Departments and Departmental Accounting

DEPARTMENTAL ACCOUNTING

 

In case different business activities are carried out under one roof/building in the same business name, It will be treated as one business unit. Each such business activity/division is known as department.

Departmental Account:

All Accounting Records are kept at one place and departmental trading and Profit & Loss A/c is prepared seperately to know the Accurate profits of each department.

Objectives:

1.  HELPS IN COMPARING MAKING:

It helps in comparing results of one department with another and results of different years for same department.

2.  HELPS IN DECISION MAKING:

It helps the management to make decision about the profitable department and how to expand it. Moreover, it also tells about the least profitable department and what steps should be taken to make it profitable.

3.  HELPS IN EVALUATION OF PERFORMANCE:

It helps the management to evaluate performance and efficiency of each department so that department with lower sales volume and high operating cost can be closed.

Advantages:

(i)       Departmental Accounts helps the owner to analyse the proper use of capital invested.

(ii)      It helps the comparison of various expenses of each department with other departments or with the previous period. 

(iii)     The departmental employees can be suitable rewarded on the basis of the departmental profits. 

(iv)     By calculating inventory Turnover Ratio, G.P Ratio, N.P Ratio etc. The efficiency of each department can be checked. 

(v)       It helps in ascertaining the trading results of each department and helps the businessman to compare the performance of each department.

(vi)     It helps the businessman to push the sale of that department which gives maximum profits

(vii)    It helps in increasing the overall profitability of business by having inter-department comparison.

(viii)   It helps the management to evaluate performance of each department so that department with lower sale and high cost can be closed.

 

 

ALLOCATION OF EXPENSES:

(1) Expenses related to Particular Deptt.

The expenses which is directly related to a particular Deptt. Will be directly

debited to that department for which it has been incurred

(2) Common Expenses.

The other type of expenses are those which are not directly related to the particular department. These expenses are basically the common expenses of whole business. However, these expenses are apportioned between the different departments on same equitable(suitable) basis such as Sales Ratio, Floor Area etc.

List of some common expenses and the basis of appotionment are as follows: Sales ratio basis: Expenses which are clearly depend upon sales, such as selling comission, bad debts, discount on sales, carriage outward should be apportioned on the basis of sales. Sales should include transfer to other departments.

(i) On the basis of Area Occupied:

Expenses such as rent and rates, insurance on building repair etc. Should be

allocated according to the area occupied by each department.

(ii) On the basis of light points:

Lighting. Heating etc. Should be allocated on the basis of number of light points used in departments.

(iii)     On the basis of Value of assets:

In case total depreciation for assets is given, it will be allocated on the ratio of value of assets.

(iv)     On the basis of Employees:

Labour welfare expenses like insurance of employees, canteen expenses are

either allocated on the basis of number of employees or in the ratio of wages

of different depatments.

(v) On the basis of Horse Power:

Power as electricity used to run the machines, should be allocated according to horse power of machines.

(vi)     On the basis of stock value:

Insurance premium on stock is allocated according to Average stock of departments.

 

 

(3) Expenses not Related to any Department:

There are certain expenses which does not relate to any department but basically belongs to the business as whole. These expenses will be directly charged to general profit and loss account after transferring profit and loss of each department in a common account to calculate total profit whole business.

 

 


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