Departmental Accounting

Objectives of Departmental Accounts

The main objects of preparing such accounts are:
1. To have comparison of the results of a particular department with previous year and also
with the other departments of the same concern;
2. To help the proprietor in formulating policy to expand the business on proper lines so as to
optimize the profits of the concern;
3. To allow departmental managers commission on the basis of the profits of their
departments; and
. To generate information! which may be helpful for planning! control! evolution of
performance of each department and for ta"ing various managerial decisions.
Advantage of Departmental Accounts
The following are the main advantages of #epartmental $ccounts%
1. The trading results of each department may help to evaluation the performance of each
department. The sales of that department which gives maximum profit may be pushed up
by special efforts.
2. The profitability of each department may help the management for ta"ing decision whether
to drop a department or add a new one.
3. The growth potentials of a department can be evaluation by having comparison with the
other departments.
. The users of accounting information can be provided more detailed information li"e the
shareholders! investors! creditors! etc.
&. The overall profits of the organization can be increased by having friendly rivalries between
different departments.
'. The departmental managers and staff can be suitably rewarded on the basis of the
departmental result.
(. )t helps the management to determine the *ustification of proper use of capital invested in
each department.
+. )t helps to have comparison of various expenses of each department with the previous
period or with other departments of the same concern.
,. )t helps to "now the efficiency of each department by calculating stoc" turnover ratio of
each department to reveal the fast or slow movement of various items of stoc".
1-. The information provided by departmental accounts may be helpful to the management for
future intelligent planning and control.
The following table .in summary form/ will help to "now the proper basis for apportionment of
some important expenses among various departments.
Expenses Basis
1. 0ales expenses as traveling salesman! salary and
commission! selling expenses after sales service!
discount allowed! bad debts! freight outwards!
0ales of each department
1
provision for discount on debtors! sales managers
salary and other benefits etc.
2. $ll expenses relating to building as rent! rates!
taxes! air conditioning expenses! heating!
insurance building etc.
3. 1ighting
. )nsurance on stoc"
&. )nsurance on plant 2 machinery
'. 3roup insurance premium
(. 4ower
+. #epreciation! 5enewals 2 5epairs
,. 6anteen expenses! 1abour welfare expenses
1-. 7or"s managers salary
11. 6arriage inwards
$rea or value of floor space
1ight points
$verage stoc" carried
8alue of plant 2 machinery
#irect wages
9.4 or 9.4 x 9ours wor"ed
8alue of assets in each
department
:o. of employees
Time spent in each department
4urchases of each department
Distinction between Departmental Accounts and Branch Accounts
The main distinctions between #epartmental $ccounts and ;ranch $ccounts are given
below%
Basis of
Distinction
Departmental Accounts Branch Accounts
1.<aintenance
$ccounts
2.$llocation of
6ommon
expenses
3.$d*ustments 2
5econciliation of
$ccounts
. 4roblem of
foreign
currency
$ll accounts are maintained at one
place 2 departmental trading and
profit and loss account is prepared
accordingly
#epartments are not geographically
separated from each other! so
problem of allocation of common
expenses among different
departments arises.
The =uestion of ad*ustments and
reconciliation of accounts does not
arise in departmental accounts.
The problem of conversion of
foreign currency into home currency
does not arise.
)n case of branch! all branch
accounts are "ept at 9ead
>ffice except cash! customers
and stoc" registers are
maintained at branch. ;ut in
case of independent branch all
accounts are "ept at branch
and a branch prepares its own
trading and 4rofit 2 1oss
$ccount.
$s branches are geographically
separated from each other so
the problem of allocation of
common expenses among
different branches does not
arises.
)n case of independent branch
some ad*ustments and
reconciliation of head office and
the branch accounts are
re=uired to be done at the end
of the year.
2
The problem of conversion of
foreign branch figures may
arise at the time of finalization
of accounts of head office.
3