a Departmental Accounts Introduction i ‘A business is generally split up into a nwrber of departments when it sells different types of goods or Eatick ome ‘activities under the same roof. Such departments are found in businesses tat sizs (atl 1 areas). It should not be assumed that departmental accounts refers oly to departmental stores. In fact, they refer to the verious facets of a business. Each department is treated asa separate profi cen, though none of the departments is separated geographically fromthe restof the departments. Tis typeof organisational subdivision creates @ need for intemal information about the operating results of each department, Since different departments may have diferent rates of grow, profitability and degreesof risk, managerial decisions in regard to pricing, closure etc. can be made on the basis of such information Therefore, the various pros and ae the actions tobe taken to increase the overall profitability ofthe business concer enn Nt be properly ‘considered until the departmental profits and losses are known. Advantages of Departmental Accounting ‘The main advantages of departmental accounting are a follows: se The performance of each department can be evaluated ‘separately on the basis of trading results. An ae sour may be made to push up the sales of thst department which is earning maximum profit Tthelps the management to decide whether to drop department 9 adda new one. ‘The growth potential of a department as compared 0 others be evaluated. Mace eraited information can be provided tothe users of the accounting information like the shareholders, investors, creditors etc. 5, Tiondly rivalry between different departments may hel organisation. Departmental managers and staff ean be rewarted property on the basis of results Ithrelps the management to determine the justification fof capital outlay in each department, Tr facitates the comparison of expense items with hose nother departments aid in the previns peri Tthelps to calculate tock turnover ratio eat department = Rs 500 Seared snth CanScamerle a (4) Loss on Scrap of Vehicle ee Cost i i Less: Accuinuliied Aceuiulbed deposition (yas Re 20 4 t Whitten down value ow the dats: ie 7 i eed vn Amount realise ne a Loss, “ \ ‘Loss on serap of cl mn elite wil be share by Cling, Depart Sts EIN greet | depreciation, Theref fore, clothing department will bear the loss ‘of RS 500/12 of RS 1,200) andl sports ees eee ee the loss of RS 700 (1/1201 Rs | 200). Pal a eee commission in June, 2008 on the basis of gross profit of 2007. “Therefore, in the + Acgount of 2007, provision mast be made for such future payment. IMustration 4 Prat ‘ Ea See ea ea trading on 14.2007 as Highway Stores, retail stations: and confectioners, a capital of Rs 30,000 which was utilised in Hhecpening of abusines Bak Accomm: Allectipts payments ap through the Bank Account, Following isa summary ofthe items credited in the business Cash Book during he: yearended 31.3.2008: _Trehioe_———— Partials ©. Parts case ‘of fixtures and fitings Tent ior the period 142007 103042008 ratory department pn) Rats orb ya ended 182008 ‘Confectionery department 15000) Eletity ft salaries: Advertsing Stationery department 22,000} Payment to supers 16400] Drawings. _ - Contectonery departs _ “The purchases during the year unde review were: Stationery department Rs 2,60,000% ‘Confectionery department Rs 292,500. The above purchases do not include goods costing Rs 5,000 bout ty the business and then tken by Me Choudhury fr his own domestic we, «Be are of Rs 5,000 is incloded in payment to suppliers. “The gross profit in the stationery partment is @ 20% on sales nite te confectionery department is © 25% on sales In both departner™, ‘rales in each month are Ways 3 ‘vuniform level. i ein each department just sufficient forthe "The policy of Mr Choudhury Following month’ ssales- The prices ay Storeshavenot changed since the business began. Bat sundry debtors at 31-3.2008 amounted t0 Rs 90,000. Tn August 2007, Mr Chowghug ah rt adtional capital of R5 90.000 ‘At 31.3.2008, Quistanding ¢ fecti ie jt amounted to Rs 1,100.3 MeChoudliary has decided that expenses not incurred by 28 portioned To departments 38 follows: 1. Rent eppeding to Moor area ooeuet. ie jecording to consumption. 