Departmental

Accounts
Unit 4
Contents
◦ Meaning and Introduction,

◦ Methods and Techniques,

◦ Allocation of Expenses,

◦ Inter-Departmental Transfers,

◦ Provision for Unrealized Profits in books of the firm and Balance Sheet of new company.
Introduction
◦ Modern business style.

◦ Specializations - Diversion of different activities under single roof.

◦ One departmental store may have a cosmetic store, shoe store, stationery store,

readymade departmental store, grocery stores, medicines, and many more.

◦ A textile merchant may trade in cotton, woolen and jute fabrics.

◦ Involvement of each department in overall business operation.

◦ Necessity to evaluate the performance of department and understand the results thereof.
Meaning
◦ An accounting information system that

◦ Maintain the accounts for one or more branches or departments of the company.

◦ Record and report revenues and expenses of the department separately.

◦ Consolidate departmental accounts into accounts of the head office to prepare

financial statements of the company.

◦ It controls wastage & misusing, compensates the employee in terms of profit and

commission, compares performance and progress of year to year or department to

department or similar type of firm to firm.

Objectives
◦ To know the financial position of each and every department separately.

◦ To help owner in making decision and formulating suitable strategy for

concerned department.

◦ To assist management for cost control.

◦ To reward the departmental mangers and staff on the basis of performance.

 Methods and Techniques of
Departmental Accounting
A] Where the individual set of books are maintained

1.The accounts of each individual department are independently

maintained.

2.The departmental results of all the department are collected and

taken into consideration to find out the net result of the

organization.
 Contd.
B] Where all departmental accounts are maintained columnar- wise
collectively

1.A Departmental Trading and Profit and Loss Account is opened for each
individual department in a columnar form to ascertain the individual result of
the different departments.

2.But the Balance Sheet is prepared in a combined form.

3.And in order to incorporate the purchase and sale of goods, the Subsidiary
Books and also the nominal accounts into the ledger.

4.If there is a larger volume of cash purchase and cash sales, the Cash Book
also must maintain separate columns for cash purchases and cash sales of
various departments.
Allocation of Department
Expenses
◦ Direct Expenses: Some expenses, which are specially incurred for a

particular department may be charged directly to the respective department.

For example, hiring charges of the transport for delivery of goods to

customer may be charged to the selling and distribution department.

◦ Indirect Expenses: Some of the expenses may be allocated according to

their uses. For example, electricity expenses may be divided according to the

sub meter of each department.

Sales of Each Department
◦ Salesman's commission

◦ Discount allowed

◦ Bad debts

◦ Carriage Outwards

◦ Advertisement

◦ Packing expenses

◦ Provision for discount on debtors

◦ Traveling salesman's salary and commission

Purchase of Each
Department
◦ Discount received

◦ Provision for discount on creditors

◦ Carriage Inward

◦ Freight

◦ Duty
Area of Floor Space of Each
Department
◦ Rent

◦ Rates and taxes

◦ Repair and maintenance of building

◦ Insurance on building

◦ Air conditioning expenses

◦ Heating
Value of Assets in Each Department

◦ Depreciation of Machinery

◦ Repairs and maintenance of plant

◦ Insurance premium
Number of Workers
◦Workmen's compensation insurance

◦Canteen expenses

◦ Labor welfare expenses

◦ Time keeping

◦ Personnel office

◦ Supervision
Direct Wages
◦ Compensation to workers

◦ Holiday pay

◦ Provident fund contribution

◦ Group insurance premium

Some other expenses
◦Number of Light Points:

◦ Lighting expenses

◦Horse Power of Machine And /Or Production Hours:

◦ Electric Power

◦Time Devoted By Him for Each Department:

◦ Work manager's salary

 Basis of
Allocation
for
Common
Expenditur
es among
different
Departmen
ts
 Basis of
Allocation
for
Common
Expenditur
es among
different
Departmen
ts
Items which can not be apportioned

◦ Cannot be apportioned and no basis of apportionment is

practicable.

◦ Transfer to General Profit and Loss Account.

◦ Expenses: Interest on Loan, Income Tax, Salary to General

Manager, Share Transfer expenses, Bank charges, Audit fees

etc.
Inter-Departmental Transfers
◦ Supply of goods or services from one Department to another.

◦ An inter-department analysis sheet is prepared at a regular interval such as

weekly or monthly basis to record all the inter-departmental transfers of goods
and services.

◦ It is necessary, as each department is working as a separate profit center.

◦ Transfer of the prices of such transactions can be cost base, market price, or
dual basis.

◦ The journal entry for inter-departmental transfer at the end of that period
(weekly or monthly) would be as follows −

Receiving Department A/c ---------------------- Dr.

Inter-Department Transfer
Price
1. Cost based Transfer Price − Where the transfer price is based on standard, actual, or

total cost, or marginal cost is called cost based transfer price.

2. Market based Transfer Price − Where the goods are transferred at selling price from

one department to another is known as market based price. Therefore, unrealized profit on

the goods sold is debited from the selling department in the form of a stock reserve for

both the opening and the closing stock.

3. Dual Pricing System − Under this system, the goods are transferred on the selling price

by the transferor department and booked at the cost price by the transferee department.
Unrealized Profit Or Stock Reserve
◦ The receiving department after receiving goods at cost price plus margin from
supplying department, if unable to sell them totally at the end of accounting
period, then in this condition a provision for unrealized profit or stock reserve has
to be affected for the unsold stock with the help of following entry:

General Profit and Loss A/C...........Dr.

To Stock Reserve A/C

◦ Similarly, if the receiving department holds the goods which are transferred at
selling price in its opening stock, the following entry is made:

Stock Reserve A/C....................Dr.

To General Profit and Loss A/C

 Contd.
◦ It is a common practice that calculated rate of gross profit is applied to closing

stock and given rate of gross profit is applied in the opening stock to calculate

unrealized profit. The rate of gross profit can be ascertained as follows:

a) % of Gross Profit = (Gross Profit/Sales + Departmental Transfers) X 100

b) Transferred portion of goods = (Departmental Transfers/Purchase +

Departmental Transfers)

c) Unrealized Profit= Gross Profit Rate X Total Amount of Stock X Transferred

Portion of Goods.