PRINCIPLES OF FINANCIAL

ACCOUNTING

DEPARTMENTAL ACCOUNT

SUBMITTED BY :
• SUBMITTED TO:
NAVEEN RANA
• Ms Kajal Popli
(assistant proffessor) ROLLNO: 273/21
• UILS,PU, ST
1 SEMESTER, SECTION E
• CHANDIGARH B.COM L.L.B(HONS)
UILS,PU
CHANDIGARH
 ACKNOWLEDGEMENT
AT the outset , I wish to thank the Almighty god for his immense
blessings and pray to him to continue to guide me on the path of my
commited calling
I deem it my proud privilege to express my indebtness and sincere thanks
to all those who have in various ways , helped me in the successful
completion of the project and without their valuable help this project
would not have been a reality
I convey my sincere gratitude to my teacher Ms Kajal Popli UILS,CHD
who has chosen me for this project and also provided me help with
knowledge , inspiration and information . It would not be possible for me
to complete this project without her encouragement , guidance and help.
I owe my regard to the entire faculty of the UILS, PANJAB
UNIVERSITY , from where I have learnt the basics of law and whose
informal discussion, intellectual support helped me in the entire duration
of this work
NAVEEN RANA
ROLL NO : 273/21
B.COM L.L.B(HONS)
1ST SEMESTER ,SECTION D
 CONTENTS
• INTRODUCTION
• OBJECTIVES OF DEPARTMENTAL ACCOUNTING
• ADVANTAGES OF DEPARTMENTAL ACCOUNTING
• METHODS OF DEPARTMENTAL ACCOUNTING
• DEPARTMENTAL EXPENSES
• DISTINCTION BETWEEN DEPARTMENTAL ACCOUNT
AND BRANCH ACCOUNTS
 INTRODUCTION
DEFINITION: Departmental Accounting is an accounting system used by
various organizations to manage the accounts of the various departments
in separate books , i.e., for every department separate trial balance and
profit and loss account is prepared and at the end of the year balances of
each department gets transferred to general profit and loss account ,
prepared to find out the the profitability of a firm as a whole.
DEPARTMENTALIZATION enables big firms to determine the areas
needing special attention for the achievement of overall objectives. The
departments needing more funds and more attention than others and the
one contributing more toward goal attainment could be identified with
good departmentalization.
The purpose is basically to find out the performance and capability of the
units or departments to make adjustment for the achievement of the
firms objectives.
 OBJECTIVES
The main objectives of departmental accounting are as given below:-
❖ To evaluate the individual performances of branches which
facilitates in doing comparison of results
❖ To help the proprietor in formulating policy to expand the business
on proper lines so as to optimize the profit of concern.
❖ To generate information which may be helpful for planning ,
control , evaluation of performance of each departments and for taking
various productive decision for maximizing the efficiency.
❖ It assist in cost control by providing full detail information about
business organisation and in efficient management of cost of all
departments by proper allocation of cost to various department.
❖ It promotes healthy competitive spirit among distinct branches that
leads to enhance the profitability.
❖ For calculation of remuneration and commissions of manager of
every department after knowing result of operations.
 ADVANTAGES

Following are some of the advantages of departmental accounting:-

❑ Enhance profitability:- Departmental accounting has an efficient
role in increasing the profitability of the business organization. This
system of accounting closely monitor every aspect of cost and
revenues of organization related to various units for avoiding any
errors and frauds. It ensures that all resources are efficiently utilized
with minimum wastage. These separate account books assist managers
in determining performance level from time to time and taking
corrective actions which leads to raising the profit level.
❑ Formulation of policies:- it helps in formulation of proper plans
and policies which play an important role in departmental accounting.
Managers get detailed information about every unit through the
individual book of accounts. They analyse these set of books for
determining the efficiency level of various departments. Proper
knowledge of every business unit enables them to take proper actions for
increasing profitability.
❑ Facilitates interdepartmental comparison:-Departmental
accounting is one which enables managers in doing a performance
comparison of various departments of business. A separate book of
accounts is prepared for every unit which records revenue and
expenses of these units on an individual basis. Profit is calculated and
compared with one another for determining their performance level.
❑ Promote competitive spirit:- It promotes a sense of competitive
spirit among all staff working within an organization. In this system of
accounting all operations of each business unit are properly monitored.
Team members are rewarded on the basis of performance of their
departments which is revealed by the departmental book of accounts.
This motivates staff to work efficiently .
❑ Determine managers commission:- Departmental accounting
help us in the fair calculation of manager’s commission working
within different departments of the business or organization .
Commissions are paid to managers on the basis of profit earned by
their respective departments and for that proper accounts should be
maintained separately for every unit yield right amount of their profit
level which is done with the help of departmental accounting.
 Assist in Expansion and Shut down decisions:- Departmental
accounting plays an efficient role in deciding the expansion and
shutting down of different departments of an organization on the basis
of data accumulated from different departments of organization .
Managers through an individual set of books are able to detect which
units have a more important role in business operations and which unit
is playing the least role and on the basis of this data they can easily
predict which unit should be expanded further and which should be
closed .
❑ Reveal the success or failures of
units:- departmental accounting determines the success rate and failure
of every department within the organization. Every expense and
income of these departments are properly recorded for calculating its
real profitability. The amount of revenue generated by these units
gives a clear idea about the one that is successful in their role and one
that fails to meet their goals.
❑ Facilitates interdepartmental
comparison:-Departmental accounting is the one which enables us to
do a clear comparison of performances of various departments of the
organization. A separate book of accounts is prepared for every unit
which records revenue and expenses of these units on an individual
basis and then Profit is calculated and compared with one another for
determining their performance level.
 METHODS OF DEPARTMENTAL
ACCOUNTING

