Departmental Accounts: Notes | Accounting for CA Intermediate (Old Scheme) PDF Download

 Page 1


 
LEARNING OUTCOMES 
  
 
 
 
DEPARTMENTAL ACCOUNTS 
 
 
 
After studying this Chapter, you will be able to – 
? Allocate common expenditures of the organisation among 
various departments on appropriate basis 
? Deal with the inter-departmental transfers and their accounting 
treatment 
? Calculate the amount of unrealised profit on unsold inter-
departmental stock-in-hand at the end of the accounting year 
 
 
 
 
 
 
  
12 
CHAPTER 
Page 2


 
LEARNING OUTCOMES 
  
 
 
 
DEPARTMENTAL ACCOUNTS 
 
 
 
After studying this Chapter, you will be able to – 
? Allocate common expenditures of the organisation among 
various departments on appropriate basis 
? Deal with the inter-departmental transfers and their accounting 
treatment 
? Calculate the amount of unrealised profit on unsold inter-
departmental stock-in-hand at the end of the accounting year 
 
 
 
 
 
 
  
12 
CHAPTER 
 
12.2 
 
ACCOUNTING 
  
 
 
 
Type of Departments
Dependent
Have inter-department transfers
Independent
Work independently, have 
negligible transfers
Basis of Allocation of Common 
Expenditure among different 
Departments
Expenses incurred specially
for each department are
charged.
Common expenses distributed among
the departments on suitable basis.
Inter-department transfers 
(forming part of closing inventory)
Cost
No unrealised 
Profit exists
Market Price
If Cost ?
Market price
If Cost ?
Market price
Cost plus agreed 
percentage of profit
Elimination of unrealised 
profit through
Inventory P & L A/c
 
Page 3


 
LEARNING OUTCOMES 
  
 
 
 
DEPARTMENTAL ACCOUNTS 
 
 
 
After studying this Chapter, you will be able to – 
? Allocate common expenditures of the organisation among 
various departments on appropriate basis 
? Deal with the inter-departmental transfers and their accounting 
treatment 
? Calculate the amount of unrealised profit on unsold inter-
departmental stock-in-hand at the end of the accounting year 
 
 
 
 
 
 
  
12 
CHAPTER 
 
12.2 
 
ACCOUNTING 
  
 
 
 
Type of Departments
Dependent
Have inter-department transfers
Independent
Work independently, have 
negligible transfers
Basis of Allocation of Common 
Expenditure among different 
Departments
Expenses incurred specially
for each department are
charged.
Common expenses distributed among
the departments on suitable basis.
Inter-department transfers 
(forming part of closing inventory)
Cost
No unrealised 
Profit exists
Market Price
If Cost ?
Market price
If Cost ?
Market price
Cost plus agreed 
percentage of profit
Elimination of unrealised 
profit through
Inventory P & L A/c
 
 
 
12.3 
 
DEPARTMENTAL ACCOUNTS 
 1. INTRODUCTION 
If a business consists of several independent activities, or is divided into several 
departments, for carrying on separate functions, its management is usually interested 
in finding out the working results of each department to ascertain their relative 
efficiencies. This can be made possible only if departmental accounts are prepared.  
Departmental accounts are of great help and assistance to the managements as they 
provide necessary information for controlling the business more intelligently and 
effectively. It is also helpful in readily identifying all types of wastages, e.g., wastage of 
material or of money; Also, attention is drawn to inadequacies or inefficiencies in the 
working of departments or units into which the business may be divided.   
 2. ADVANTAGES OF DEPARTMENTAL ACCOUNTING 
The main advantages of departmental accounting are as follows: 
1. Evaluation of performance: The performance of each department can be 
evaluated separately on the basis of trading results. An endeavor may be made 
to push up the sales of that department which is earning maximum profit. 
2. Growth potential of each department: The growth potential of a department 
as compared to others can be evaluated. 
3. Justification of capital outlay: It helps the management to determine the 
justification of capital outlay in each department. 
4. Judgement of efficiency: It helps to calculate stock turnover ratio of each 
department separately, and thus the efficiency of each department can be 
revealed. 
5. 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. 
Basically, an organisation usually divides the work in various departments, which is 
done on the principle of division of labour.  Each department prepares its separate 
accounts to judge its individual performance. This can improve efficiency of each and 
every department of the organisation. 
  
