TOPIC 5: DEPARTMENTAL ACCOUNTS | B/KEEPING FORM 4
Departmental Accounts
The Trading Account for a Departmental Store
Draw up the trading account for a departmental store
Introduction:
Departmental
Accounts are accounts relating to the several departments or sections
of a business drawn up with a view to ascertaining their individual
performances. A business may have a number of departments each dealing
in a different type of goods. For instance, Departmental Store is an
example of large scale trading by a retail trader.
Accounts are accounts relating to the several departments or sections
of a business drawn up with a view to ascertaining their individual
performances. A business may have a number of departments each dealing
in a different type of goods. For instance, Departmental Store is an
example of large scale trading by a retail trader.
In
order to carryout business more efficiently, a businessman divides his
store into many sections, each section is called a Department. In order
to ascertain the profit or loss made by each department, it is desirable
to prepare separate Trading and Profit and Loss Account for each
department.
order to carryout business more efficiently, a businessman divides his
store into many sections, each section is called a Department. In order
to ascertain the profit or loss made by each department, it is desirable
to prepare separate Trading and Profit and Loss Account for each
department.
The
preparation of such Trading and Profit and Loss Account separately for
each department enables to compare the results of trading activities; in
brief:
- It
enables to compare the performance of one department with that of
another and to measure the progress of the department itself by
comparing year-wise performance. - It enables to measure the
profitability of each department. In the absence of departmental
accounting, if there is a loss, the businessman thinks that the whole
business is at loss. Thus he may stop the business and may start a new
business, because he is unable to understand the performance of each
department. But, by preparing departmental accounts separately, the
contribution of profit made by each department can be known. Thus a good
profit- making department can be developed and the department which
gives small margin of profit or no profit can be closed down. It is also
possible to check the profit of a department, not to be eaten away by
the department which makes no profit. - It helps in formulating
new policies and to adopt new and latest techniques in the departments,
thereby further profitability of the department can be expected. - Departmental
Managers of the profit-making department can be encouraged by adopting a
method of commission on the basis of departmental profit. This step
will further boost the profit-making department.
Accounting Procedure:
There are two methods of keeping departmental accounts:
- Independent
Basis: In this method, accounts of each department are maintained
separately. Each department prepares Trading and Profit and Loss
Account. Finally, the profit or loss of each department is transferred
to the (General) Profit and Loss Account for all the departments. The
independent departmental book-keeping is an expensive one. - Columnar
Basis: In this method, there is a single set of books. All accounts of
all the departments are maintained together, but in a columnar or
tabular form. In order to enable the preparation of departmental trading
and profit and loss accounts, various subsidiary books, such as
purchases, sales, returns books, are prepared in a columnar form and
this shows the record, in detail, for each department.
The following is the specimen of a purchase book and a sales book:
The same pattern of rulings may be followed in case of other subsidiary books.
The Overheads Expenses to Department
Apportion the overheads expenses to department
Apportionment
ofoverheadcosts means to divide total cost ofoverheadamong different
departments or branches or cost centers of a company. We need the steps
of apportionment ofoverheadcosts when there are many departments or cost
centers of any company because when we know theoverheadcost of each
department, we can find the total cost of department. With this, we can
compare the revenue of each department with their total cost. After
this, we can take many decisions relating to particular department.
ofoverheadcosts means to divide total cost ofoverheadamong different
departments or branches or cost centers of a company. We need the steps
of apportionment ofoverheadcosts when there are many departments or cost
centers of any company because when we know theoverheadcost of each
department, we can find the total cost of department. With this, we can
compare the revenue of each department with their total cost. After
this, we can take many decisions relating to particular department.