To maintain the records of profit and loss incurred by every department,

trading
Profit and loss account are prepared by the organization. The accounting
system which is adopted for departmental organization depends upon the
need to identify the different expenses and revenues of each department .it
must be designed in such an manner so that it may provide maximum
information and is simple to understand .Such departmental accounts
can be kept by following two methods given below :-
 SEPARATE DEPARTMENTAL
ACCOUNTING
In general, this method is adopted by large organizations having
vario,us departments or if the law has asked to prepare separate
departmental accounts. In this method, accounts of each department
are kept independently, and each department is considered as a
separate unit of an organization. Companies involved in insurance
business are the one which are compulsorily required to implement
this system of accounting. Under this method each department is
treated as a separate unit and accounts are kept independently.
Trading result of each department are combined at the end of the
year to get trassding result of the organization as a whole This
method is a more expensive method than the columnar method of
departmental accounting
 COLUMNAR BOOKS
DEPARTMENTAL ACCOUNTING

This method is adopted by the small business organizations in which

they do not maintain a full book-keeping system; however, it only
maintains records of some transactions such as purchases, sales,
stock details and expenses incurred by the departments. Trading and
profit & loss account contain different columns for each department,
and expenses pertaining to respective departments are recorded in
their particular column, and if the expenses are of common nature,
they get distributed amongst all departments according to the
concerned ratios.
 DEPARTMENTAL
EXPENSES

The allocation of expenses in departmental accounting is very important

issue to arrive at the correct profit and loss account of each department.
Expenses of a business can be broadly divided into following two
categories:-
1.DIRECT EXPENSES:-Expenses relating to more than one
department are called direct expenses. They are charged to respective
department. For example wages, staff salaries,material etc.
2.INDIRECT EXPENSES:- Expenses relating to one or 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 OF
DEPARTMENTAL EXPENSES
There are certain expenses which can be specially incurred for a
particular department: for example , salary paid to salesman in sales
department etc. and there are certain expeses which can be precisely
charged to specific department . As these departments are benefited
by these expenses such as lighting will bee charged to the
department according to separate meters .
Appointment of departmental expenses:-
1. Selling expenses:- these expenses include bad debts ,
discount allowed , selling commission , and should be divided
among the different departments on the basis of sale
2. Building expenses:- these expenses include all the rents and
rates , insurance on building and other exoenses related to
building or premises . Charges of different departments depend
upon various factors like if any department enjoying any special
benefit then charge for these expenses must be adjusted
accordingly
3. Power:- It should be appointed on the basis of probable usage as
determined by ornumbers and types of machines adjusted where
necessary accourdingb to running hours in absence of separate
meters for each department .
4. Heating and lighting:- if there are no separate meters , these may
be appointed among the different departments on the basis of points ,
lamps used , area or inversely to the number of windows.
5. Advertising:- it should be appointed on the basis of advertising
space used by the different departments or on the basis of
advertisement for the benefit of all departments
6. Labour welfare expenses:- these would be appointed among the
different departments on the basis of number of employees working
insuch department.
7. Insurance premium:- it must be seen whether the insurance
premium has been paid for stock premises or loss or profit por
workmens compensation and should be appointed on the basis of
stock carried , proportion of premises occupied , profits earned in the
preceding years and wages respectively but if there exists any
abnormal feature relating to any department that may be considered
while apportioning such expenses
8. depreciation:- it should be allocated among the different
departments on the basis of assets employed in each department.
Following table will help to know the proper bases for
appointment of some important expenses among various
departments:-

EXPENSES BASIS
1.Sales expenses as travelling Sales of each department
salesmans salary and
commission , celling
expenses , after sale services ,
bad debts , provision for
discount on debtors , sales
manager salary and other
benefits etc. Area or value of floor space
2.All expenses relating to Consumption of energy of
building as rent , rates , taxes, each department
heating etc.
3.Lighting and heating Average stock carried
4.Insurance on stock Value of plant of machinery
5.Insurance on plant and
machinery
6. Power
7. Depreciation , renewals&
repairs
8. Canteen expenses and
labour welfare expenses
9. Work managers salary
10. Intrest on loan
11. Profit & loss on sale of
investment
12. wages
H.P Or H.P. x hours worked
Value of assets in each
department otherewise on time
basis
No. of employees
Time spent in each department
utilization of loan amount in
each department(if can be
identified ) otherwise in
combined P& L A/c
Value of investment sold in
each department ( if value can
be identified) , otherwise in
combined P & L A/c
Time devoted to each
department
Distinction between departmental accounts and branch
accounts

Departmental Accounts Branch Accounts

• Departments are • It is either inland or

always inland Foreign
• All departments of a • Branch of a concern is
business remains established at
generally under one different place in the
roof same town or
• Departments are made different town
to increase the • Branch is opened to
efficiency of the increase the sale
business
• all accounts are
maintained at one • All branch accounts
place and are kept at head
departmental trading office except cash ,
and profit and loss coustomers and stock
account is prepared register are
accordingly maintained at branch
• Departments are not
geographically separated
from each other so
problem of allocation of
common , expenses
among different
departments arises
• These are comparatively
less costly as a small team
of accountants can be
appointed to maintain the
accounts.
• The chief executive who
is to keep a constant
watch over the department
supervisor closely and
supervises effectively.
• As branches are
geographically separated
from each other so the
problem of allocation of
common expenses among
different branches does not
arise
• Branch accounts are costly
to maintain as it involves a
big team of accountants to
maintain accounts for each
branch
• The chief executive who
is to keep a constant
watch over the
department supervisor
closely and supervises
effectively.
 Bibliography

Book
• Principles of financial accounting ; Kalyani publishers

Websites
• www.icai.org
• https://commercemates.com
• https://theinvestorsbook.com