Departmental Accounting Notes [Financial Accounting Notes BCOM 1st SEM and BCOM 2nd SEM NEP Syllabus]

Departmental Accounting Notes 
[Financial Accounting Notes BCOM 1st SEM and BCOM 2nd SEM]

Table of Contents – Departmental Accounting Notes

1. Meaning of Departmental Accounting System 2. Purpose or Objectives of Departmental Accounting 3. Advantages and Disadvantages of Department Accounts 4. Types of Department 5. Methods and Types of Departmental Accounting 6. Allocation of all Expenses and Incomes in Departmental Accounts 7. Inter departmental transfers 8. Calculation and Treatment of Unrealized Profit in Departmental Accounting 9. Difference between Departmental Accounts and Branch Accounts 10. Departmental Accounting Problems and Solutions Also Read: Departmental Accounting MCQs

Advantages and Disadvantages of Department Accounts

Departmental Accounts Advantages are listed below:

a)      It provides an idea about the affairs of each department.

b)     It helps to evaluate the performance of each department.

c)  It helps to reward the Departmental mangers and staff on the basis of performance.

d)      It facilitates control over the working of each department.

e)     It helps to compare the result of one department with those of other departments.

f)      It helps the management to formulate the right business policies for the various departments.

g)      It will help in the preparation of departmental budgets.

h)      It helps to calculate stock turnover ratio of each department.

Departmental Accounts Disadvantages / Problems and limitations are listed below:

a) Apportionment of expenses between or amongst various departments is difficult due to which exact profit cannot be ascertained.

b) There are certain expenses which cannot be allocated on some equitable basis such as debenture interest, dividend, share transfer fees, general office expenses, income tax etc. and thus should not be apportioned.

c) Separate Accounts for each department are maintained which increases the accounting charges.

Types of Department

There are two types of department

a) Dependent Department: Dependent department are those which transfer goods from one department to another department for further processing. Here, the output of one department becomes the input for the other department. These transfers may be done at cost or pre-decided market price. The price at which this is done is known as transfer price. In these departments unloading is required if the transfer price is having profit element. This is done by the passing the following entry:

Profit and Loss A/c                                          Dr

To Stock Reserve A/c

b)   Independent Department: Independent Department is those departments which work independently of each other and have negligible inter departmental transfer.

Methods and Types of Departmental Accounting

A departmental organization can record its transactions in two ways:

a) Unitary Method

b) Tabular or Columnar Method

a)      Unitary method: Under this method, the accounts of each department are kept separately. The results of the various departments are finally combined together in one general P & L account.

b)     Tabular or columnar method: Under this method, the accounts of each department are kept in columnar form with a separate column for each department and also with a separate column for the total. The tabular method is more popular and is adopted by almost all the departmental undertaking.

Under this method, at the end of the accounting year, Trading and P & L account (columnar) is prepared with separate amount column for each of the department and also for the total. The trading and P & L of a departmental organization kept in the columnar basis is called Departmental Trading and P & L account. In trading account, opening stock, purchases, direct expenses and Gross profit are debited and sales and closing stock credited. Indirect expenses have to be apportioned between the departments and debited to the P&L account.

Allocation of all Expenses and Incomes in Departmental Accounts

Departmental Expenses: The expenses of a business can be broadly divided into following two categories:

1. Direct expenses: Expense relating to a particular department is called direct expenses. They are charged to respective department. For example wages, staff salaries, material etc.

2. Indirect Expenses: Expenses relating to more than one department are called indirect expenses. They are further divided into:

(a) Expenses which can be allocated

(b) Expenses which cannot be allocated

Allocation and Apportionment of Departmental Expenses

(1) There are certain expenses which can be specially incurred for a particular department. Such expenses are charged directly to the department.

(2) There are certain expenses which are indirect in nature and incurred for the whole department. Such expenses are distributed amongst various departments on some suitable basis. The following table will help to know the proper basis for apportionment of some important expenses among various departments.

Expenses	Basis
a)   Sales expenses as traveling salesman, salary and commission, selling expenses after sales service, discount allowed, bad debts, freight outwards, provision for discount on debtors, sales manager’s salary and other benefits etc.	a) Sales of each department
b)   All expenses relating to building as rent, rates, taxes, air conditioning expenses, heating, insurance building etc.	b) Area or value of floor space
c)    Lighting	c)  Light points
d)   Insurance on stock	d) Average stock carried
e)   Insurance on plant & machinery	e) Value of plant & machinery
f)    Group insurance premium	f)  Direct wages
g)   Power	g) H.P or H.P x Hours worked
h)   Depreciation, Renewals & Repairs	h) Value of assets in each department
i)     Canteen expenses, Labour welfare expenses	i)   No. of employees
j)     Works manager’s salary	j) Time spent in each department
k)   Carriage inwards	k) Purchases of each department

(3) There are certain expenses which cannot be allocated on some equitable basis such as debenture interest, dividend, share transfer fees, general office expenses, income tax etc. and thus should not be apportioned. Profits of all departments should be brought down in one total and such expenses should be debited and non-departmental profits credited to this without making any effort for its apportionment amount different departments in combined income account.

