DEPARTMENTAL
ACCOUNTING
CLASS 1 CLASS 2 CLASS 3
CLASS 4 AIMS CA CLASS 5
2 CA BISHAL BHATTARAI
UNIT 2 DEPARTMENTAL ACCOUNTING
COVERAGE
A. Meaning and objective of Departmental Accounting
B. Allocation of expenses
C. Inter departmental transfers and their accounting treatment
D. Unrealised profit on unsold stock
MEANING AND OBJECTIVE OF DEPARTMENTAL ACCOUNTING
Meaning When a business is divided into several separate divisions/departments to
carry on separate functions, to access the working results of each
departments, management prepare departmental accounts.
Separate Trading and Profit and Loss account are prepared for each
department in order to measure the relative efficiency and profitability of
each department.
Advantage The main advantage of departmental accounting are as follows:
a. Performance Evaluation : The performance of each department can be
evaluated separately on the basis of trading results. An effort may be
made to push up the sales of that department which is earning maximum
profit.
b. Growth Potential of each department: The growth potential of a
department as compared to others can be evaluated.
c. Justification of Capital Outlay: It helps the management to determine
the justification of capital outlay in each department.
d. Judgement of efficiency: It helps to calculate stock turnover ratio of
each department separately, and thus the efficiency of each
department can be revealed.
e. Planning and Control: Availability of separate cost and profit figures
for each department facilitates better control. Thus effective planning
and control can be achieved on the basis of departmental accounting
information.
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UNIT 2 DEPARTMENTAL ACCOUNTING
ALLOCATION OF EXPENSES
Meaning While preparing departmental accounts the expenses should be allocated
among the different departments on a rational basis. Some of the practical
guidelines in this regards are as follows:
Charging of The expenses which can be directly identified with a particular department,
individual are charged directly thereto.
identifiable
expenses
Charging of The common expenses which have been incurred for various departments
common are charged to various departments proportionately on some equitable
expenses basis. Some bases of distribution of the common costs are given below:
Expenses Basis
Rent, rates, taxes, repairs and Floor area of each department
maintenance of building
Lighting No of Light points in each
departments
Power Consumption as per separate
meter or horse power of
machines
Discount Received/ Carriage inwards Purchases of each department
Carriage outward, Discount allowed, Sales of each department (do
Bad debts, Salesman’s commission, not include internal transfer)
advertisement, Delivery expenses
Depreciation, Insurance, Asset value of each department
Maintenance of Capital assets,
repairs etc
Canteen expenses and other labour No of employees of each
welfare expenses department
PF contribution Wages and salaries of each
department
General managers Salary Time devoted to each
department
Note There are certain expenses and income, most being of financial nature,
which can’t be apportioned on a suitable basis, therefore they are
recognised in the combined profit and loss account.
Ex: Interest of loan, profit/ loss on sale of investment etc.
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UNIT 2 DEPARTMENTAL ACCOUNTING
TYPES OF DEPARTMENTS
Dependent/ Departments which transfer goods from one department to another
Assembly department for further processing are called dependent/ Assembly
Department departments. Here, the output of one department becomes the input for
the other department.
Independent / Departments which work independently of each other and have negligible
Retail inter department transfer are called Independent / retail departments.
Departments
INTER DEPARTMENTAL TRANSFERS
Basis of Inter Goods and services are provided by one department to another usually on
Departmental either of the following three bases:
Transfers a. Cost
b. Ruling market price
c. Cost plus agreed percentage of profit
The transfer by transferor department is treated as sales and as
purchases by transferee department.
Elimination of When profit is added in the inter departmental transfers the loading
Unrealised included in the unsold stock at the end of the year is to be excluded before
profit final accounts are prepared so as to eliminate any anticipatory profit
included therein.
Such unrealised profit is eliminated by creating an appropriate stock
reserve by debiting the combined profit & loss account.
Amount of Stock reserve = Amount of stock * content ratio * GP ratio of
transferor department
Journal Entry
Profit & Loss A/c Dr ****
To Stock Reserve ****
(Being a provision made for unrealised profit included in closing inventory)
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UNIT 2 DEPARTMENTAL ACCOUNTING
In the beginning of the next accounting year, the aforesaid journal entry
will be reversed)
Disclosure in
Liabilities Amount Assets Amount
Balance Sheet
Current Assets
Inventory ****
Less: Stock Reserve (***)
MEMORANDUM STOCK A/C AND MEMORANDUM MARKUP A/C
Meaning When departments are retail departments, for adequate check on
department stock, a memorandum stock account is maintained at selling
price/ inflated price.
A memorandum mark up account is also maintained for the loading.
Department gross profit comes out from the memorandum markup account.
Accounting 1. The opening stock is brought down on the debit side of the
Treatments Memorandum Stock account at selling price ( Cost + Mark up). Amount
of mark down on opening stock is brought down on the credit side of the
memorandum stock account.
2. The loading on opening stock is brought down on the credit side of the
memorandum mark up account. Amount of mark down on opening stock is
brought down on the debit side of the memorandum stock account.
3. For goods purchased
Memorandum stock a/c Dr (Selling price)
To Purchases Account (Cost price)
To Memorandum Markup Account (Loading)
4. For sale of goods
Sales account Dr (Selling price)
To Memorandum Stock account (Selling price)
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UNIT 2 DEPARTMENTAL ACCOUNTING
Accounting 5. For transfer of goods by one department to another (Say by X to
Treatments Y)
Y’s Memorandum Stock a/c Dr (Cost Price)
To X’s Memorandum Stock a/c (Cost Price)
6. For loading on transfer by X department
Memorandum Mark up a/c Dr (Loading of X department)
To Memorandum Stock a/c
7. For loading on goods received by Y department
Memorandum Stock a/c Dr (Loading of Y department)
To Memorandum Mark up a/c
8. Sometimes goods may have to be marked down due to competition or
due to deterioration of goods lying in stock. In such a case, the entry
will be
Memorandum mark up a/c Dr (Mark down)
To Memorandum Stock a/c
9. For loss of stock
Loss of stock a/c Dr (Cost Price)
Memorandum markup a/c Dr (Loading)
To Memorandum Stock a/c (Selling price)
10. For markdown on goods lying in stock
Memorandum Stock a/c Dr
To Memorandum mark up a/c
Now, the balance of memorandum stock account will represent the closing
stock at selling price. Loading on closing stock is to be carried forward. The
balance of memorandum markup account will represent gross profit.
