Departmental Account -
Separate Accounts Of Individual Department

          Departmental Account refers to the accounting system of maintaining seperate set of books for indvidual departments of commodities or services that a company deals into. The accounts of different departments are then compiled into the books of accounts to prepare the final financial statements of the company as a whole.

Advantages Of Departmental Accounting:
  1. It provides an analytical idea about the affairs of each department.
  2. The result of each department may be critically compared with the result of the same department over a number of years.
  3. It provides managerial control over the working of each department.
  4. The result of individual department helps in framing business policies and maximising profits.
Methods of Departmental Accounting:

There are two methods of keeping departmental accounts:

1.Accounts of all departments are maintained in one book:

          Under this method, the income and expenditure of individual department is seperately recorded in subsidiary books and then it is accumulated and transferred in columnar in ledgers.

          Under this system, the gross profit of individual department can be determined accurately.

2 Separate set of books are kept for each department:

          Under this method, separate set of books are kept for each department, including complete stock accounts of goods received from or transferred to other departments and also the sales. Nevertheless, even when separate sets of books are maintained for different departments, it becomes necessary to devise a basis for allocation of common expenses among the different departments. This becomes necessary if an organisation is interested in determining the separate departmental net profit in addition to the gross profit.

Apportionment Of Expenses Under Departmental Accounting:
  1. Expenses on purchase for example carriage, freight, Octroi, Duty etc are to be apportioned in the ratio of departmental net purchases but ignoring the inter-departmental purchases.
  2. Selling expenditures such as selling commission, bad debts, discount allowed, carriage outward, advertisement etc are to apportioned in the ratio of net sale of various departments but ignoring the inter-departmental sales.
  3. Expenses on Land and Building for example Rent, Rates, Depreciation, Repairs etc are to be apportioned on the basis of floor space occupied by each department.
  4. Expenses on Machinery for example Depreciation, Repairs etc are to be apportioned on the basis of value of value of machinery used by each department.
  5. Expenses of Electricity for example heating lighting etc are to be apportioned on the basis of meter reading or points used by each department.
  6. Expenses on Insurance are to be apportioned on the basis of value of stock, cost of machinery or actual premiums.
  7. Expenses on employee welfare, canteen, recreation etc are to be apportioned on the basis of number of employees engaged in each department.
  8. Workmen�s compensation is to be apportioned on the basis of wages of each department.
  9. Salary of factory manager is to be apportioned on the basis of time devoted by him in each department.
  10. Non- departmental expenses, the allocation of which becomes impossible, can be charged to General Profit and Loss Account.
Inter-Departmental Transfers:

          Often goods are transferred at cost price from one Department to another � Inter-Departmental transfer. Such transfer must be credited to Supplying Department and debited to Receiving Department. The rule of Personal Account (Debit-The Receiver and Credit-The giver) is followed. No further adjustment is needed.

          However, if goods are transferred at selling price, then some amount of profit is earned by the supplying department within the organization. Now, if the goods, transferred from one department to an�other at selling price, still remain unsold with the transferee department, at the end of the accounting period, it becomes necessary to eliminate the unrealised profit on such stock in hand. This is because, issuing department�s speculative profit remain unrealised from the viewpoint of the firm as a whole. The reserve will be equal to the amount of profit included in respect of unsold goods at the end of the year.

The Journal Entry that is to be passed is:

General Profit and Loss A/c -------------- Dr.

          To Stock Reserve A/c

          Sometimes, the transferee department may have some quantity of stock in the beginning of the account�ing period, against which stock reserve was already created in the previous year; it also needs to be trans�ferred to General Profit and Loss Account. The following Journal entry needs to be passed:

Stock Reserve A/c -------------- Dr.

          To General Profit and Loss A/c

          Alternatively, a single journal entry can be passed for the unrealised profit on the basis of the difference between unrealised profit included in opening and closing stock.