Allocation of incomes in Departmental Accounts

Common incomes should be allocated among different departments on the following basis:

a)      Discount received and reserve for discount on creditors: They should be allocated on the Basis of net purchases of each department.

b)      Commission earned on sales: It should be allocated on the basis of net sales of each department.

c)      Other incomes: Such as dividend received, transfer fees etc can be allocated equally. Alternatively, they can be credited to General P & L account.

Inter departmental transfers

Transfer of goods or services by one department to another department are called inter departmental transfers. When one department transfers goods to another department, the transaction should be considered as a sale for the supplying department and a purchase for the receiving department. As such, the supplying department should be credited and the receiving department should be debited with the value of goods supplied.

Similarly, when one department renders service to another department, the department rendering the service should be credited and the department receiving the service should be debited with the value of service rendered.

Goods may be transferred either at cost price or at selling price. If goods are transferred at selling price by the transferor department and such goods are unsold at the end of the accounting year by the transferee department, then profit charged on such unsold goods by the transferor department is treated as unrealized profit and it should be debited to the general profit and loss account as stock reserve. In the balance sheet stock reserve should be deducted from closing stock. If unrealized profit is contained in the opening stock, such reserve should be credited to the general profit and loss account.

Calculation and Treatment of Unrealized Profit in Departmental Accounting

To calculate Stock Reserve, the following steps must be followed:

Step 1: Calculate the value of IDT (inter Department transfer) by using the following formula: Closing Stock of Transferor dept x IDT / Total Direct expenses excluding op stock

Step 2: The value of step 1 denotes the Value of IDT stock included in Transferee dept. Now calculate the GP (Gross Profit) ratio at which transferor dept sells goods to transferee. i.e. this amount is at selling price. GP ratio is to be calculated on SP to eliminate Unrealized Profit i.e. St. reserve with the help of following formula:

GP ratio on sales = (GP of Transferor Dept / Total sales) /100

Where Total sales = Normal sales + IDT sales

Step 3: Result of Step 1 x Result of Step 2

Treatment: The following journal entry is to be passed to eliminate the amount of unrealized profit:

General P & L                                     A/c

              To Stock Reserve A/c

Note: In next year the stock reserve of current year will become realised and to be credited to P & L a/c

Difference between Departmental Accounts and Branch Accounts

The main difference between Departmental Accounts and Branch Accounts are given below:

Basis of Distinction	Departmental Accounts	Branch Accounts
Maintenance of Accounts	All accounts are maintained at one place & departmental trading and profit and loss account is prepared accordingly.	In case of branch, all branch accounts are kept at Head Office except cash, customers and stock registers are maintained at branch. But in case of independent branch all accounts are kept at branch and a branch prepares its own trading and Profit & Loss Account.
Allocation of Common Expenses	Departments are not geographically separated from each other, so problem of allocation of common expenses among different departments arises.	As branches are geographically separated from each other so the problem of allocation of common expenses among different branches does not arises.
Adjustments &  Reconciliation of Accounts	The question of adjustments and reconciliation of accounts does not arise in departmental accounts.	In case of independent branch some adjustments and reconciliation of head office and the branch accounts are required to be done at the end of the year.
Problem of foreign currency	The problem of conversion of foreign currency into home currency does not arise.	The problem of conversion of foreign branch figures may arise at the time of finalization of accounts of head office.
Reason for creation	Departments are the result of fast human life.	Branches are the outcome of tough competition and expansion of business.
Functional Division of accounts	Functional division is possible in case of departmental trading which is a must for the existence of a department.	It is not possible in case of a branch trading.
Segmentation and Condensation	Departmental Accounting is practically a segment of accounts.	Branch Accounting is a condensa­tion of accounts.

Conclusion: After Going through this comprehensive article on Departmental Accounting Notes, i hope you will be familiar with the Departmental Accounting Procedure. These notes are useful for B.Com 1st Sem to 6th Sem Students. Thanks for Viewing our website regulrly.