Categories: Accounting Content

Departmental Accounting: Meaning, Objectives, Methods, and Advantages

What does mean Departmental Accounting? The main point is explained; Meaning, Concept, Objectives, Methods, Advantages, with Principles. Departmental Accounts and Departmental Accounting both are same. Modern life is very mechanical, especially in big cities. The citizens of such cities expect all the goods and services just under a single roof. Such individual accounts will help to evaluate and control the different departments. So, what is the topic we are going to discuss; Departmental Accounting: Meaning, Objectives, Methods, and Advantages…Read in Hindi.

Here are explained What is Departmental Accounting? Meaning, Concept, Objectives, Methods, Advantages, with Principles.

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

The departmental stores are the example of large-scale retail selling just under a single roof. Different departments are involved in different goods to be sold out. To calculate the net result of the whole organization, full-fledged trading, and profit, and loss account is to be prepared. But to evaluate individual department, it will be creditworthy to prepare individual trading and profit and loss account.

For 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 the head office which is then incorporated by the head office in their accounts. Maintenance of separate accounts for each branch of a bank or financial institution also falls under the category of departmental accounting. The bank then prepares its financial statement after consolidating accounts of all branches.

A departmental accounting system is an accounting information system that records the activities and financial information about the department. Departmental Accounting is a vital one for large prosperous business organizations. It controls wastage & misusing, compensates the employee in terms of profit and commission, compares performance and progress of year to year or department to department or similar type of firm to firm.

Meaning of Departmental Accounting:

Where a big business with diverse trading activities is conducted under the same roof the same is usually divided into several departments and each department deals with a particular kind of goods or service. For example, a textile merchant may trade in cotton, woolen and jute fabrics. The overall performance for this type of business depends, however, on departmental efficiency.

As a result, it is desirable to maintain accounts in such a manner that the result of each individual department can be known—together with the result as a whole. The system of accounting which is followed for this; purpose is known as Departmental Accounts. This system of accounting actually helps the proprietors to:

  • Compare the results among the different departments together with the previous results thereof,
  • Formulate policy in order to extend or to develop the enterprise in the proper line; and
  • Reward the departmental managers on the basis of departmental results.

The Concept of Departmental Accounting:

Departmentalization enables big firms to determine clearly the areas needing special attention to the achievement of overall objectives. The units or departments needing more funds and more attention than others and the one(s) contributing more toward goal attainment could be identified with good departmentalization. The purpose is basically to find out the performance and capability of the units or departments with a view to making adjustments for the achievement of the firm’s objectives.

Each unit, department or subsidiary is given the free use of some of the assets of the firm and some responsibilities which can be profit-making, revenue generation or cost control. As expenses are incurred by the firm on behalf of all its departments, indirect expenses are to be apportioned to the departments, if each department is to present a financial statement or if the statement is to be prepared by the company on a departmental basis.

Departmental accounting is about the preparation of final accounts taking into consideration divisional performance before the overall performance. With that system of accounting, companies that departmentalize can easily reach a conclusion as to they are very well’ performing units, averagely or moderately performing units. Departmental accounting aims at separating the several activities of a business in order to compare results and to assist the proprietors/owners in formulating policies.

Objectives of Departmental Accounting:

The main objectives of departmental accounting are:

  • To check out an interdepartmental performance.
  • To evaluate the performance of the department with the previous period result.
  • The gross profit of each department can be ascertained.
  • Unprofitable departments will be revealed.
  • The result of operations can be used to determine the remuneration of managers of each department.
  • The progress of each department can be monitored for appropriate actions to be taken.
  • To help the owner for formulating right policy for the future.
  • To assist the management for making the decision to drop or add a department.
  • It helps in determining the commission of the department manager when it is linked to profit achieved by their department.
  • It can help the management in deciding which department should be developed more and which should be closed in order to maximize the profitability of the whole company.
  • To provide detail information about the entire organization, and.
  • To assist management for cost control.
  • It also helps in allocating cost to various departments and therefore helps in better control of the cost of the departments of the company.
  • For a company which is dealing with multiple products, it is much easier to control and monitor several departments based on the products they sell rather than controlling it as one single business.

Methods and Techniques of Departmental Accounting:

Departmental accounts are prepared in such a manner that all desired information is available and departmental profit can correctly be made.

Here are two methods are advocated viz:

  • Where the individual set of books are maintained, and.
  • Where all departmental accounts are maintained columnar- wise collectively.

They explain below;

Where Individual Set of Books are Maintained:

Under this method, the accounts of each individual department are independently maintained. The departmental results of all the department are collected and taken into consideration to find out the net result of the organization.

Where All Departmental Accounts are Maintained Columnar-Wise Collectively:

A Departmental Trading and Profit and Loss Account is opened for each individual department in a columnar form together with a separate column for ‘Total’ in order to ascertain the individual result of the different departments and also as a whole. But the Balance Sheet is prepared in a combined form.

And in order to incorporate the purchase and sale of goods, the subsidiary books and also the nominal accounts into the ledger must be ruled out with extra columns for each department in arriving at the desired departmental figures to prepare departmental final accounts. If there is a larger volume of cash purchase and cash sales, the Cash Book also must maintain separate columns for cash purchases and cash sales of various departments.

Appropriateness of some of the apportionment methods – key points:

  • Can be a very subjective process.
  • The best way to apportion costs is on the basis of the greatest benefit- i.e. the
    department who gets the greatest benefit from the cost must take the greatest amount
    of the cost.
  • This makes the apportionment process very time consuming and expensive.
  • The more appropriate basis may be for depreciation to be based on the book value of assets in
    each department.
  • Insurance of the assets based on the book value of the assets.

Advantages of Departmental Accounting:

The most significant advantages of departmental accounts are:

  • Individual result of each department can be known which helps to compare the performances among all the departments, i.e., the trading results can be compared.
  • Departmental accounts help to understand or locate the success, failure, rates of profit, etc.
  • It helps the management to make a proper plan of action, policies in order to increase profit after analyzing the results of the operation of various departments.
  • Departmental accounting helps us to understand which department should be expanded further or which one should be closed down as per the results of the operation.
  • If also helps to encourage a healthy competitive spirit among the various departments which, ultimately, helps to increase profits of the firm as a whole.
  • For additions or alterations of various departments, departmental accounts help a lot as it supplies the necessary information.
  • As detailed information about the firm is available from departmental accounting the users of accounting information, particularly, the auditors and investors are widely benefited.
  • Since departmental accounting presents separate departmental results, the Performance, of a successful department encourages the management, employees and increases the motivation of the staff as a whole.
  • Percentage of gross profit on sales and stock turnover ratio of each individual department helps to make a comparative study among all departments.
Departmental Accounting: Meaning, Objectives, Methods, and Advantages. Image credit from #Pixabay.

Principles of Departmental Accounting:

Preparation of final accounts of a departmentalized business requires the following:

  • That the gross profit or loss and the net profit or loss of each department be determined separately before taking. The totals to the appropriate account or the balance sheet of the business, and.
  • That there should be some bases of apportioning gains and expenses to the departments or units of the business. And, that should be done as fair and equitable as possible.

Sometimes control accounts have to be resorted to in order to determine the creditors’ or debtors’ value to the business. In any case, as the departmental values are shown. The total figures, for the business as a whole, are to be summed up.

Nageshwar Das

Nageshwar Das, BBA graduation with Finance and Marketing specialization, and CEO, Web Developer, & Admin in www.ilearnlot.com.

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