Departmental Accounts

Welcome to class!

In today’s class, we will be talking about departmental accounts. Enjoy the class!

MEANING OF DEPARTMENTAL ACCOUNTS

Usually, in a large organization, the operation is divided into separate departments. This is because such organizations have a large volume of transactions coupled with a wide range of lines of product and as such finds it convenient and for accounting purpose to separate or divide its operations into different departments. This affords the organization easy operations and accountability.

In departmentalized organizations, the accounting process entails keeping separate journal and ledger books for each of the departments such as separate cashbook separate purchases and sales books, separate stocks, separate returns and personal ledgers etc.

At the end of the financial year, the accountants bring together the separate journal and ledger books to integrate, compare and determine the department that performs better than the other (see final accounts).

FINAL ACCOUNTS OF A DEPARTMENTALIZED ENTERPRISE

The trading, profit and loss accounts of each of the departments in a departmentalized organization are drawn separately but in a combined format called DEPARTMENTAL, TRADING, PROFIT AND LOSS ACCOUNT.

The aim of departmental, trading, profit and loss account is to compare trading result and to assist the owner of the business in formulating policies, having known the departments that perform better and those that perform worse.

NB: The Balance sheet follows a normal procedure: not in a combined format.

Format

Departmental Trading, Profit and loss Account for the year ended 31^st Dec. 19xx

A B C Total A B C Total

N N N N N N N N

Opening stock x x x x Sales x x x x

Add purchases x x x x Returns I.R x x x (x)

Inter dept. T/f x x x –

X x x x

Less clo. Stock (x) (x) (x) (x)

Cost of sales x x x x

Gross profit c/d x x x x

X x x x

x x x x

Expenses G/P b/d x x x x

Wages & Salaries x x x x Dis. Rec. x x x x

Rent x x x x

Commission x x x x

Depreciation x x x x

Motor expenses x x x x

Net profit c/d x x x x

X x x x x x x x

INTER DEPARTMENTAL TRANSFER AND APPORTIONMENT OF EXPENSES

Inter-Departmental Transfer: Sometimes goods purchased by one department may be transferred to another department by reason of sales and such purchases transferred is deducted from the department giving it out and is added to the department receiving it.
Apportionment of Expenses: Expenses are usually not separated to reflect expenses incurred by each department. As a result of this, there is a need for apportionment (i.e. division). Expenses must, therefore, be adjusted and then apportioned for each of the departments.

Methods

Turnover Basis: This is the use of sales (i.e. Turnover as a basis of sharing (i.e. sharing ratio).
Floor Space Basis: This uses the area of floor space occupied as the basis of sharing i.e. sharing ratio.
The number of Articles Sold Basis: Ratio used is the items sold.
Direct Analysis Basis: Ratio used here is specified.
Equality Basis: The ratio used here is the number of departments existing.

ILLUSTRATION

Below is the trial balance of Akinbode Electronic shop for the year-end 31st December 2006.

N N

Sales: Dept E 30,000

Dept F 20,000

Stock (1/1/2006): Dept E 800

Dept F 750

Purchases: Dept E 22,000

Dept F 18,500

Commission 1,500

Salaries 800

Insurance premium 1,000

Stationery 450

Discount allowed 100

Discount received 350

Sundry expenses 110

Stock at close: Dept E 1,100

Dept F 900

NOTE

The total floor area occupied by each department is
- - Dept: E (2/5)
  - Dept F: (3/5)
Apportionment basis is:
- - Commission, discount allowed – sales ratio
  - Discount received – purchases ratio
  - Insurance – floor area
  - Other – equal apportionment

Solution

AKINBODE’S DEPARTMENT TRADING, PROFIT AND LOSS ACCOUNT FOR THE YEAR END 31ST DEC. 2006

DEPT E DEPT F DEPT E DEPT F

Stock (1/1/2006) 800 750 Sales 30,000 20,000

Purchases 22,000 18,500

Cost of goods avail. 22,800 19,250

Less stock (31/12) (1,100) (900)

Cost of sales 21,700 17,350

Gross profit c/d 8,300 2,650

30,000 20,000 30,000 20,000

Expenses G/P b/d 8,300 2,650

Commission 900 600 D/R 190 160

Salaries 400 400

Insurance 400 600

Stationeries 225 225

Discount allowed 60 40

Sundry expenses 55 55

Net profit 6,450 890

8,490 2,810 8,490 2,810

Apportionment Basis

(A) Sales Ratio

Dept. E: 30,000: Dept. F: 20,000 = 50,000

= 30,000/50,000 = 20,000/50,000

(B) Purchases Ratio

Dept. E: N22,000 Dept. F: 18,500 = 40,500

= 22.000/40.500 = 18,500/40,500

Floor area gave Dept. E 2/5; Dept. 3/5
Other expenses = equally = (÷ 2) or 50%; 50%

GENERAL EVALUATION

Explain five errors that would affect the agreement of the trial balance
List and explain three classifications of ledger accounts
List ten accounts found in the nominal ledger
State the purpose of departmental accounts
List six items each found in the asset and liability sides of the balance sheet of a sole trader

In our next class, we will be talking about Manufacturing Accounts. We hope you enjoyed the class.

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Departmental Accounts