From the Desk of Dr.

P N RATH

Departmental Accounts

By
Dr. Pranabananda Rath
Consultant & Visiting Faculty
 Why

When all the division of a business unit

are located under one roof and it is
described to ascertain the profit and loss
of each department separately, the
departmental accounts are prepared.
 Departmental Accounting

 Departmental Accounts are accounts relating to the

several departments or sections of a business drawn
up with a view to ascertaining their individual
performances.
 In order to carryout business more efficiently, a
businessman divides his store into many sections, each
section is called a Department. In order to ascertain
the profit or loss made by each department, it is
desirable to prepare separate Trading and Profit and
Loss Account for each department
 The preparation of such Trading and Profit and Loss
Account separately for each department enables to
compare the results of trading activities.
 Objectives

 To have comparison of the financial result of a

particular department & also with other departments.

 To help in formulating the various policy to expand or

diversification of the business.

 To allow departmental managers’ commission on the

basis of profit of their department.

 To allocate the various expenditure among different

department in their agreed ratio.

 It helps management to maintain the business

integrity.
 Classification of Department

*Operating Departments – Perform an

organization’s main functions
• Production
• Selling
*Service Departments – Provide
support to operating departments
• Payroll
• Human Resources
• Accounting
Advantages of Departmental Accounting

Evaluation of Performance

Planning & Control

Growth Potential of Each Department

Justification of Capital Outlay

Monitoring the Various Expenses

Judgment of Efficiency
Methods of Departmental Accounting

Methods
Columnar Basis
Independent Basis
 Columnar Basis

In this method, there is a single set of books. All

accounts of all the departments are maintained
together, but in a columnar or tabular form. In
order to enable the preparation of departmental
trading and profit and loss accounts, various
subsidiary books, such as purchases, sales, returns
books, are prepared in a columnar form and this
shows the record, in detail, for each department.
 Independent Basis

In this method, accounts of each department are

maintained separately. Each department prepares
Trading and Profit and Loss Account. Finally, the
profit or loss of each department is transferred to
the (General) Profit and Loss Account for all the
departments. The independent departmental
book-keeping is an expensive one.
 Distribution of Expenses

Normally, all direct expenses are charged to the

respective departments, in case of indirect or
general expenses, proper allocation among the
departments must be made in order to ascertain
the profit and loss made by each department.
Each department is charged with proper business
expenses. If the basis for such allocation is not
specially mentioned, then the basis of allocation
of different departments are as follows:
 Allocation of Expenses
Sl.No Expenses Basis
1 Rent, rates & taxes, repairs & Floor area occupied by each
maintenance, insurance of department, otherwise on
building time basis
2 Lighting & heating expenses Consumption of energy
(energy)
3 Selling expenses: discount, bad Sale of each department
debt, commission, freight
outward, travelling.
4 Carriage inward/ discount Purchase of each department
received
5 Wages & Salaries Time devoted to each
department
6 Depreciation, insurance, repairs & Value of assets of each
maintenance of capital assets department, otherwise on
time basis.
Sl.No Expenses Basis
7 Administrative & other expenses: Time basis or equally
salaries to manager, directors, among all
common advertisement expenses departments
8 Labour welfare expenses, Canteen Number of employees
& recreation. in each department
9 PF/ESI Contribution Wages and Salaries of
each department

Note: There are few expenses and income, most being of financial nature,
which can not be found a suitable basis of apportioned, they are
recognized in the combined P/L A/C like: interest on loan, Profit or loss on
sale of investment , audit fee, bank charges & share transfer expenses
etc.
 Types of
Departments

Independent Dependent

Work
Have inter
independently,
departmental
have negligible
transfers
transfers
 Interdepartmental Transfer

Goods are often supplied from one Department to

another – Inter-Departmental transfer. Such
transfer must be credited to Supplying Department
and debited to Receiving Department. If the
transfers are made at cost price, then it can be
treated as mere transfer. No further adjustment is
needed.
If the transfers of goods are made at selling price,
then a profit is earned by the supplying department
of the same organization. When the goods,
transferred from one department to anther, still
remain unsold with the transferee department, at
the end of the accounting period, there arises a
necessity to eliminate the unrealized profit on such
stock on hand. This is because, so much of issuing
department’s profit (notional) remain unrealized
from the viewpoint of the firm as a whole. The
reserve will be equal to the profit included in respect
of unsold goods at the end of closing.
 Entries

General Profit and Loss Account Dr.

