Methods of 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.
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.