purchased |
|
|
To Wages | 12,000 | 8,000 | Goods | 4,500 | 6,000 |
To Carriage Inwards | 2,000 | 2,000 | Finished Goods out of t/f | 4,800 | 2,800 |
To Return of Finished Goods | 7,000 | 10,000 | Balance | 19,200 | 11,200 |
To Gross Profit | 38,500 | 46,000 | By Return of Finished Goods | 10,000 | 7,000 |
|
|
|
|
|
|
| 2,21,500 | 1,89,000 |
| 2,21,500 | 1,89,000 |
b. Calculation of Gross Profit Ratio
Particulars | M (Rs) | S (Rs) |
Sales Add : Transfer of Finished Goods Less : Return of Finished Goods Net Sales [A] Gross Profit [B] as calculated below Gross Profit Ratio [B ÷ A] | 140,000 35,000 (7,000) 168,000 38,500 22.9% | 112,000 40,000 (10,000) 142,000 46,000 32.4% |
c. Consolidated Trading Account for the year ended 31st March, 2013
Dr. Cr.
Particulars | Amount (Rs) | Particulars | Amount (Rs) | ||
To | Opening Stock (20,000+12,000) |
| By | Sales (1,40,000 + 1,12,000) | 2,52,000 |
To | Purchases (92,000 + 68,000) | 160,000 | By | Closing Stock |
|
To | Wages (12,000 + 8,000) | 20,000 | By | Purchase Goods 10,500 |
|
To | Carriage Inwards | 4,000 |
| (4,500+6,000) |
|
| (2,000+2,000) |
| By | Finished Goods 38,000 | 48,500 |
To | Stock Reserve: |
|
| (24,000+14,000) |
|
| [24,000 × 20%] × 32.4% | 1,555 |
|
|
|
| [14,000 × 20%] × 22.9% | 641 |
|
|
|
To | Net Profit | 82,304 |
|
|
|
|
| 3,00,500 |
|
| 3,00,500 |
Q18) Department X sells goods to Department Y at a profit of 25% on cost & to Department Z at a profit of 10% on cost. Department Y sells goods to X & Z at a profit of 15% & 20% on sales, respectively.
Department Z charges 20% & 25% profit on cost to Department X & Y, respectively.
Department Managers are entitled to 10% Commission on Net Profit subject to Unrealised profits on Departmental sales being eliminated.
Departmental profits after charging manager’s commission, bur before adjustment of unrealised profits are : X = Rs 36,000; Y = Rs 27,000; Z = Rs 18,000
Stocks lying at different departments at the year end are as under : ( 8 marks)
Particulars | X (Rs) | Y (Rs) | Z (Rs) |
Transfer from Department X Transfer from Department Y Transfer from Department Z | — 14,000 6,000 | 15,000 — 5,000 | 11,000 12,000 — |
Find out the correct Departmental Profits after charging Managers’ Commission.
A9)
Computation of Unrealised Profits
From Department X to Y and Z At 25% and 10% of Cost |
Nil | 15,000 × 25/125 = 3,000 | 11,000 × 10/110 = 1,000 | 4,000 |
From Department Y to X and Z At 15% and 20% of Sales | 14,000 × 15/100 = 2,100 | Nil | 12,000 × 20/100 = 2,400 | 4,500 |
From Department Z to X and Y At 20% and 25% of Cost | 6,000×20/120 = 1,000 | 5,000×25/125 = 1,000 | Nil | 2,000 |
Computation of Correct Departmental Profits after charging Manager’s Commission correctly
Particulars | Department X (Rs) | Department Y (Rs) | Department Z (Rs) |
Profits after charging Manager’s Commission Add : Wrong Commission = 10% of Profits = 1/10 on Profits before charging commission = 1/9 on Profits after charging commission | 36,000 1/9 × 36,000 = 4,000 | 27,000 1/9 × 27,000 = 3,000 | 18,000 1/9 × 18,000 = 2,000 |
Profits before charging commission Less : Unrealised Profits i.e. Stock Reserve | 40,000 4,000 | 30,000 4,500 | 20,000 2,000 |
Profits qualifying for commission Less : Commission at 10% of above | 36,000 3,600 | 25,500 2,550 | 18,000 1,800 |
Correct Profits after charging commission | 32,400 | 22,950 | 16,200 |
Q19) The following details are available in respect of a business for a year.
Department | Opening Stock | Purchase | Sales |
X Y Z | 120 units 80 units 152 units | 1,000 units 2,000 units 2,400 units | 1,020 units at Rs 20.00 each 1,920 units at Rs 22.50 each 2,496 units at Rs 25.00 each |
The total value of purchases is Rs 1,00,000. It is observed that the rate of Gross Profit is the same in each department. Prepare Departmental Trading Account for the above year. (8 marks)
A10)
Computation of Closing Stock Quantity (in units)
Particulars | X | Y | Z |
Opening Stock Add: Purchases Less : Units Sold | 120 1,000 (1,020) | 80 2,000 (1,920) | 152 2,400 (2,496) |
Closing Stock | 100 | 106 | 56 |
Computation of Gross Profit Ratio
We are informed that the GP Ratio is the same for all departments. Selling Price is given for each department’s products but the Sale Quantity is different from that of Purchase Quantity. To find the Uniform GP Rate, the sale value of Purchase Quantity should be compared with the Total Cost of Purchase, as under. Assuming all purchases are sold, the sale proceeds would be
Department | X | 1,000 | Units | @ | Rs 20.00 | 20,000 |
Department | Y | 2,000 | Units | @ | Rs 22.50 | 45,000 |
Department | Z | 2,400 | Units | @ | Rs 25.00 | 60,000 |
Total Sale Value of Purchase Quantity | 125,000 |
| ||||
Less : Cost of Purchase | 1,00,000 |
| ||||
Gross Profit Amount Gross Profit Ratio | 25,000 25,000 ÷ 1,25,000 |
20% of Selling Price | ||||
Computation of Profit and Cost for each article
Department | Selling Price | Profit at 1/5 of SP | Cost = Sales – Profit |
Department X Department Y Department Z | Rs 20.00 Rs 22.50 Rs 25.00 | 1/5 of Rs 20.00 = 4.00 1/5 of Rs 22.50 = 4.50 1/5 of Rs 25.00 = 5.00 | Rs 16.00 Rs 18.00 Rs 20.00 |
Departmental Trading Account for the year ended
Dr Cr
Particulars | X (Rs) | Y (Rs) | Z (Rs) | Total (Rs) | Particulars | X (Rs) | Y (Rs) | Z (Rs) | Total (Rs) |
To Op. Stock To Purchase To Gross Profit | 1,920 16,000 4,080 | 1,440 36,000 8,640 | 3,040 48,000 12,480 | 6,400 100,000 25,200 | By Sales By Cl. Stock | 20,400 1,600 | 43,200 2,880 | 62,400 1,120 | 126,000 5,600 |
22,000 | 46,080 | 63,520 | 131,600 | 22,000 | 46,080 | 63,520 | 131,600 |
Opening and Closing Stocks are valued at Cost as indicated in WN 3 above. Sale Amount in the Trading Account is computed for the Sale Quantity only. Gross Profit is calculated at 20% of Sale Value.
