Departmental Accounts

Introduction

Departmental accounts refer to the accounting system where a business organization is divided into several departments, and separate records are maintained for each. This is common in large retail stores (like supermarkets or boutiques) where different types of goods are sold under one roof.

i. Objectives of Departmental Accounts

• Performance Evaluation: To compare the results (profits or losses) of each department to determine which is more profitable.
• Identifying Weaknesses: To identify loss-making departments so that management can decide whether to improve or close them.
• Formulating Policies: To provide data that helps management in making decisions regarding expansion, pricing, and staffing for specific departments.
• Commission Calculation: To facilitate the calculation of commission for departmental managers based on their department's net profit.
• Effective Control: To enable better control over the stocks and expenses of each unit.

ii. Apportionment of Expenses

In departmental accounting, expenses are categorized into two: Direct Expenses (which can be specifically identified with a department) and Indirect/Common Expenses (which must be shared or 'apportioned' among departments).

Bases of Apportionment

• Floor Area Occupied: Used for Rent, Rates, Heating, Lighting, Air-conditioning, and Building Insurance.
• Sales (Turnover): Used for Selling expenses, Advertising, Salesmen’s commission, Carriage outwards, and Bad debts.
• Number of Employees: Used for Staff welfare, Canteen expenses, and Medical expenses.
• Value of Assets/Stock: Used for Depreciation of plant/machinery, Insurance of stock, and repairs.
• Direct Allocation: Some expenses like wages of staff working only in one department are allocated directly.

iii. Departmental Trading and Profit and Loss Account

This account is usually prepared in a columnar form. Each department has its own column for figures, and there is a 'Total' column for the whole business.

• Trading Account: Used to find the Departmental Gross Profit. Includes Opening Stock, Purchases, Direct Wages, Carriage Inwards, and Sales.
• Profit and Loss Account: Used to find the Departmental Net Profit. Includes apportioned indirect expenses.
• Inter-departmental Transfers: When one department transfers goods to another, it is treated as a sale for the sending department and a purchase for the receiving department.