3 navertising — according (9 (Or -tworthieds ofthe business floar SP oped by the stationery department while three-quarters of the electricity is consumed by that department. Tthas been decided APY Geprectation on fixtures and fitings shouldbe provided @ 10%% of the cost of assets held at the year end. Required : 008 forthe — (stationery department f@) ‘ATrading aed Profit and Loss count forthe year ended 1.3.21 pv \ ss Act vir ii confectionery JepareAt (py A Balance Shest as on 3 Seared snith CanSeamerSolution Highway Stores Dr. Departnnial trading and Profit and Loss Aocatnt fw the fe ended 1st March, 2508 Particulars | Statinery. | Gonfectonery Pasticubar ay ont (hs) jE + 90,000 fo Puuehaces 9.925004 By Ss (Nae §) To Gross Prot ed i r {OLOOU; Ly Closing tod (Hoke Tosuls s2nqnn| 382500 | al Salaries 22,000) 15,440} By Gross Pro ld ; To Rent (Rs 13,000 ~ 1,000) ral oa " | To Rates (Note 7) 3,800 1.900 \ Taeticy (Rs 3.700 + 1.100) 3600) 1,200 jo Advertising (Note 7) , 5 To Depreciation o 5900) Senn Fixtures and Fittings @ 10% To Net Prot 4 [a eh 0.000 en... Balance Sheet of at 31st March, 2008 Liabiiies a a “Rs Liabitigs ‘Assets Rs Capital Introduced Fitures and fitings ( oo | 30,000 Fiatures and Fatings (As 26,000 + 15,000) 41,000 Add: Furte Le 90,000 Less : Depreciation 4 36,900 from Stationery 45,000 | stock (Rs 20,000 + Rs 22,500) (Note 3) 42,500 Profit from Confectionery 60,000 Debtors 90,000 95, Prepac ; Less: Drawings (s 50,000¥5,000) .'s5.000 | 1.40.00 pet m= Creditors (Note 2) "22,000 Outstanding Electricity 1,100 Bank Overdraft (Note 1) St Bank count Particulars — ire me [eae ~Paniulars : To Cash (Capital introduced) 30,000) By Fxtres and Fitings To Sundry Debtors (Note 5) 570,000] By Stall Salaries To Cash (Further capital) 90,000} By Rent To Balance old 7,300) By Rates By Electricity By Advertising By Creditors By Drawings [oraeraa ~ (Q) Creditors Account Particulars Parteulrs “ToBank By Purchases To Balance cid —Stalionery 2,60,000 - —Confectionery 2.92.50 Drawings (siment for staoneryakenover) |__ S08 ‘7,500 . ee at) ‘are uniform in each month. ; Ins” sale, Therefore, closing stock will be ery department’ Rs 2,92,500/ (3) _ Closing stock will ‘Therefore, purcha — Stationery department : 13 = Rs 22,500. wot Me — Dy. ‘ » Drow ho dete Aten I be equal to next month's sale. Sales ses during 2007-08 are equal to 13 months’ sale, Fes 2,60,000 / 13 = Rs 20,000. Confection Seared snth CanScamerUemartinenial ace ouats 23M Staley Dexa (4) Catcutation of Sales fae ‘Stationery Depavimenl “: aoe Soe 5; Confectionery Nepartrncut % Less: Ginss Profit @ 20% wo sakes sonar Tegnfen | & Cost 20} Less: Gross Proll @ 25% ae Dato Goats Sl Pens ac | 3 sates «Ost of Gots rae 4 Stock) 9,40,000) Cont of ints Sold (Purchases Chg Sort) pron a rola 300,000 ggg = S280 Gr Sold, 4g9 “S800 ‘otal sales : : ha me ofthe year Rs eceeaten Rs 3,60,000 = Rs 6,60,000. Amount due from sundry detrors at the end ‘Therefore, amount collected from sundt amount sundry debtors = Rs 6,60,000 ~ Rs 90,000 = Rs 570,000. © a has been paid for 13 months (1.4.2007 to 30.4.2008). erefore, prepaid rent will be — Rs 13,000/ 13 = Rs 1,000. (7) Apportionment of Common Expenses | a i Expenses _ ___Basis Stationery Confectionery — oO 0005 13. Rs 4.000 i) Rates £55,700 x19 = Rs 1,900, (Gi) Electricity oo Turnover (8 tion 5 Fd Y are in partnership managing a small etal store which specialises in sweets and confectionary managed by X and newspapers and periodicals lanaged by Y. The partnership agreement provides for Xto sate three-fifths ofthe profit, and Y two-fifths, each partner be P towed 8% interest on capital and each fo receive a commission of 10% of the profit of their respect’ sections prior to any