ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.

ACCOUNTING FOR BUSINESS , DEPARTMENT ACCOUNTS NOTES

1. DR KUMAR J ASSOCIATE PROFESSOR ACCOUNTING FOR BUSINESS.II   DEPARTMENTAL ACCOUNTS

2. Meaning of Departmental Accounting Departmental accounting is an accounting system that keeps a distinct book of accounts for each department or division of a corporation. It is one in which accounts are generated and kept individually for various sections of an organisation to evaluate their results fairly. These separate books of account are then merged with the head office's accounts to create business financial statements. Departmental accounting tries to document a department's costs and income in a separate book of accounts. 

3. It allows for the measurement of the profitability of each branch and the detection of departments that are underperforming their capabilities. Such an accounting information system is appropriate for organisations that engage in various operations. Departmental accounting effectively tracks business spending and performance when various branches manufacture multiple goods under the same roof.  For example , a textile business may produce various materials such as woollen , cotton, and jute.

4. Advantages of Departmental Accounting The following are the significant benefits of departmental accounting:  1. Policy Formulation Departmental accounting plays a vital role in formulating appropriate plans and policies. The individual book of accounts provides managers with specific information on each unit. They examine these books to determine the effectiveness of various departments. Knowledge of each business unit helps them make appropriate decisions to increase profitability. 2. Facilitates Interdepartmental Comparison Departmental accounting allows managers to compare the performance of multiple corporate departments. Every unit has its book of accounts, which tracks its revenue and costs individually. Profit is computed and compared to other companies profits to determine their performance level.

5. 3. Unit Success or Failure This accounting evaluates the success rate and failure rate of each department inside the organisation . Every cost and income of these departments are correctly recorded to calculate their true profitability. The income these units create reveals which units are effective in their roles and which fail to reach their objectives. 4. Assist in Expansion and Shutdown Decisions Departmental accounting efficiently determines the expansion and shutdown of various organisational departments. Managers can discover which units are more vital in corporate operations and which play the least important function. Based on the results, they can simply select which units should be extended further and which should be closed.

6. 5. Benefits to Auditors and Investors It provides auditors and investors with accurate information about each company unit. Auditors may readily access the accounts of each unit to learn about all costs and revenues, allowing them to check the accuracy of financial records. Investors can receive a clear picture of an organisation's mobility and overall worth. 6. Improve Profitability Departmental accounting plays a vital role in boosting the profitability of a corporation. This accounting system monitors every component of the organisation's costs and revenues connected to multiple divisions to avoid mistakes and fraud. It guarantees that all resources are used efficiently and with little waste. These distinct account books enable managers to establish performance levels regularly and implement remedial steps that increase profit.

7. 7. Compute the Manager's Commission Departmental accounting aids in the equitable computation of managers' commissions throughout various corporate departments. Managers are paid commissions based on the profit generated by their departments. Proper accounting, kept individually for each unit, produces the correct quantity of profit levels. 8. Encourage a Competitive Spirit It encourages a competitive spirit among all employees in an organisation . This accounting system accurately monitors the operations of each corporate unit. Team members are compensated based on the success of their departments, as evidenced by the departmental book of accounts. This encourages employees to work effectively to improve overall performance.

8. Objectives of Departmental Accounting The primary objectives of departmental accounting are as follows: To evaluate each branch's performance, allowing for easier comparison of findings. To compare the department's performance to the prior period's results. To compute the gross profit of each department. To highlight the non-profitable departments. It aids in determining the department manager's commission when it is linked to the profit made by their department. Each department's progress may be tracked to determine what measures should be taken .

9. To assist the owner in developing the best insurance for the future. To aid management in selecting whether to eliminate or create a department. It can assist management in determining which departments should expand and which should close to maximise overall business profitability. To offer complete information on the entire organisation . To aid management with cost-cutting measures. It also aids in allocating expenditures to various divisions, allowing for greater control of the company's costs. Controlling and monitoring numerous departments depending on the items they sell is considerably easier for a corporation dealing with multiple products than controlling it as a single firm. Determines the financial situation of each department in the organisation .

10. After learning the findings of each branch, develop appropriate plans and tactics. Taking necessary steps after assessing the performance of all divisions. Efficient cost management of all departments through efficient cost distribution to all departments. Encourages a solid competitive spirit among several branches, which leads to increased profitability.

11. Methods of Departmental Accounting Organisations make trading and profit and loss accounts to determine the profit or loss suffered by each department, and each department's account is closed by transferring its profit or loss to the general profit and loss account.  The following are two approaches for keeping such department accounts: 1. Separate Departmental Accounting In general, this approach is used by big organisations with several departments or where the law requires the preparation of separate department accounts. Accounts for each department are kept individually under this system, and each department is treated as a separate unit of an organisation . This form of departmental accounting is more costly than the columnar method.

12. 2. Columnar Books Departmental Accounting This approach is used by small businesses that do not maintain a comprehensive bookkeeping system; instead, it merely keeps records of certain transactions such as purchases, sales, stock data, and costs made by the departments. Trading and profit and loss accounts include separate columns for each department, and costs belonging to various departments are recorded in their respective columns. If the expenses are similar, they are allocated between all departments based on the relevant ratios .

13. Difference between Departmental and Branch Accounting is as follows: BASIS OF DIFFERENCE DEPARTMENTAL ACCOUNTING BRANCH ACCOUNTING LINKAGE Departments are attached with the main organization under a single roof. Branches are separate from the main organization. RESULTS OF Departments are the results of fast human life. Branches are the outcomes of the tough competition and expansion of the business.

14. GEOGRAPGICAL LOCATION Departments are not geographically separated . Branches are geographically separated. TYPES There is no classification of departments. The branches may be dependent or independent. ALLOCATION OF EXPENSES Allocation of departmental common expenses is a tough job. There is no need of allocation of branch expenses. RECONCILIATION In departmental accounts, no reconciliation is required because there is no central account division. To find out the net result of organization the reconciliation of different branch is a main job.

15. TRADING Departmental trading with their head office is conducted under the same roof although each department deals with separate line of activity. Branch trading is conducted in different parts of the country under the head office dealing with usually the same line of activity. PRFOITABILITY The profitability position of department is seen within the larger picture of a parent organizational profits. The profitability of each branch is equally important and seen separately. METHODS OF PREPARATION OF ACCOUNTS There are only two methods: Separate set of books are maintained Separate set of books are not maintained. There are various methods of preparation of accounts like Stock and debtors system Debtors system Final accounts system Wholesale price system

16. ACCOUNTS MAINTAINED The accounts maintained are; Departmental trading and profit and loss account General profit and loss account The accounts maintained are: Branch stock account Branch adjustment account Branch debtors account Branch expenses account FUNCTIONAL DIVISION Functional division is possible in case of departmental concerns. It is not possible in case of branch. CONTROL The chief executive who is to keep a constant watch over the department supervisor closely and supervises effectively. Control is unpracticable in case of a far off branch since it is not possible for the head office to keep instant watch.

17. RECONCILIATION OF RESULTS Departmental accounting presents the trading results of each individual department. Branch accounts present the trading results of each individual branches. NATURE Departmental accounting is practically a segment of accounts. Branch accounts are a condensation of accounts. EXPENSIVE These are comparatively less costly as a small team of accountants can be appointed to maintain the accounts. Branch accounts are costly to maintain as it involves a big team of accountants to maintain accounts for each branch.