The Methods Used in Apportioning Overhead Expenses
Explain the methods used in apportioning overhead expenses
The
determination of a suitable basis is of primary importance and the
following principles are useful guides to a cost accountant:
determination of a suitable basis is of primary importance and the
following principles are useful guides to a cost accountant:
- Service or Use or Benefit Derived:If
the service rendered by a particular item of expense to different
departments can be measured, overhead can be conveniently apportioned on
this basis. Thus, the cost of maintenance may be apportioned to
different departments on the basis of machine hours or capital value of
the machines, rent charges to be distributed according to the floor
space occupied by each department. - Ability to Pay Method:Under
this method, overhead should be distributed in proportion to the sales
ability, income or profitability of the departments, territories, basis
of products etc. Thus, jobs or products making higher profits take a
higher share of the overhead expenses. This method is inequitable and is
not generally advisable to relieve inefficient units at the cost of
efficient units. - Efficiency Method:Under this
method, the apportionment of expenses is made on the basis of production
targets. If the target is exceeded, the unit cost reduces indicating a
more than average efficiency. If the target is not achieved, the unit
cost goes up, disclosing thereby the inefficiency of the department. - Survey Method:In
certain cases it may not be possible to measure exactly the extent of
benefit wick the various departments receive as this may vary from
period to period, a survey is made of the various factors involved and
the share of overhead costs to be borne by each cost centre is
determined.Thus, the salaries of foreman serving two departments can be
apportioned after a proper survey which may reveal that 30% of such
salary should be apportioned to one department and 70% to the other
department. The cost of lighting, when not metered, may similarly be
apportioned on a survey of the number and wattage of light points and
the hours of use in each cost centre.
TOPIC 5: DEPARTMENTAL ACCOUNTS | B/KEEPING FORM 4
The Profit and Loss Account in Columnar Form
Draw the profit and loss account in columnar form
Activity 1
Draw the profit and loss account in columnar form
The Departmental Trading, Profit and Loss Account
Draw the departmental trading, profit and loss account
Departmental Trading and Profit and Loss Account:
When
the books and accounts are maintained on a columnar basis, Trading and
Profit and Loss Account can also be prepared on columnar basis. There
arises no difficulty in finding out gross profit and net profit for each
department separately. From the analytical ledger accounts and
subsidiary books department-wise figures are readily available. If an
item of expenses definitely identified with a particular department, it
can be termed as direct expenses with reference to the department.
the books and accounts are maintained on a columnar basis, Trading and
Profit and Loss Account can also be prepared on columnar basis. There
arises no difficulty in finding out gross profit and net profit for each
department separately. From the analytical ledger accounts and
subsidiary books department-wise figures are readily available. If an
item of expenses definitely identified with a particular department, it
can be termed as direct expenses with reference to the department.
For
instance, salary of Manager and salesman of a particular department,
special advertising, separately metered electricity etc. are expenses
and exclusively meant for and identified with particular departments.
Apart from this, there are some expenses termed as indirect expenses.
instance, salary of Manager and salesman of a particular department,
special advertising, separately metered electricity etc. are expenses
and exclusively meant for and identified with particular departments.
Apart from this, there are some expenses termed as indirect expenses.
Certain
types of expenses are not readily identifiable departmentally and the
benefit of such type of expenses goes to all departments. And such types
of expenses, called joint expenses, are incurred for the business as a
whole.
types of expenses are not readily identifiable departmentally and the
benefit of such type of expenses goes to all departments. And such types
of expenses, called joint expenses, are incurred for the business as a
whole.
For
instance, rent, depreciation, selling expenses, welfare expenses,
advertising etc. Allocation of such expenses among the various
departments becomes indispensable on an equitable basis at the date of
account. The important point in such cases is to fix the basis on which
the different revenueitems are to be split up. It is neither possible nor desirable to sub-divide all items on equal basis.
instance, rent, depreciation, selling expenses, welfare expenses,
advertising etc. Allocation of such expenses among the various
departments becomes indispensable on an equitable basis at the date of
account. The important point in such cases is to fix the basis on which
the different revenueitems are to be split up. It is neither possible nor desirable to sub-divide all items on equal basis.
Allocation of Common Expenses:
Normally,
all direct expenses are charged to the respective departments, in case
of indirect or general expenses, proper allocation among the departments
must be made in order to ascertain the profit and loss made by each
department. Each department is charged with proper business expenses. If
the basis for such allocation is not specially mentioned, then the
following procedure may be followed.
all direct expenses are charged to the respective departments, in case
of indirect or general expenses, proper allocation among the departments
must be made in order to ascertain the profit and loss made by each
department. Each department is charged with proper business expenses. If
the basis for such allocation is not specially mentioned, then the
following procedure may be followed.
Some
expenses cannot be apportioned and no basis of apportionment is
practicable. For instance, interest on Loan, Income Tax, Salary to
General Manager, Share Transfer expenses, Bank charges, Audit fees etc.
Here these expenses can safely be transferred to General Profit and Loss
Account.
expenses cannot be apportioned and no basis of apportionment is
practicable. For instance, interest on Loan, Income Tax, Salary to
General Manager, Share Transfer expenses, Bank charges, Audit fees etc.
