Departmental Accounts SS1 Financial Accounting Lesson Note

MEANING OF DEPARTMENTAL ACCOUNTS

Usually in large organizations, the operations are 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 find it convenient for accounting purposes 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 sea separate journal and ledger books for each of the departments such as separate cashbooks, 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 accounts is to compare trading results 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 normal procedure: not in a combined format. 

INTERDEPARTMENTAL TRANSFER AND APPORTIONMENT OF EXPENSES 

1. Inter-Departmental Transfer: Sometimes goods purchased by one department may be transferred to another department because of sales and such purchases transferred are deducted from the department giving it out and added to the department receiving it.  

2. 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 

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