To Stock Reserve
In certain cases, the transferee department may have some stock in
the beginning of the account­ing period, against which stock reserve
was already created in the previous year, will also be trans­ferred to
General Profit and Loss Account by means of Journal entry:
Stock Reserve Account Dr.
To General Profit and Loss Account
Alternatively, a single journal entry can be passed for the unrealized
profit on the basis of the difference between unrealized profit included
in opening and closing stock.
 Preparation of Departmental Trading & P/L
Account
Trading Account

Particulars Dept.1 Dept.2 Particulars Dept.1 Dept.2

To By
Opening Stock Sales

Purchase Inter Depart. Transfer

Direct Exp. Closing Stock

Inter Depart.
Transfer By Gross Loss C/D

To Gross Profit
C/D
Total
 Departmental P/L Accounts

Particulars Dept.1 Dept.2 Particulars Dept.1 Dept.2

To By
Gross Loss b/d Gross Profit b/d

To Indirect Expenses
BY N.L C/D
To N.P C/D

Total

Notes: The company also prepare General Profit and Loss Accounts
to show their combined net profit. Any indirect expenses that are
not distributed proportionately can be put in General Profit and
Loss Accounts
 General Profit and Loss Accounts

Particulars Amt. Rs Particulars Amt. Rs

To By Net Profit:
General Exp.(Whose Dept.1
allocation is not possible) Dept.2

To Net Profit By Net Loss

Total
 Case

From the following information you are required to prepare

Departmental Trading and Profit and Loss Accounts.
Particulars Dept.A Rs. Dept.B Rs
Opening Stock 2,00,000 4,00,000
Purchases 1,00,000 2,00,000
Sales 6,00,000 9,00,000
Closing Stock 70,000 50,000

Department A transfer goods to B department of Rs 2,00,000 during

the period. The expenses incurred during the period are: Rent Rs
50,000, Salaries Rs 1,00,000, Wages Rs 2,00,000, Advertisement
expenses Rs 70,000.
The floor area of Department A and B are 2,000 and 1,500 sq.ft. The
number of employee working at corporate office of both the
departments are 20 and 10 respectively. The number of workers
working in the production units of both the departments are 5 and 3.
 Solution
Departmental Trading Accounts
Particulars A . Rs B. Rs Particulars A. Rs B. Rs
To By
Opening Stock 2,00,000 4,00,000 Sales 6,00,000 9,00,000

Purchase 1,00,000 2,00,000 Interdepartmental 2,00,000

Transfer(A)
Wages(5:3) 1,25,000 75,000
Closing Stock 70,000 50,000
Interdepartme
ntal - 2,00,000
Transfer(B)

To Gross Profit 4,45,000 75,000

C/D
8,70,000 9,50,000 8,70,000 9,50,000
 Departmental P/l a/c

Particulars A. Rs B. Rs Particulars A. Rs B. Rs
To By
Rent(20:15) 28,571 21,429 G.P b/d 4,45,000 75,000

Salary( 20:10) 66,667 33,333 By N.L c/d - 21,762

Adv. Exp.(6:9) 28,000 42,000

To N.P c/d 3,21,762 -

4,45,000 96,762 4,45,000 96,762
 Case

From the following information you are required to prepare Departmental

Trading and Profit and Loss Accounts. Show actual profit and loss of Steel and
Motor Department.
Particulars Steel Rs. Motor Rs
Opening Stock 2,00,000 4,00,000
Purchases 1,00,000 2,00,000
Sales 6,00,000 9,00,000
Closing Stock 70,000 50,000

Steel department transfer goods to Motor department of Rs 2,00,000 during

the period. The expenses incurred during the period are: Rent Rs 50,000,
Salaries Rs 1,00,000, Wages Rs 2,00,000, Advertisement expenses Rs 70,000.
Salary of legal of officer was Rs 1,00,000. Insurance charge during the period
was Rs 7,000. Stationary purchases of Rs 6,000 during the period.
The floor area of Department Steel and Motors are 2,000 and 1,500 sq.ft. The
number of employee working at corporate office of both the departments are
20 and 10 respectively. The number of workers working in the production
units of both the departments are 5 and 3.
 Solution
Departmental Trading Accounts
Particulars Steel Rs Motor Rs Particulars Steel Rs Motor Rs
To By
Opening Stock 2,00,000 4,00,000 Sales 6,00,000 9,00,000

Purchase 1,00,000 2,00,000 Interdepartmental 2,00,000

Transfer(Steel)
Wages(5:3) 1,25,000 75,000
Closing Stock 70,000 50,000
Interdepartme
ntal
Transfer(Moto - 2,00,000
r)

To Gross Profit 4,45,000 75,000

C/D
8,70,000 9,50,000 8,70,000 9,50,000
 Departmental P/l a/c

Particulars Steel Rs Motor Rs Particulars Steel Rs Motor Rs

To By
Rent(20:15) 28,571 21,429 G.P b/d 4,45,000 75,000

Salary( 20:10) 66,667 33,333 By N.L c/d - 21,762

Adv. Exp.(6:9) 28,000 42,000

To N.P c/d 3,21,762 -

4,45,000 96,762 4,45,000 96,762
 General P/L a/c

Particulars Amt. Rs Particulars Amt. Rs

To By
Net Loss b/d 21,762 Net Profit b/d 3,21,762

To Salary of Legal 1,00,000

Officer

To Insurance 7,000

To Stationary 6,000

To Net Profit c/d 1,87,000

3,21,762 3,21,762