ALLOCATION OF EXPENSES IN DEPARTMENTAL ACCOUNTING

DEPARTMENTAL ACCOUNTS BCOM 1ST YEAR

DEPARTMENTAL ACCOUNTS BCOM 1ST YEAR : Departmental accounting, meaning, features, objectives, advantages, allocation of expenses.

QUESTION: What do you mean by departmental accounts? Explain its objectives. Briefly discuss the methods of departmental accounts.

DEPARTMENTAL ACCOUNTING: Departmental Accounting refers to maintaining accounts for one or more departments of the company. Revenues and expenses of the department are recorded and reported separately. The departments are then consolidated into the accounts of the head office to prepare the financial statements of the company.

A department is defined as a part with the special or allocated duty/ function or area of activity.

EXAMPLE: A Textile mill which is having head office and factory. Separate accounts are maintained for production facilities and then the final results are sent to head office which is then incorporated by head office in their accounts.

Thus, a departmental accounting system is an accounting information system that records the activities and financial information about the department.

FEATURES OF DEPARTMENTAL ACCOUNTING

  • The accounts are prepared separately for each department.
  • Each department is taken as profit center.
  • Planning and budgeting is done separately for each department based on its own accounting records.
  • The accounts of various departments are consolidated to provide a whole view of the company.
  • Departmental Accounting is generally adopted by the multi national corporations.

OBJECTIVES OF DEPARTMENTAL ACCOUNTING

The following are the objectives of the departmental accounting:

ASSESSING OPERATIONAL EFFICIENCY: The main aim of departmental accounting is to assess the operational efficiency of each department separately. Each department prepare its own accounts and this leads to knowing its profitability position separately from others. Also the stock turnover ratio and other ratios are calculated separately that tells about its efficiency.

OPEN OR SHUT DEPARTMENT: Departmental accounting helps to know about the profit or loss incurred by each department. After analyzing the whole financial position of the department from its accounts, the decision can be taken whether to shut the department or not.

Also in departmental accounting, the workload of any department can be checked out. It helps in taking decision of the opening of a new separate department.

INTER-DEPARTMENTAL COMPARISON IS POSSIBLE: Departmental Accounting helps in comparing one department with the other. It highlights the positive points of each department. Inter-departmental comparison induces officials of departments to perform better.

DETAILED INFORMATION ABOUT CONCERN: In departmental accounting, firstly accounts are made on the basis of the departments and then are consolidated to make accounts of company as a whole. By doing this, we can get detailed information about all the departments.

IMPROVEMENT IN OVERALL PROFIT OF THE BUSINESS: The friendly rivalry among all the departments induces them to work in the best possible way. Efficiency at each department level leads to the efficiency of the whole company. This makes improvement in overall profit of the business.

SOUND PLANNING AND BUDGETING: In departmental accounting, every department makes its budget at its own. It is easy for the officials to take decisions or plan about their future course of action. Thus, planning and budgeting at departmental level promotes sound planning for company also.

OTHER OBJECTIVES: The other objectives of departmental accounting are as follows:

  • The growth potential of each department in comparison to other can be evaluated.
  • Departmental managers and staff can be rewarded properly on the basis of the results.
  • It helps the management to determine the justification of capital outlay in each department.
  • It facilitates the comparison of expenses items with those in other departments and in the previous period.

METHODS OF DEPARTMENTAL ACCOUNTING

There are two methods for departmental Accounting:

METHOD 1: WHEN SEPARATE SET OF BOOKS ARE KEPT FOR EACH DEPARTMENT

As per this method, each department is taken as an independent unit and it makes its own books of the accounts.  This method is featured as:

  • Separate books from other departments are maintained.
  • This method is suitable for large organizations.
  • The trading results are deposited with the main accountant to make the account of the whole company.
  • This method is very expensive.
  • It is very less common among the departmental enterprises.

METHOD 2: WHEN SEPARATE SET OF BOOKS ARE NOT MAINTAINED

As per this method, no separate records of each department is maintained, rather joint accounts are maintained of all departments. This method is featured as:

  • No separate books are maintained.
  • This method is suitable for small organizations.
  • The whole accounts are kept by central accounts department.
  • The central Accounts department maintain analytical or Columnar sales book, purchases books are maintained.
  • The columnar trading accounts is maintained to calculate the gross profit and to keeping the records to stock.
  • The indirect expenses are apportioned among the departments on sound basis.
  • The columnar profit and loss account is maintained to calculate net profit of each department.
  • The departments kept some records of sales, purchases or direct expenses at their own but not on double entry system.
  • This method is less expensive.

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