other appropriation of profit. During the year to 31st March 2008, atrial balance etaeted at that date revealed the following figures. —— Particulars _—_—_—— ~ Dr (Rs)_|_Cr. (8s) Xx 14,000 = x J— 8000 Current Accounts =X 2020 Y xX Drawings - Y Freehold shop premises. Equipment at witen-down val Confectionery section _. Periodical section Purchases : confectionery sect ~~ Periodical sation lock a 1st Apri: Confectionery se ~_Petodal section ‘Confectionery section. Periodical section. “Wages: Confectionery section sical section Light and eal “Advertising - Debtors and creditors Bad debls- Peviodical section shinhand “Cash at bank - Prowsion for doutll debs : Prides! set Total - - Seared snith CanSeamer48.02 Advanced Accounting (Volume 1) Additional information available: (Stock at 31st March, 2008 was Fs 3,G4H) in ie Wlisiioney seation, and Ro $400 iu te Pai {ii} The partners have agreed that raies shoul be: apperivuatvedt bs 4 he Cunrfectionery and Perivaticad ited sections on a 3:2 ratio, advertising on atio, fighting. ard heating on 22:3 ratio, and miscellanem iat ‘expenses on a 1:1 ratio, o Gil) Wages owing at 31st March, 2008 : Rs 25 and Ri: 0 for the Confectionery ancl Periodical section ‘in ___ fespectively. — ———— ~ o a iv) Advertising prepaid at 31st March, 2008 amounted to Rs 100. eal (¥) The provision for doubtful debts is to be increased to 5% of the debtors of the Periodical section, ‘Apel 10 which amount to Rs 1,500 at 31st March 2008, pi 20 wi Equipment of both sections is to be depreciated at 10% of the written-down value at Ist April, 2007, Aon 30 tequired: - (@) Prepare Trading and Profit and Loss Account for the Confectionery and the Periodical sections, and Att also for the business as a whole, for the year ended 31st March, 2008. (Note : A Balance Sheet is not Reo required). (b) Prepare an Appropriation Account for the year encled 31 st March, 2008. Tar Solution Cost Dr.___ Departmental Tr the year ended 31st March, 2008 Cr. ae " “Toes” Peta | To a Particulars __Patculrs,___|_tonery Rs ech ing Stock vas00| 2 s00] 40000 sinoe af ene ts nl au 4,400) 8,000 price m fo Wages To Gross Preece . a Must 7 -—2s.s00l— a0, Mohitt To Misc. Expenses 200) 300) 6300 a To Rates —— To Advertising Paha To Lighting & Heating To Bad Debts cand To Prov. for Gad Debts ae To Depreciation To Net Proft-ranslered | fe casi cart y ote To interest on Capital: 0 | x Qo | To snaeot Pott o | ® Ga) Wages + Confectionery Rs 1,175 + oustanding Rs 25 = Rs 1200; and Periodical Rs 1470 + o outstanding Rs 30 = Rs 1,500. et : . (2) Miscellaneous expenses: 15 and Peric RSLS. f Confectioner I Fe 300 and Periodical 2/5 of Rs 500 = Rs 200. wee @) Rates: Conti ery - U/2of (Rs 250 Rs 100) = Rs75 and Periodical 1/2 of Rs 150 = R875, i (4) Advertising : Confectiong’y™ r Rs 160 and Periodical - 3/5 of Rs 400 = (3 Siening. and heating : Confectionery —2/5 of Rs 400=Rs Rs 240. Seared snth CanScamerInter-Departmental Transfer ‘i we charped for raed op considered ti nate nietimes price each depattinyent inter departmental t toarrange all inter depay leanne by 4 separate protit cent herally a wee cabal (ranetion Th pus ultsoaer dea , it is neces y oF moutily Departmeatal Trae le shicct tay be ins the fo have sepay fe reconls for | ilo Aual ysis Sheet is prepared tollovring tora bine Departmental Transtor Analysts Shoot {| Supplying Departs ' | 2008 Dax | aera Neceiviny Uepeitments, | toni a ot Dept 2 Dept X Dept Y Oept2 | ‘April 10 = Snr = o» | = ail20 = 500 = so “ = | April30 __ 200 | = = “ ae - a 800 00 0 the end of the week/month, the transfer is reconded by pass r ; yy passing the following entry: Receiving Department Dr. [Transfer price} ‘To Supplying Department ‘Transfer prices can be cost-based or market-based. Dusl pricing is also sometimes used. They are discussed below: Cost-based Transfer Price Under cost-based transfer pricing, the price may be based on actual cost, total cost or standard cost. Marginal cost is also sometimes used as a basis of ascertaining transfer price. Standard cost is preferred to actual cost ince the inefficiency of one department cannot be passed on to another department. Taking full costas transfer price means that the supplying departments’ fixed cost becomes the variable cost ofthe receiving department. Mustration 6 Mohit Udyog operates a general business and the firm's Trial Balance prepared at 31. 