Q.
Department refers to activity centre (cost or profit centre) usually located under the same roof but
carrying out different types of business. Department accounting or departmental accounting is a
system of financial accounting which is used in organizations whose all works are done through their
different departments or departmental stores.
Departmental accounting is a system of accounting which maintains a separate book of account for
every department or branch of a business enterprise. It is one where accounts are prepared and
maintained for different departments of an organization on an individual basis for evaluating their
results in a fair manner. These individual books of account are then consolidated together with
accounts of head office for preparation of financial statements of business.
Departmental accounting aims at recording all the expenses and revenues of each department in a
separate book of accounts. It enables in measuring the profitability of every branch and detect if any
department is underperforming than their capability.
The main objectives of departmental accounting are:
1. Evaluation of individual performance of branches and their financial position
2. It facilitates comparison of results of a particular department with previous years and also
with other departments of the same concern
3. To aid in formulating policies to expand the business and optimize the profits
4. To allow calculation of departmental managers’ commission and remuneration on the basis
of the departmental profits.
5. Efficient cost management by allocating the cost to the various departments
6. It helps management to determine the justification of capital outlay
7. It helps in calculating stock turnover of each department separately which will show the
efficiency of each department.
8. Promotes healthy competition among the different branches which leads to an increase in
profitability of the business
9. Helps in generating information which will be useful for the planning, organizing, controlling
and monitoring the performance of the departments
10. Assisting in taking decisions related to expansion and liquidation of business departments in
accordance to their results.
Q. 2
Expenses should be allocated among different departments on a rational basis while preparing
departmental accounts. Expenses can be divided into two types. They are:
Individual identifiable expenses (direct expenses) - these are the expenses incurred
specifically for a particular department and are allocated directly to the department
Common expenses (indirect expenses) – the benefit of the common expenses is shared by all
the departments and is capable of precise allocation (apportionment). They are distributed
among the departments on some equitable basis considered suitable in the circumstances of
the case.
Apportionment of the expenses:
Sr. No. Common expense Basis of apportionment
1. Expenses on purchases E.g. carriage Ratio of departmental net purchases
inwards, freight, duty, octroi, etc. (ignoring inter-departmental purchase)
2. Expenses on sales E.g. carriage Ratio of departmental net sales (ignoring
outwards, bad debts, commission, inter-departmental sales)
discount allowed, advertisement, etc.
3. Rent, rates and taxes, repairs and Floor area occupied by each department
maintenance, insurance of building, etc (otherwise on time basis)
4. Lighting and heating expenses Consumption of energy by each department
5. Wages and salaries Time given to each department
6. Depreciation, insurance, repairs and Value of assets of each department
maintenance of capital assets (otherwise on time basis)
7. Administrative and other expenses E.g. Time basis or equally among the
managers salary, directors salary, etc. departments
8. Expenses on welfare, canteen, Number of employees of each department
recreation of employees
9. Provident fund or employees State Wages and salaries of each department
insurance contributions
Some expenses cannot be apportioned as the basis of apportionment is not practicable. For in-
stance, interest on Loan, Income Tax, Salary to General Manager, Share Transfer expenses, Bank
charges, Audit fees etc. Here these expenses are transferred to the General Profit and Loss Account.
