Meaning of Departmental Accounts
Departmental Accounts refer to a system of accounting in which the business is divided into different departments, and separate Trading & Profit and Loss Accounts are prepared for each department. These accounts help in determining the profitability, efficiency and financial performance of each independent department within the same organisation.
A business may have multiple departments such as Clothing, Footwear, Cosmetics, Electronics, Food Division, Service Division etc. Preparing departmental accounts makes it easier to identify strong-performing and weak-performing departments.
Objectives of Preparing Departmental Accounts
- 1. To Ascertain Department-wise Profit or Loss: Helps in identifying which department is contributing more or less to total profit.
- 2. To Measure Efficiency of Each Department: Highlights productive areas and areas that need managerial improvement.
- 3. To Provide Basis for Comparison: Allows comparison of performance across periods and with other departments.
- 4. To Exercise Control Over Operations: Helps management control expenses, stock, manpower and resources department-wise.
- 5. To Assist in Policy Formation: Provides data for pricing, expansion, closure or restructuring decisions.
- 6. To Fix Responsibility: Makes departmental managers accountable for results of their respective departments.
Advantages of Departmental Accounting
- 1. Helps in Profit Maximisation: By identifying loss-making areas and improving efficiency.
- 2. Facilitates Internal Comparison: Boosts healthy competition among departments.
- 3. Assists in Budgeting and Forecasting: Department-wise data improves accuracy of budgeting.
- 4. Easy Detection of Inefficiencies: Wastage, pilferage or misuse can be easily identified.
- 5. Enables Better Resource Allocation: Funds and manpower can be shifted to profitable departments.
- 6. Useful for Incentive and Commission Schemes: Rewards can be based on department performance.
- 7. Supports Scientific Decision-Making: Helps management decide expansion, diversification or closure of departments.
Basis of Allocation of Expenses Over Departments
Some expenses can be directly charged to a department (direct expenses), while others are common expenses requiring allocation. Allocation must be done on a fair and logical basis.
| Expense | Basis of Allocation |
|---|---|
| Rent, Rates & Taxes | Floor area occupied by each department |
| Electricity Expenses | Number of units consumed or floor area |
| Salaries of Department Managers | Directly charged to respective department |
| Salaries of General Staff | Number of employees or time spent |
| Advertising Expenses | Sales ratio of departments |
| Insurance of Stock | Value of stock held in each department |
| Carriage Inward | Purchases of each department |
| Depreciation on Machinery | Value or usage of machinery |
| Repairs & Maintenance | Usage of asset or floor area |
| Telephone & Internet Charges | Estimated usage |
| General Administration Expenses | Sales or Gross Profit ratio |
Conclusion
Departmental Accounts are an essential tool for large businesses operating through various departments. They help in determining profitability, improving managerial control and ensuring fair allocation of expenses. By applying scientific bases for distribution of indirect expenses, departmental accounts present a true and fair picture of the performance of each department, enabling informed decision-making.