Contents

Introduction................................................................................................................................2

Advantages of departmental Accounting...................................................................................2

Methods of Departmental Accounts...........................................................................................3

1. Where separate set of books are kept for each department.............................................3

2. Where accounts of all departments are kept together on columnar books......................3

Allocation of Departmental Expenses........................................................................................3

Technique of Departmental Accounts........................................................................................4

1) Columnar purchase and sales books, etc. (Manual System)...........................................4

2) Computerized system......................................................................................................4

Distinction between Departmental accounts and Branch accounting........................................4

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Introduction
A business is generally split out into number of departments when it sells different types of
goods or carries on several activities under the same proof. Such departments are found in
businesses of all sizes. A department is generally a physical part of the rest of the business. It
should not be assumed that departmental accounts refers only to department stores. In fact,
they refer to the various facets of a business. Each department is treated as a separate profit
centre, though none of the departments is separated geographically from the rest of the
departments. This type of organizational subdivision creates a need for internal information
about the operating results of each department. Since different departments may have
different rates of growth, profitability and degrees of risk, managerial decisions in regard to
pricing, closure etc. can be made on the basis of such information. Therefore, the various pros
and cons of the actions to be taken to increase the overall profitability of the business concern
cannot be properly considered until the department profits and losses are known.

Advantages of departmental Accounting

The main advantages of departmental accounting are as follows:

1. The performance of each department can be evaluated separately on the basis of

trading results. An endeavor may be made to push up the sales of that department
which is earning maximum profit.
2. It helps the management to decide whether to drop a department or add new one.
3. The growth potential of a department as compared to others can be evaluated.
4. More detailed information can be provided to the users of the accounting information
like the shareholders, investors, creditors etc.
5. Friendly rivalry between different departments may help to increase the overall profit
of the organization.
6. Departmental managers and staff can be rewarded properly on the basis of results.
7. It helps the management to determine the justifications of capital outlay in each
department.
8. It facilitates the comparisons of expense items with those in other departments and in
the previous periods.
9. It helps to calculate stock turnover ratio of each department separately, and thus the
efficiency of each department can be revealed.

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 10. Departmental accounting information also provides a basis for intelligent planning
control.

Methods of Departmental Accounts

In order to ascertain the departmental profit accurately, it is necessary to identify the different
expenses and revenues of each department. The accounting system must be designed in each
manner that it provides maximum information and is simple to operate.

There are two methods of keeping departmental accounts:

1. Where separate set of books are kept for each department.

This method of accounting is employed when the size of the organization is very large or the
law of the land requires the maintenance of separate books for each department. For example,
in India, general insurance company is required to prepare separate revenue account for each
type of business--- fire, marine, accidents, etc.

Under thus method each department is regarded as a separate unit and accounts are kept
independently. At the year end the trading results of all the department are combined to get
the trading results of the organization as a whole. This method is rarely used and is also
expensive in operation.

2. Where accounts of all departments are kept together on columnar books.

When the size of the organization is small, the entire book keeping system for the business as
a whole is generally kept by a central accounts department.

A department does not maintain a full double-entry book keeping system of its own, but some
records are normally kept regarding purchases, sales and direct expenses, stock within the
department, etc. The central accounts departments generally maintain an analytical or
columnar purchase and sales day book to distinguish between the purchase and sales of
different departments.

Allocation of Departmental Expenses

In practice the following general rules are usually applied for allocation and apportionment of
expenses:

1) Expenses directly related to a particular department should be charged to that

department. For example, salary of employees of a department or bad debts

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 from the sale of a particular department can be charged to the concerned
department directly.
2) The expenses which have a direct bearing with the sales should be apportioned
on the basis of net sales. For example, advertisements expenses should be
apportioned on the basis of departmental sales to outside customers.
3) All other business expense, e.g. rent, rates, lighting, heating, depreciation,
insurance etc. should be apportioned on the most logical basis. The nature of
the expenses, and the nature of the business will determine the basis for
apportionment of expense.

Technique of Departmental Accounts

1) Columnar purchase and sales books, etc. (Manual System)
If the number of departments are small, it is convenient to use columnar or analytical
purchase day book and sales day book for recording credit purchase and credit sales of each
department. Return inwards book and returns outwards book are ruled in a similar manner.
For recording cash sales and cash purchases, special columns are also provided in the cash
book.

2) Computerized system
If the number of departments are very large, the use of separate journal column for each
department would result in journal of unmanageable size. Now-a-days almost all large
departmental stores are using computer to record transaction data directly into a computerized
accounting system. With the help of computer terminals each department enter sales
information into a main computer at the time each sales is rung up. Journals, ledgers and
other reports are prepared at the end of each month for the use of management.

Distinction between Departmental accounts and Branch accounting

1) In case of a depended branch, all important accounting records are kept by the head
office. The branch maintains only cash account and customer account. However, an
independent branch, usually maintains its own books of account and prepares its own
trading and profit and loss account. In case of departmental accounts, all accounting
records are maintained at one place and departmental trading and profit and loss
account is prepared accordingly.

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2) As the departments are not geographically separated from each other, the problem of
allocation of common expenditure among different departments arises. But in case of
branch account this problem of allocation of common expenditure does not arise since
branches are geographically separated from each other.
3) In case of independent branch, at the end of the accounting year, some adjustment
and reconciliation of head office and branch accounts are required. In case of
department accounts, the questions of adjustments and reconciliation of accounts does
not arise.
4) At the time of finalizations of accounts of head office, the conversion of foreign
branches figures may create some problems. In case of Departmental accounts, this
types of problems does not arise.