Page 4


 
LEARNING OUTCOMES 
  
 
 
 
DEPARTMENTAL ACCOUNTS 
 
 
 
After studying this Chapter, you will be able to – 
? Allocate common expenditures of the organisation among 
various departments on appropriate basis 
? Deal with the inter-departmental transfers and their accounting 
treatment 
? Calculate the amount of unrealised profit on unsold inter-
departmental stock-in-hand at the end of the accounting year 
 
 
 
 
 
 
  
12 
CHAPTER 
 
12.2 
 
ACCOUNTING 
  
 
 
 
Type of Departments
Dependent
Have inter-department transfers
Independent
Work independently, have 
negligible transfers
Basis of Allocation of Common 
Expenditure among different 
Departments
Expenses incurred specially
for each department are
charged.
Common expenses distributed among
the departments on suitable basis.
Inter-department transfers 
(forming part of closing inventory)
Cost
No unrealised 
Profit exists
Market Price
If Cost ?
Market price
If Cost ?
Market price
Cost plus agreed 
percentage of profit
Elimination of unrealised 
profit through
Inventory P & L A/c
 
 
 
12.3 
 
DEPARTMENTAL ACCOUNTS 
 1. INTRODUCTION 
If a business consists of several independent activities, or is divided into several 
departments, for carrying on separate functions, its management is usually interested 
in finding out the working results of each department to ascertain their relative 
efficiencies. This can be made possible only if departmental accounts are prepared.  
Departmental accounts are of great help and assistance to the managements as they 
provide necessary information for controlling the business more intelligently and 
effectively. It is also helpful in readily identifying all types of wastages, e.g., wastage of 
material or of money; Also, attention is drawn to inadequacies or inefficiencies in the 
working of departments or units into which the business may be divided.   
 2. ADVANTAGES OF DEPARTMENTAL ACCOUNTING 
The main advantages of departmental accounting are as follows: 
1. Evaluation of performance: The performance of each department can be 
evaluated separately on the basis of trading results. An endeavor may be made 
to push up the sales of that department which is earning maximum profit. 
2. Growth potential of each department: The growth potential of a department 
as compared to others can be evaluated. 
3. Justification of capital outlay: It helps the management to determine the 
justification of capital outlay in each department. 
4. Judgement of efficiency: It helps to calculate stock turnover ratio of each 
department separately, and thus the efficiency of each department can be 
revealed. 
5. 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. 
Basically, an organisation usually divides the work in various departments, which is 
done on the principle of division of labour.  Each department prepares its separate 
accounts to judge its individual performance. This can improve efficiency of each and 
every department of the organisation. 
  
 
12.4 
 
ACCOUNTING 
 3. METHODS OF DEPARTMENTAL ACCOUNTING 
There are two methods of keeping departmental accounts: 
3.1  Accounts of all departments are kept in one book only 
To prepare such accounts, it will be necessary first, for the income and expenditure of 
department to be separately recorded in subsidiary books and then for them to be 
accumulated under separate heads in a ledger or ledgers.  This may be done by having 
columnar subsidiary books and a columnar ledger.  
3.2 Separate set of books are kept for each department 
A separate set of books may be kept for each department, including complete stock 
accounts of goods received from or transferred to other departments or as also sales.    
Nevertheless, even when separate sets of books are maintained for different 
departments, it will also be necessary to devise a basis for allocation of common 
expenses among the different departments, if an organisation is interested in 
determining the separate departmental net profit in addition to the gross profit.  
 
 4. BASIS OF ALLOCATION OF COMMON 
EXPENDITURE AMONG DIFFERENT 
DEPARTMENTS 
Expenses should be allocated among different departments on a rational basis while 
preparing departmental accounts.  
Methods of keeping departmental accounts
Accounts of all departments are kept in 
one book only
Income and expenditure of department is
separately recorded in subsidiary books and then
accumulated under separate heads in a ledger or
ledgers. This may be done by having columnar
subsidiary books and a columnar ledger.
Separate set of books are kept for each 
department
Each department maintains separate books
including complete stock accounts of goods
received from or transferred to other departments
or as also sales. Common expenses need to be
allocated to determine profitability.
Page 5


 
LEARNING OUTCOMES 
  
 
 
 
DEPARTMENTAL ACCOUNTS 
 
 
 
After studying this Chapter, you will be able to – 
? Allocate common expenditures of the organisation among 
various departments on appropriate basis 
? Deal with the inter-departmental transfers and their accounting 
treatment 
? Calculate the amount of unrealised profit on unsold inter-
departmental stock-in-hand at the end of the accounting year 
 
 
 
 
 
 
  
12 
CHAPTER 
 
12.2 
 
ACCOUNTING 
  
 
 
 
Type of Departments
Dependent
Have inter-department transfers
Independent
Work independently, have 
negligible transfers
Basis of Allocation of Common 
Expenditure among different 
Departments
Expenses incurred specially
for each department are
charged.
Common expenses distributed among
the departments on suitable basis.
Inter-department transfers 
(forming part of closing inventory)
Cost
No unrealised 
Profit exists
Market Price
If Cost ?
Market price
If Cost ?
Market price
Cost plus agreed 
percentage of profit
Elimination of unrealised 
profit through
Inventory P & L A/c
 