Here these expenses can safely be transferred to General Profit and Loss
Account.
Similarly,
income of general nature such as Interest on Calls-in-arrears, Interest
on Investment, fees on share transfer etc. credited to General Profit
and Loss Account. The Departmental Trading Account shows the Gross
Profit or Loss and Departmental Profit and Loss Account shows the Net
Profit or Loss earned or suffered by each department.
income of general nature such as Interest on Calls-in-arrears, Interest
on Investment, fees on share transfer etc. credited to General Profit
and Loss Account. The Departmental Trading Account shows the Gross
Profit or Loss and Departmental Profit and Loss Account shows the Net
Profit or Loss earned or suffered by each department.
Example 1
Illustration 1:
The
proprietor of a large retail store wished to ascertain approximately
the net profit of the X, Y and Z departments separately for the three
months ended 31st March 2006. It is found impracticable actually to take
stock on that date, but an adequate system of departmental accounting
is in use, and the normal rates of gross profit for the three
departments concerned are respectively 40%, 30% and 20% on turnover
before charging the direct expenses. The indirect expenses are charged
in proportion to departmental turnover.
proprietor of a large retail store wished to ascertain approximately
the net profit of the X, Y and Z departments separately for the three
months ended 31st March 2006. It is found impracticable actually to take
stock on that date, but an adequate system of departmental accounting
is in use, and the normal rates of gross profit for the three
departments concerned are respectively 40%, 30% and 20% on turnover
before charging the direct expenses. The indirect expenses are charged
in proportion to departmental turnover.
The following are the figures for the departments:
The
total indirect expenses for the period (including those relating to
other departments) were Rs. 5,400 on the total turnover of Rs. 1,
08,000. Prepare a statement showing the approximate net profit, making a
stock reserve of 10% for each department on the estimated value on
31-3-2006
total indirect expenses for the period (including those relating to
other departments) were Rs. 5,400 on the total turnover of Rs. 1,
08,000. Prepare a statement showing the approximate net profit, making a
stock reserve of 10% for each department on the estimated value on
31-3-2006
Example 2
Illustration 3:
Department C – 2,496 units @ Rs 25 each
The rate of Gross Profit is the same in each case. Prepare Departmental Trading Account.
Solution:
Inter-Departmental Transfers:
Goods
are often supplied from one Department to another – Inter-Departmental
transfer. Such transfer must be credited to Supplying Department and
debited to Receiving Department. If the transfers are made at cost
price, then it can be treated as mere transfer. No further adjustment is
needed.
are often supplied from one Department to another – Inter-Departmental
transfer. Such transfer must be credited to Supplying Department and
debited to Receiving Department. If the transfers are made at cost
price, then it can be treated as mere transfer. No further adjustment is
needed.
However,
if the transfers of goods are made at selling price, then a profit is
earned by the supplying department of the same organisation. When the
goods, transferred from one department to another, still remain unsold
with the transferee department, at the end of the accounting period,
there arises a necessity to eliminate the unrealised profit on such
stock on hand. This is because, so much of issuing department’s profit
(notional) remain unrealised from the viewpoint of the firm as a whole.
The reserve will be equal to the profit included in respect of unsold
goods at the end of closing.
if the transfers of goods are made at selling price, then a profit is
earned by the supplying department of the same organisation. When the
goods, transferred from one department to another, still remain unsold
with the transferee department, at the end of the accounting period,
there arises a necessity to eliminate the unrealised profit on such
stock on hand. This is because, so much of issuing department’s profit
(notional) remain unrealised from the viewpoint of the firm as a whole.
The reserve will be equal to the profit included in respect of unsold
goods at the end of closing.
The entry is:
General Profit and Loss Account Dr.
To Stock Reserve
In
certain cases, the transferee department may have some stock in the
beginning of the accounting period, against which stock reserve was
already created in the previous year, will also be transferred to
General Profit and Loss Account by means of Journal entry:
certain cases, the transferee department may have some stock in the
beginning of the accounting period, against which stock reserve was
already created in the previous year, will also be transferred to
General Profit and Loss Account by means of Journal entry:
Stock Reserve Account Dr.
To General Profit and Loss Account
Alternatively,
a single journal entry can be passed for the unrealised profit on the
basis of the difference between unrealised profit included in opening
and closing stock.
a single journal entry can be passed for the unrealised profit on the
basis of the difference between unrealised profit included in opening
and closing stock.
