Concept And Objectives Of Departmental Accounting

Concept Of Departmental Accounting Modern life is very mechanical specially in big cities. The citizens of such cities expect all the goods and services just under a single roof. Contemplating the need of the consumers, the business men are also providing the expected service to the consumer just under a roof by opening large scale departmental stores. The departmental stores are the example of large scale retail selling just under a single roof. Different departments are involved for different goods to be sold out. To calculate the net result of the whole organization, a full fledged trading and profit and loss account is to be prepared. But to evaluate individual department, it will be credit worthy to prepare individual trading and profit and loss account. Such individual accounts will help to evaluate and control the different departments. Objectives Of Departmental Accounting The main objectives of departmental accounting are: 1. to check out interdepartmental performance 2. To evaluate the performance of the department with previous period result. 3. To help the owner for formulating right policy for future. 4. To assist the management for making decision to drop or add a department 5. To provide detail information of the entire organization 6. To assist management for cost control

EXAMPLESAllocation of Incomes and Expenses Until unless the size of thebusiness entity is very large,the entire bookkeeping system for the entity is kept by a central accounts departmentalong with some departmentalspecific records e.g. sales,purchases, stocks and staffsalaries etc. Rest of theoperating expenses and otherincomes need to be allocatedamong the departmentsbased on their nature, utility, economic benefits and belongingness. Forallocation and division purposesthe expenses/incomes can be categorized as: 1. Separately identified 2. Obvious just ratio 3. Specific ratio/salesratio 4. Un-allocable Separatelyidentified It depends upon the size of theentity that it canseparately identify itsexpenses with each of the department, a largeentity will be incurring most of the operatingexpenses thatare department specific e.g.carriage inward, receiving and handling, wages and salaries,electricity, telephone, repair and maintenance, entertainment,advertisement, salespromotion, selling commissions,research and development costetc. Obviousjust ratio Most of the expenses are allocated on the most logical basisthat is obvious and also just.Nature of the expenses and nature of the business will determine the basis for division.Some important basis and expenses are givenbelow

Specific ratio or sales ratio Stillthere are some expenses which provide economic benefits to more than one department and should be allocated but theratio is not obvious, for suchexpenses a specificratio will be determined or otherwisethese will be divided in theratio of their respectivedepartmental sales revenue.These may include: Insurance on stock/inventory Insurance on plant and machinery Power and fuel Depreciation/Amortization Un-allocable These are the expenses which provide economic benefits to the business entity on the whole;these cannot be identified with a specific department. Suchexpenses are often incurred against financial facilities.Examples include; loss on disposal of investments, damagespaid for infringement of law, interest on loan and bank overdraftsetc. Thereare certain financialincomes as well that cannot be identified or allocated amongthe department e.g. interest on investment, profit on disposal on investments, profit on fixed depositsetc. All these types of expenses and incomes are shown in a generalprofit and lossaccount whereprofits or losses of eachdepartment are clubbed to ascertain theoperating results of the business on thewhole. Allocation of income taxexpense Unlike other operating expensesincome tax expense is divided on the basis of departmentaloperating profits. Somestudents having knowledge of income tax law may possibly get confused thatnevertheless there arecertain expenses or losses admissible from the tax stand pointthat are shown in thegeneral profit and loss accounthave not yet been deducted from the departmental operatingresults then why thisincome tax expense is beingcharged before subtractingcertain expenses. Rememberthis is just an allocation of income tax expense (thathas already been calculated)among the differentdepartments. It has nothing to do with the calculation of taxable profit or income taxcharge for the year