Deparmental Account

  In some organizations where operations are divided into separate departments, the trading result of each department must be ascertained. The criteria for identifying the departments in an examination question is always the separate sales/work-done revenue.

  A department account is an accounting information system that records the activities and financial information about each department. Managers can use the financial information they get from departmental accounting system to determine how profitable and efficient each department of the company is.

Large corporations cannot be properly managed and controlled with a centralized accounting system. The corporation has to be divided into many departments like sales department, manufacturing department e.t.c.

Each department has its own system of accounting to monitor revenues and expenses. 

   These various accounting systems also provide useful efficiency ratios  to evaluate each department and consider if it would be necessary to merge departments or get rid of some of the departments.

   It is convenient to separate  the operations of each department. The separation is done in order to compare the results of each department and assist in policy making. It shows the department that is most profitable.
   
        Advantages of Departmental Account

1. The gross profit for each department is easily ascertained.
2. It helps to compare the performance of one department with the performance of another department.
3. Unprofitable departments will be easily discovered.
4. It gives room for proper monitoring of the progress of each department.
5. The results of operations can be used for the payment of the managers of each department of the organization.

     Methods of Apportionment of Expenses are:

• Turnover basis
• Number of articles sold basis
• floor space basis
• direct analysis basis

  The two most common methods are explained below:
(1) Turnover basis: The expenses will be apportioned on the basis of sales
  Example: The sales of departments A and B are $5000 and $6000 respectively. The selling expenses of $660 is to be apportioned on the basis of sales.
          Solution
 Total Sales of A and B is $5000 + $6000 =  $11000
Apportionment of  A = 5000/11000 x 660 = $300
                               B = 6000/11000 x 660 = $360
  
(2) Floor Space Occupied: The area of floor space occupied will be used as the basis of apportionment.
  Example: If Rent is $10000, allocate the expenses in proportion to floor area. Departments A and B are 1/5 and 4/5 respectively.
        Solution  
Dept. A = 1/5 x 10000 = $2000
Dept. B = 4/5 x 10000 = $8000

 Inter-departmental transfers(transfers from one department to another) also need to be accounted for in the preparation of the departmental account. The goods produced in one department of an organization can be transferred to another department of the same organization. In such case, the value or amount of the goods purchased are deducted from the department that transferred it, i.e, the original department and should be added to the department receiving the goods.
 The balance sheet of the departmental accounts should follow the normal procedure as the usual balance sheet we know. It should show the financial position of the organization as a whole.
 Manager`s commission may be difficult to account for. However, we can get it by using the formula:  
                      percentage commission            x     profit before commission
             100 + percentage commission

 Preparation Of Departmental Trading And Profit And Loss Account(Income Statement)  

 When the books of accounts are maintained on a columnar basis, we can prepare a Trading and Profit and Loss Account. There is no difficulty or hindrance in calculating gross profit as well as net profit for each department separately using the figures in the analytical ledger accounts and subsidiary books for each department that are available. If an item of expenses is identified with a particular department, it is called direct expense with reference to the department.

Some types of expenses cannot be identified with a particular department and the benefits of such type of expenses are enjoyed by all departments. Such types of expenses are called joint expenses because they are incurred for the whole business.

Direct expenses are charged to the departments that incurred them. As for indirect expenses, allocation among the departments should be made so as to discover the profit and loss that each department made. If the method for such allocation is not mentioned specifically, then the following procedure may be used:

	Indirect expenses	Basis or method of allocation
(1)	Salary of factory manager	Time devoted by him for each Department.
(2)	Expenses incurred on land and expenses e.g. depreciation, rent, rate e.t.c.	Space occupied by each department.
(3)	Expenses on employees` compensation	Wages of each department.
(4)	Expenses on electricity, lightening e.t.c.	Points, meter readings or space occupied By each department.
(5)	Expenses on insurance	Stock value and/or cost of machinery or Actual premiums.
(6)	Expenses on welfare, canteen e.t.c.	Number of employees of each department.
(7)	Expenses on selling e.g discount allowed, Carriage e.t.c.	Net sales of various departments ignoring Inter-departmental sales.
(8)	Expenses on purchase e.g duty, carriage, Discount allowed e.t.c.	Net purchases of each department ignoring Inter-departmental purchases.

 



  FORMAT OF THE DEPARTMENTAL FINAL ACCOUNTS

Departmental trading and Profit and Loss Account For the Year ended 31st December, 2015.
	X	Y		X	Y
Opening stock Add purchases Less return inward Add carriage inward Less closing stock Gross profit c/d Direct expenses Indirect expenses Net profit c/d	$   XXX (XXX)  XXX  XXX	$   XXX  XXX  XXX (XXX)  XXX  XXX  XXX  XXX  XXX  XXX  XXX	Sales Less return inward Gross profit b/d Discount received	$    ------          XXX	$   XXX (XXX)  XXX ------  XXX  XXX  XXX  ------  XXX

 In the table above, X and Y are the departments.