Departmental Accounts – SS1 Financial Accounting Lesson Note (Third Term)

Departmental accounts are separate records kept for each department of a large organisation, so that the owner can see the result of every department.

Behavioural objectives

1. Explain the meaning of departmental accounts.
2. State why large organisations divide their operations into departments.
3. State the aim of the departmental trading, profit and loss account.
4. Explain inter-departmental transfer of goods.
5. List and describe the methods of apportioning expenses among departments.

What are departmental accounts?

Departmental accounts are separate books of account kept for each department of a business.

• Department: a separate section of a business that sells a particular line of goods, such as the provisions, clothing or electronics section of a supermarket.
• Separate books kept: cash books, purchases books, sales books, stock records, returns books and personal ledgers.
• Year-end task: the accountant brings the separate books together to combine and compare them.
• Combined account: the results are shown in one departmental trading, profit and loss account.

Why do large organisations use departments?

Large organisations use departments because one set of books cannot handle a large volume and wide range of transactions.

• Large volume of transactions: one set of books would be crowded and hard to manage.
• Wide range of products: each product line is easier to record on its own.
• Easier operations: each department handles its own records.
• Better accountability: each department head answers for the results of that department.
• Comparison: the owner sees which department performs better than the others.

What are the final accounts of a departmentalised enterprise?

The final accounts are the departmental trading, profit and loss account and the balance sheet.

• Departmental Trading, Profit and Loss Account: the trading, profit and loss accounts of all departments drawn up side by side in one combined format.
• Balance sheet: it follows the normal procedure and is not drawn in a combined format.

What is the aim of the departmental trading, profit and loss account?

Its aim is to compare the trading results of the departments.

• Compare results: it compares the trading results of the departments.
• Guide policy: the owner knows which departments perform better and which perform worse.
• Support decisions: the owner can decide where to expand, improve or reduce activity.

What is the layout of the account?

Each department has its own column, and a total column is added at the end.

How are the figures shown? A simple example

• Step 1: find the sales and cost of sales of each department.
• Step 2: subtract cost of sales from sales to get the gross profit.
• Step 3: subtract the expenses of each department to get the net profit.
• Step 4: add across to get the total column.

• Reading the result: Department A earns more net profit than Department B, so the owner may consider expanding A or improving B.

What is inter-departmental transfer?

Inter-departmental transfer is the passing of goods bought by one department to another department to meet its sales.

• Giving department: the goods transferred are deducted from its purchases.
• Receiving department: the goods transferred are added to its purchases.
• Effect on the business: total purchases of the whole business stay the same.

Worked example of a transfer

1. Department A buys goods for N200,000 and Department B buys goods for N150,000.
2. Department A transfers goods worth N20,000 to Department B.
3. Department A purchases become N200,000 less N20,000, which is N180,000.
4. Department B purchases become N150,000 plus N20,000, which is N170,000.
5. Total purchases are N180,000 + N170,000 = N350,000, the same as N200,000 + N150,000.

What is apportionment of expenses?

Apportionment is the division of an expense among the departments that share it.

• Why it is needed: expenses are usually not separated to show the amount each department incurred.
• Before sharing: expenses must first be adjusted, for example for accruals and prepayments.

What is the difference between direct and common expenses?

• Direct expenses: expenses clearly belonging to one department, charged to it alone.
• Common expenses: expenses that serve all departments, shared on a suitable basis.

What are the methods of apportioning expenses?

There are five methods of apportioning expenses: turnover, floor space, number of articles sold, direct analysis and equality.

Which basis suits which common expense?

How do we work out apportionment? Worked examples

1. Floor space: rent of N60,000 is shared among A (300 m²), B (200 m²) and C (100 m²). The ratio is 3 : 2 : 1, so A bears N30,000, B N20,000 and C N10,000.
2. Turnover: advertising of N50,000 is shared among A (sales N500,000), B (N300,000) and C (N200,000). The ratio is 5 : 3 : 2, so A bears N25,000, B N15,000 and C N10,000.
3. Equality: administrative expenses of N30,000 are shared among three departments. Each bears N10,000.

What are the advantages of departmental accounts?

• Performance: the profit or loss of each department is known.
• Control: weak departments are easily identified and corrected.
• Staff motivation: departments can be rewarded according to their results.
• Planning: the owner can base stock and expansion decisions on departmental figures.

What are the disadvantages of departmental accounts?

• More work: more books and more staff are needed.
• Cost: record keeping costs more.
• Unfair sharing: the basis used for apportionment may not reflect the true cost of each department.

Evaluation

1. What are departmental accounts?
2. Why do large organisations divide their operations into departments?
3. State the aim of the departmental trading, profit and loss account.
4. How are goods transferred between departments treated in the accounts of the two departments?
5. List the five methods of apportioning expenses.

Assignment

1. Explain the term apportionment of expenses and say why it is needed. Then describe any two methods of apportioning expenses among departments, with a simple example of each.