Example 3
Illustration 1:
A
firm has two departments — Piece goods and readymade dresses. All goods
purchased by the readymade department from Piece goods department are
charged at the usual selling price.
firm has two departments — Piece goods and readymade dresses. All goods
purchased by the readymade department from Piece goods department are
charged at the usual selling price.
From the following particulars prepare departmental trading and profit and loss accounts for the year ended Dec. 31, 2005:
The
stocks in the readymade department are considered as consisting of 75%
cloth supplied from Piece goods dept. and 25% expenses and cloths from
outside. The Piece goods department earned gross profit in 2004 at the
same rate as in 2005. General expenses of the business as a whole in
2005 amounted to Rs 45,000.
stocks in the readymade department are considered as consisting of 75%
cloth supplied from Piece goods dept. and 25% expenses and cloths from
outside. The Piece goods department earned gross profit in 2004 at the
same rate as in 2005. General expenses of the business as a whole in
2005 amounted to Rs 45,000.
Solution:
Example 4
Illustration 2:
From
the following balances extracted from the books of a firm, prepare
Departmental Trading and General Profit and Loss Account for the year
ended 31st December 2005 and a Balance Sheet as on that date after
adjusting the unrealised departmental profits, if any.
the following balances extracted from the books of a firm, prepare
Departmental Trading and General Profit and Loss Account for the year
ended 31st December 2005 and a Balance Sheet as on that date after
adjusting the unrealised departmental profits, if any.
Additional information:
- Closing stock of Dept. A – Rs 13,000 including goods from Dept. B Rs 4,000 at cost to Dept. A.
- Closing stock of Dept. B – Rs 26,000-including goods from Dept. ARs 9,000 at cost to Dept. B.
- Sales
Dept. A includes transfer of goods to Dept. B of the value of Rs 20,000
and sales of Dept. B includes transfer of goods to Dept. A of the value
of Rs 30,000 both at market price to transferor departments. - Opening
stock of Dept. A and Dept. B includes goods to the value of Rs 1,000
and Rs 1,500 taken from Dept. B and Dept. A respectively at cost price
to transferor departments. - Depreciate land and buildings by 5% and furniture by 10% p.a.
Solution:
N.B.
There is no need for any adjustment for opening stock which includes
inter-departmental transfers. This is because goods have been valued at
cost to the transferor department and not to transferee departments.
There is no need for any adjustment for opening stock which includes
inter-departmental transfers. This is because goods have been valued at
cost to the transferor department and not to transferee departments.
Exercise 1
EXCERSISE:
A
company has two departments viz. Piece goods and Tailoring. All goods
purchased by the Tailoring Department from Piece goods Department are
sold at normal market prices, same as prices charged to outside
customers.
company has two departments viz. Piece goods and Tailoring. All goods
purchased by the Tailoring Department from Piece goods Department are
sold at normal market prices, same as prices charged to outside
customers.
From
the following particulars prepare Departmental Trading and Profit and
Loss Account and a Balance Sheet as on 31st March 2005.
the following particulars prepare Departmental Trading and Profit and
Loss Account and a Balance Sheet as on 31st March 2005.
A Department Balance Sheet
Draw a department balance sheet
Example 5
Illustration 2:
From
the following particulars you are required to prepare Trading and
Profit and Loss Accounts for the year ended 31st December 2005, showing
the gross and net profits of each department. Apportion the general
expenses of the business on the basis of turnover. Also prepare the
Balance Sheet.
the following particulars you are required to prepare Trading and
Profit and Loss Accounts for the year ended 31st December 2005, showing
the gross and net profits of each department. Apportion the general
expenses of the business on the basis of turnover. Also prepare the
Balance Sheet.
Stock in hand Dec. 31, 2005 Dept. A Rs 30.000 and B Rs 20,500.
Total
sales are Rs 1.20.000 i.e., Dept. A Rs 80.000 and B Rs 40.000.
Proportion of general or indirect expenses chargeable to A 2/3 and B
1/3. (B.Com. Madurai. MS. Bharathiar)
sales are Rs 1.20.000 i.e., Dept. A Rs 80.000 and B Rs 40.000.
Proportion of general or indirect expenses chargeable to A 2/3 and B
1/3. (B.Com. Madurai. MS. Bharathiar)
Solution:
