Departmental

Accounting
Submitted by: Aditya Agrawal, Roll no. BPA22.
Submitted to: Ms. Deepika Kakkar

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 Departmental Accounting

Departmental Accounting refers to maintaining accounts for one or more

branches or departments of the company. Revenues and expenses of the
department are recorded and reported separately. The departmental
accounts are then consolidated into accounts of the head office to prepare
financial statements of the company.

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 Methods of
Departmental Accounting

1. Separate Set of Books are kept for each Department: It is a system in

which separate records in respect of subsidiary books and ledger are
maintained for each department i.e. purchases book, sales book etc.
This system is suitable when size of each department is very large or its
business regulated by some special laws of country.

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 2. Accounts of all Departments are kept in one Book Only: It is a system in
which accounts of all the departments are kept in the same books with
separate columns for each department. This system is suitable when the
size of business firm is small and transactions are limited. In this system
complete accounting for each department is done by central accounts
department.

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 Advantages of
Departmental Accounting
1. Evaluation of Performance: Departmental accounting is very helpful to
evaluate the performance of each department on the basis of their
accounting results in terms of profit or loss.
2. Discloser of Fact: Sometimes the business taken as a whole might be
shown net profit and yet one or two departments only are running at a
loss and absorbed the profits earned by other departments.
3. Comparative Analysis: Management can compare not only the results of
the various departments for a given accounting period but also the result
of the same department for the past few years and can collect valuable
information for running the department efficiently.
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 4. Judgement of Efficiency: It helps the users of accounting information
eg. shareholders, investors, creditors etc. to calculate stock turnover
ratio of each department of separately and thus the efficiency of each
department can be revealed.
5. Planning and Control: This system enables the management to
formulate an effective policy for developing the business enterprise in
certain line of activities by implementing proper planning and control
6. Competition: This system motivates different departments for
competition to each other i.e. inter - departmental competition which
would ultimately benefit the business firm as a whole.
7. Justification of Capital Outlay: This system helps the management for
assessing the capital requirement in each department . It depends upons
the size of department , nature of goods in which the department deals,
number of employees required in concerned department etc. It helps
mgt. To justify the amount of equal expenditure or capital outlay in each
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department
 Departmental and Branch Accounting
Departmental Accounting Branch Accounting

The departments are not geographically separated, all On the other hand branches can be categorised
accounting records are maintained by the head office. between dependent and independent branch. All
Therefore, Departmental Trading and Profit and Loss accounting records of dependent branch are kept by
Account is prepared by head office itself head office except cash account and cutomers account.

Expenditures whic are commonly incurred are

required to be allocated on some suitable basis. No need of allocation of expenditure.

As expenditures are allocated according to concern Independent branches have to be reconciled their
department hence, there is no need for any adjustment accounts with those of head office by making
or reconciliation. adjustment entries in respect of goods-in-transit and
cash-in-transit.

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 Allocation of Expenses
Nature of Expenses Basis of Allocation

Selling expenses , travelling expenses , salary and

commission , advertisement , Baddebts carriage on Sales of turnover of each department
sales, after sale service, packing expense , godown rest
, storage expense , discount allowed , provisions for
discount on debtors

Carriage on purchase , discount received On the basis of purchases

Rent , rates , repairs and building , insurance of On the basis of floor area occupied by each
building, department (if given) otherwise on the basis of time

Lighting Floor area or light paints

Depriciation , repairs of assets other than building , Value of assets of each department otherwise on time
insurance provision on plant and machinery basis

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 Allocation of Expenses
Nature of Expenses Basis of Allocation

Insurance premium on stock Average stock carried

Group insurance premium Direct wages

Power Horse power used or H.P × hours worked

Canteen expenses , labour welfare expense , medical Number of employees

benefits

Salary of works manager Time spent in each department

PF/EFI contribution Wages and salaries of each department

Heating and Air conditioning Consumption of energy by each department

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 Types of Departments

1. Independent Departments: Departments which work independtly of

each other in terms of their working or dealing of goods and services and
have negligible inter-departmental tranfers are termed as Independent
departments.
2. Dependent Departments: A business firm in which inter-departmental
transfers are made on regular basis, the concern departments are
termed as Dependent departments.

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 Pro-forma Departmental Trading and P and L Account
For the year Ended on...
Dept. Dept. Dept. Total Dept. Dept. Dept. Total
Particulars A B C Particulars A B C
(in Rs.) (in Rs.) (in Rs.) (in Rs.) (in Rs.) (in Rs.) (in Rs.) (in Rs.)

Opening stock Sales

Purchases Stock at the end
Wages Gross Loss

Power
Carriage

Inwards etc.

Gross Profit

Total

Indirect Expenses Gross Profit

Reserve on stock @
10%
Net Profit

Total
 Stock Reserves

When profit is added in the inter-departmental transfers the loading (profit

element) included in the unsold portion of the stock at the end of the year, is
required to be eliminated before preperation of final account. This elimination
can be done by creating an appropriate stock reserve be debiting the combined
profit and loss Account.

Formula: Transfer price of closing stock x Profit element included in transfer price

Transfer price

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 Accounting Treatement
In the beginning of the next Accounting year,
the aforesaid journal entry will be reserved as
follows:
Profit and loss A/C Dr.
To stock reserve A/C

(Being creation of provision for unrealised profit

including in closing stock)
In the beginning of the next Accounting year,
the aforesaid journal entry will be reserved as
follows:

Stock Reserve A/C. Dr.

To profit and loss A/C

13 (Being reversal of provision for unrealised profit)

 Extract of Balance Sheet

Liablities (in Rs.) Assets (in Rs.)

Current Assets:

Stock xxxx

Less: Stock Reserve xxx xxxx

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 Thank You.

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