 
 
12.3 
 
DEPARTMENTAL ACCOUNTS 
 1. INTRODUCTION 
If a business consists of several independent activities, or is divided into several 
departments, for carrying on separate functions, its management is usually interested 
in finding out the working results of each department to ascertain their relative 
efficiencies. This can be made possible only if departmental accounts are prepared.  
Departmental accounts are of great help and assistance to the managements as they 
provide necessary information for controlling the business more intelligently and 
effectively. It is also helpful in readily identifying all types of wastages, e.g., wastage of 
material or of money; Also, attention is drawn to inadequacies or inefficiencies in the 
working of departments or units into which the business may be divided.   
 2. ADVANTAGES OF DEPARTMENTAL ACCOUNTING 
The main advantages of departmental accounting are as follows: 
1. Evaluation of performance: The performance of each department can be 
evaluated separately on the basis of trading results. An endeavor may be made 
to push up the sales of that department which is earning maximum profit. 
2. Growth potential of each department: The growth potential of a department 
as compared to others can be evaluated. 
3. Justification of capital outlay: It helps the management to determine the 
justification of capital outlay in each department. 
4. Judgement of efficiency: It helps to calculate stock turnover ratio of each 
department separately, and thus the efficiency of each department can be 
revealed. 
5. 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. 
Basically, an organisation usually divides the work in various departments, which is 
done on the principle of division of labour.  Each department prepares its separate 
accounts to judge its individual performance. This can improve efficiency of each and 
every department of the organisation. 
  
 
12.4 
 
ACCOUNTING 
 3. METHODS OF DEPARTMENTAL ACCOUNTING 
There are two methods of keeping departmental accounts: 
3.1  Accounts of all departments are kept in one book only 
To prepare such accounts, it will be necessary first, for the income and expenditure of 
department to be separately recorded in subsidiary books and then for them to be 
accumulated under separate heads in a ledger or ledgers.  This may be done by having 
columnar subsidiary books and a columnar ledger.  
3.2 Separate set of books are kept for each department 
A separate set of books may be kept for each department, including complete stock 
accounts of goods received from or transferred to other departments or as also sales.    
Nevertheless, even when separate sets of books are maintained for different 
departments, it will also be necessary to devise a basis for allocation of common 
expenses among the different departments, if an organisation is interested in 
determining the separate departmental net profit in addition to the gross profit.  
 
 4. BASIS OF ALLOCATION OF COMMON 
EXPENDITURE AMONG DIFFERENT 
DEPARTMENTS 
Expenses should be allocated among different departments on a rational basis while 
preparing departmental accounts.  
Methods of keeping departmental accounts
Accounts of all departments are kept in 
one book only
Income and expenditure of department is
separately recorded in subsidiary books and then
accumulated under separate heads in a ledger or
ledgers. This may be done by having columnar
subsidiary books and a columnar ledger.
Separate set of books are kept for each 
department
Each department maintains separate books
including complete stock accounts of goods
received from or transferred to other departments
or as also sales. Common expenses need to be
allocated to determine profitability.
 
 
12.5 
 
DEPARTMENTAL ACCOUNTS 
Individual Identifiable Expenses: Expenses incurred specially for a particular 
department are charged directly thereto, e.g., insurance charges of stock held by 
the department. 
Common Expenses: Common expenses, the benefit of which is shared by all the 
departments and which are capable of precise allocation are distributed among the 
departments concerned on some equitable basis considered suitable in the 
circumstances of the case. 
Allocation of Expenses 
S. No. Expenses Basis 
1. Rent, rates and taxes, repairs and 
maintenance, insurance of building 
Floor area occupied by each 
department (if given) otherwise 
on time basis 
2. Lighting and Heating expenses  
(e.g., energy expenses) 
Consumption of energy by each 
department 
3. Selling expenses, e.g., discount, bad 
debts, selling commission, freight 
outward, travelling sales manager’s 
salary and other costs 
Sales of each department 
4. Carriage inward/ Discount received Purchases of each department 
5. Wages/Salaries Time devoted to each 
department  
6. Depreciation, insurance, repairs  and 
maintenance of capital assets 
Value of assets of each 
department otherwise on time 
basis 
7. Administrative and other expenses, 
e.g., salaries of managers, directors, 
common advertisement expenses, etc.  
Time basis or equally among all 
departments 
8. Labour welfare expenses Number of employees in each 
department 
9. PF/ESI contributions Wages and salaries of each 
department 
Note: There are certain expenses and income, most being of financial nature, which 
cannot be apportioned on a suitable basis; therefore, they are recognised in the combined 
Profit and Loss Account, for example, interest on loan, profit/loss on sale of investment, 
etc.