Departmental Accounts

Contents:
 Problems relating to allocation of exp
 Problems relating to determination of stock
 Problems relating to interdepartmental transfer and
stock reserve
 Problems relating to manager’s commission
 Retail departments

Intro:
 Dept is a business expansion activity
 Expanding in same place by entering into new
products/services is done through depts
 Can be divided based on products (ex. Air pods, ipad,
mac) , on process ( manufacturing activities), on services
(ex : ca coaching , cs coaching , acca)
 A business enterprise prepares financial statements (FS)
for overall reporting. It does not make product wise
financial statement but prepares financial statement for
business as a whole.
 Preparation of FS product wise or service wise or
process wise refers to departmental accounting.
  Dept accounts are the a/c relating to the several
departments or divisions of the business and prepared
to ascertain operating results for each dept separately.
 Trading and P/l a/c are prepared for each dept
separately in order to measure efficiency and
profitability of each dept.
 Methods of Dept a/c
o Where sperate sets of books are kept for each dept
o Where accounts of all the departments are
maintained together in columnar books.

When separate books are kept for each dept:

 When organization is very large.
 Each dept is regarded as a separate unit and a/c are
kept independently.
 At year end trading results of all dept are compiled
together to get trading results of the organisation as a
whole.
 This method is rarely used as it is expensive and time
consuming.

When accounts of all books are kept together on columnar

books:
 For small business organization
 Entire book keeping system for the business as a whole
is maintained by Central accounts team.
 A dept doesn’t keep double entry book keeping system
on its own but records key info like sales , purchases
stocks within dept. The central accounts team maintain
columnar purchase and sales book of each dept .
 After compiling purchases, sales and cl stock of each
dept, common exp are allocated to all depts on suitable
basis to determine profits or loss of each dept.
Inter departmental transfer:
 Meaning:
when one dept transfers goods to another dept this is
called IDT
 Accounting:
The receiving dept treats it as purchase and records it
At Dr side of trading a/c and the sending dept treats it at
sale and records it in Cr side of trading a/c.
 Transfer price: can take place at –
o Market price
o Cost price
o Mutually agreed price b/w depts

STOCK RESERVE:
 When goods are trf to another dept above CP and the
receiving dept has not sold all goods purchased then the
cl stock of the receiving dept has unrealized profit of
sending dept. Such unrealized profit is called STOCK
RESERVE. Since these profits are unrealized , they are
eliminated in General P/l a/c.
 Stock reserve refers to unrealized profit of sending dept
included in the cl stock of receiving dept.
 This is done to realize actual profits of each dept and
hence these unrealized profits are eliminated.
  Journal entries:
o For cl stock reserve :
General p/l a/c Dr
To stock reserve a/c
o At the beginning of next year the above entry is
reversed :
Stock reserve a/c Dr
To General p/l a/c
 Formula for calculating Stock reserve:
Stock of recd dept X Content % X GP % of
of sending dept of sending dept
 Unrealized profits of sending dept is included in 2
places:
o NP of sending dept
o Stock of receiving dept
The unrealized profit Is not in NP of receiving dept

Manufacturing Dept:
 These depts work in assembly line system ( chain
system)
 Output of a dept is an input of another dept
 The next dept after further processing sends it to the
next dept
 The FG is trf to selling dept which in turn sells to outside
customers.
 Only selling dept deals with outside customers.
  The intermediate depts don’t deal with outsiders

How to calculate Stock reserve in case of Mfg dept:

Suppose 3 depts a,b,c

A( has input ) output of a B  C (selling dept)
input for b

Stock reserve will be calculated as under:

o Unrealized profit of dept A =0

o Unrealized profit of dept B = xxx
Stock of B X Content % of A X GP% of A

IDTA X 100
IDTA + other cost (like RM) + labour
o Unrealized profit in stock c = xxx

 B’s profit in stock c =

Stock C X Content % of B X GP% of B
 A’s profit in stock C =
Stock C – Profit of B X Content % of A X GP% of A
Retail dept/outlets :
Goods are supplied to these retail outlets by the central
office. These retail outlets prepare the following 2 a/cs –
 Memorandum stock a/c:
It is prepared at SP. Thus a/c records the inflow and
outflow of goods and provides information about the
position of stock on a particular date.
 Memorandum mark up a/c:
This a/c is prepared to ascertain GP of the retail outlet.
Notes:
 Stock shortage: represents abnormal loss. The cost
incurred on such goods is a loss for the organization but
such loss is recorded in p/l not in memorandum mark up
a/c.
 Generally GP is calculated as the difference between
revenue and cost incurred to earn revenue (Sales-COGS)
but in case of memorandum markup a/c GP is calculated
using 3 steps:
o Step1- First ascertain total profit that can be
earned if all the goods are sold at MRP
o Step2: ascertain profit that could not be earned to
stock shortage or disc on sales or unsold goods.
o Step3: Profit earned= Step1 - Step2
(Diff b/w what we (Cr side of the (Dr side
Could have earned mark up a/c) of the
and what we couldn’t earn) markup a/c)