12. 2007 was as follows Patties Gris) [Pals s 7 Capital 62,000] Freehold Garage Premises: is oe 90 ‘Spare parts — etrol aire ett tat me | information is as follows : othe an ‘and equipment, all of which is used for repair work, is to be depreciated by 10%. (2) Stocks at 31.12.2007 were — Cars Rs 7,400; Petrol Rs 1,600; Spare parts Rs 700. G) _Noentries have been made for the following : {i) Petrol used in demonstration runs cost RS 200, (ii) Parts used in repair jobs cost Rs 750; Gii) Repairs on cars subsequently sold were charged out at Rs 2,400. : (4) _ Expenses which cannot be specitcally allocated to one activity are to be apportioned — GO'% to Cars; 10% to Petrol; 10% to Spare parts; 20% to Repairs. . (5) General expenses accrued amount to Rs 300, ana provision istobe made of Rs 500 forcarsalesmen’s nission. Prepie Trading, and Profit and Loss Account, preferably in columnar form, to show clearly the profit or Joss in cach of the four main areas of business activity for the year ended 31.12.2007. ‘Also prepare the Balance Sheet at that date, Seared snith CanSeameran 28.14 Advanced Accounting (Volume 1) [at Rupees in ‘C00, be Dep wo cont ar ended 31st Ls ie 2007 or. Solution artnental Trading and Profit and Loss Account forthe YeSr CNS SO a Particulars {tas | Patol | Spare | Hepat] is a _ ; 120, 32) ~-|by Sates . By Inter Departmental Ses 10.75] By Cosing Stock —| 03 i 7ai 18] | ToOpening Stock 0 ToPurchases, To Paris used in epirs (ote 2) ToRepais on cass sold (Wate 3) ToWages, To Gross Profit od To fice woges (te 4) 1.1) By Gross Profit bd To Rates and insurance To Salesmen's salaries and ‘commission(7700 + 500) ‘To General expenses (Note 4) Ta Demonstration petrol cost formes Solution Depa of the uni Let. X Therel (ite 1) ‘To epreition en: Plant and Equiment | - ToWet Prott 457] =| 38) 268 oe Lal as 08 Balance Sheet of Mohit Udyog as at 31st December, 2007 _ bis As Asst Capial (Opening) ano Fetal Garage Premises 200 ~ ‘ad: Pott rom Cars 1,700 Pat and Equpmeat 7000 ‘ad: Prof rom spare pats ass Depeiaton “| 30 hee ‘Pott rom Reps 2.80 Stock (Rs 7.40 + 1600+ 700) 370 Less: Loss from Petrol {1,000} 14990 Metcost ots Creditors 470 ‘Outstanding: General Exoenses 14500 ae Cars Salman's Commision L. To avoid — sim It does not Working Notes : outsiders. (J) Petrol used for demonstration run will be treated as selling expenses of Car department and sales of Dual Pri Petrol department. ane (2) Spare parts used in repairs Rs 750 will be treated as direct expenses of Repairs department and sales | To motivst ‘of Spare parts department with two d (3) _ Repairs on ear subsequently sold Rs 2,400 will be treated as direct expenses of Cardepartment and | _¢&Partment sales of Repairs department. [ire goo (@) Apportionment af Common Expenses | secant 7 “gas | tears) | Gasiny [Peto @) [Spweranetaa| neamiay | (Jor anreal (9 General Expenses | “6:4:1:2 | so 3980 seo. (Genera 2. {0} Oice Wages | 6:4:1:2 | 5500 3:00 60 To Pr (i) Ras and sree |_6:1: 1:2] 1900 Ltn L390 | atshe bes Rs 6,300 +s 30O(outstanding) =Rs 6,600. reece Mlustration 7 ) Mlustration ‘Shri Gangaram sells two products manvfactured in his own factory. The goods are made in wo depautmnents | Raman can} ‘Aand B for which separate sets of accounts are maintained. Some of the manufactured goods of Department department ‘Aaare used as raw materials by Department B and vice versa. From the following particulars, youare required | ga'to cost fo toascertain the total costof goods manufactured in these (wo departments: tated Seared snth CanScamer31.950, 19814 (©) Insurance o nee ot Sick | Avrage Stock evel | ts 940 ' | Son ete [Ps M0 ogg ne ato (i) General {rotons a 2 Sooo Fotlotsaesant e240 ta te200 . inn es rage tee nT» ann = Ws Gn can 119300 (2) Managers’ Com Hardwar 1% of Rs 12,075 = Rs OH (appro ot Rs 82) ~ Ral Gren) d @) ope and Rates : Rs 1,580 ~ Rs 80 (prepaid) = Rs 1,500; Heating and Lighting: Rs 80+ Rs 20 oustanding) = Rs 900; sneral Administrative Expenses : Rs 2,073 ~ Rs 33 (prepaid) = Rs 2,040 tion 3 inhood is a retail trader whose stores has two departments dealing 19 Tespectively. The following Trial Balance was extracted rom books at 31.12. clothing and sports equipment 2007, the accounting year end “Resene Cres “Bank Oveiat Debtors a “Building — At cost hides — ALcost_ vision ore Additional information — (a) Gross profit is earned as follows = Clothing — 1/3rd of sales; Sports equipment — 3/10th of sales. (b) Stock is ‘valued at cost on 31.12. 2007 : Clothing Rs 8,000; Sports equipmentRs 14,000 () Amounts prepaid at 31.12.2007 : Establishment expenses — Clothing Rs 300. (a) Amount outstanding on 31.12.2007 : Sales and administrative expenses — Clot (©) ‘The sales staf receive commission in June of exch year based on the Bro department in the previous financial year + Clothing — 2% of gross profit; Sports equipment — 3% of gross profit. (9 In Juve 2007, adaliionalfunitare was aequired ata cost of Rs 4,000 was debited to purchases. 1g Rs 200; Sports equipment Rs 700. 3s. profit earned in their Seared snth CanScamer23.8 Advanced Accounting (V (2) Depreciation is provided annually atthe relevai nd Built (Un August 2007, buch hat 8 scrapped. the firm di = (The fixed assets ont Chahing, Sports Equipancat Building ia ean Furniture 5 ws ewe siz m2 You are required to prepare the Trading and Profit an Loss Account for the year ended 31.12.2007 and the Balance Sheet as on that date. Solution Robi _Dr._Departmental Trading and Profit and Loss Account for the year ended 31st December, 2007__Cr. cme ] Oeting | Soon Panculars Fave | ths) | mere ToOpenag Sec apm feroa —— |e 16000 To Purchases (Balancing figure) | 78.000! 1.10000] By Gesig Stock To Gross Prof ed (given) | _ 40.000 ToEstbishment Expenses Note 1) | 14,700 To Sales and Adrinistratve Exp. (Nett 2) To Outstanding Sales Sat Come. (Nate 5) To Deprecision on (Note 3) Buldag (1: 1) | Furniture (3:2) | Vehices (6:7) To Loss oaScrapcf Venice (Nete 4) | To Net Prof tansteed) __ Tas asses ‘capital (opening) 20.000 Bulag ‘Add: Profit trom Ciothing 11400 | Less: Provision for depreciation ‘Add: Profit from Sports Equipment 16800 | 48.200] Furnture (Rs 26,000 + Rs 4,000) Reserve | 211480] _ Less: Provision for depreciation. Creditors | “s.e00| vehicles (As 22,000 - Rs 6.000) Outstandog: | Less: Prosion for depreciation ‘Sales and Administrative Expenses (Rs 200 + 700) | _ $00] Stock(Rs 6,009 » As 14,000) Sales Sttf Commission | 2240] Debtors Bank Overdraft |___2:300] Prepaid Estabishment Expenses | s0.20 Working Notes : (D) Establishment Expenses . Clothing — Rs 15,000 - Rs 300 (prepaid) = Rs 14,700. (2) Sales and Administrative Expenses Clothing — Rs 7.400 + Rs 200 (outstanding) = Rs 7,600. pment — Rs 5.$40-+ Rs 700 (outstandins) (@) Caleutation of Depreciation ‘On Building — Rs 20,000 @ 2% =Rs On Furniture — Rs 30,000 @10% = Rs 3, ‘On Vehicles — (Rs 42,000 Rs 6,000) @ 20% = Rs 7,200. Rs 6.540, Seared snth CanScamera . 23.8 Advanced Accounting (Volume U1) Furniture 3/5 5/12 W2 for the year ended 3 12.2007 and the You are required to prepare the Trading and Profit and Loss Account Balance Shect as on that date. Robinhood he year ended 3ist December, 2007 _Cr. Solution Dr. Departmental Trading and Profit and Loss Account for t! ; Particulars a Particu lars a Ciothing | Spots Equip- ment “Fo Opening Stock aT 10,000) | 184 To Purchases (Balancing figure) a Oe cod Stock fit c/d (given) A To Gross Pro! (given) ren 2 on ad To Establishment Expenses (Note ) a any a By Gross Profit b/ i le B o To Sales and Admi trative Exp. ( i aa col 1440 Ta Autstanding Sales Staff Comm. ( | Seared sith CanSeamer