DEPARTMENTAL ACCOUNTS 1

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Advance Financial Accounting (FIN-611)

LESSON # 9

DEPARTMENTAL ACCOUNT

A business entity where diversified natures of economic activities are undertaken is

split into number of departments for accounting purposes. Generally it is management

who will decide the number of departments in which the whole business is to be

divided, but the criteria for identifying the departments in an examination question is

always the separate sales/work-done revenue.

Each department is considered as a profit centre, though none of the departments is

separated geographically from the rest of the departments. This type of organizational

subdivision creates a need for internal information about the operating results

(profitability) of each department. Based upon the departmental knowledge of

profitability and growth rate the management takes certain decisions e.g. pricing,

costing, sales promotion, closure etc.

Allocation of Incomes and Expenses

Until unless the size of the business entity is very large, the entire book keeping

system for the entity is kept by a central accounts department along with some

departmental specific records e.g. sales, purchases, stocks and staff salaries etc. Rest of

the operating expenses and other incomes need to be allocated among the

departments based on their nature, utility, economic benefits and belongingness.

For allocation and division purposes the expenses/incomes can be categorized as:

1. Separately identified

2. Obvious just ratio

3. Specific ratio/sales ratio

4. Un-allocable

Separately identified

It depends upon the size of the entity that it can separately identify its expenses with

each of the department, a large entity will be incurring most of the operating expenses

that are department specific e.g. carriage inward, receiving and handling, wages and

salaries, electricity, telephone, repair and maintenance, entertainment, advertisement,

sales promotion, selling commissions, research and development cost etc.

Obvious just ratio

Most of the expenses are allocated on the most logical basis that is obvious and also

just. Nature of the expenses and nature of the business will determine the basis for

division. Some important basis and expenses are given below:

S# Basis

Expenses

Sales/Work-done Revenue

Selling and distribution expenses

After sales service

Discount allowed

Carriage/freight outward

Bad debts

Selling commissions

Number of Employees

Salaries and wages

Staff welfare

Advance Financial Accounting (FIN-611)

Canteen/cafeteria facility

Group insurance

Area Occupied

Building rent

Building depreciation

Building insurance

Building repair and maintenance

Air conditioning and heating

Property tax

Inter-com

Purchases

goods/raw Carriage/freight inward

material

Import duties

Custom tax

Receiving and handling cost

Discount received (income)

Specific ratio or sales ratio

Still there are some expenses which provide economic benefits to more than one

department and should be allocated but the ratio is not obvious, for such expenses a

specific ratio will be determined or otherwise these will be divided in the ratio of their

respective departmental sales revenue. These may include:

Insurance on stock/inventory

Insurance on plant and machinery

Power and fuel

Depreciation/Amortization

Un-allocable

These are the expenses which provide economic benefits to the business entity on the

whole; these cannot be identified with a specific department. Such expenses are often

incurred against financial facilities. Examples include; loss on disposal of investments,

damages paid for infringement of law, interest on loan and bank overdrafts etc.

There are certain financial incomes as well that cannot be identified or allocated

among the department e.g. interest on investment, profit on disposal on investments,

profit on fixed deposits etc.

All these types of expenses and incomes are shown in a general profit and loss account

where profits or losses of each department are clubbed to ascertain the operating

results of the business on the whole.

Allocation of income tax expense

Unlike other operating expenses income tax expense is divided on the basis of

departmental operating profits. Some students having knowledge of income tax law

may possibly get confused that nevertheless there are certain expenses or losses

admissible from the tax stand point that are shown in the general profit and loss

account have not yet been deducted from the departmental operating results then why

this income tax expense is being charged before subtracting certain expenses.

Remember this is just an allocation of income tax expense (that has already been

calculated) among the different departments. It has nothing to do with the calculation

of taxable profit or income tax charge for the year.

Advance Financial Accounting (FIN-611)

Format of departmental profit and loss account

Income statement

For the year ended December 31, 2008

Particulars

Total

***

Sales

***

Less Cost of goods sold

***

Gross profit

***

Less Operating expenses

Salaries & Wages

***

Rent, rates & taxes

***

Repair & renewal

***

Lighting & heating

***

Profit from operations

***

Add Other incomes

***

Profit before tax

***

Less Income tax

***

Net profit/Profit after tax

***

Less General expenses

***

Net profit of the business

***

Solved Problem:

From the following information of Trendy Store prepare departmental Income

Statement and also compute net profit of the entity on the whole for the year ending

on 31.12 2008

Particulars

Jewellery Hairdressing

Clothing

Rs.

Opening stock (1/1/2008)

2,000

1,500

3,000

Purchases

11,000

3,000

15,000

Closing stock (31/12/2008)

3,000

2,500

4,000

Sales and work done

18,000

9,000

27,000

Staff salaries

2,800

5,000

6,000

Following expenses cannot be traced to any particular department:

Rupees

Rent

3,500

Repair expenses

4,800

Air conditioning & lighting

2,000

General expenses

1,200

Basis of allocation

Rent & Air-conditioning expense Floor space occupied

Repairs & General expense

Sales and work done

Advance Financial Accounting (FIN-611)

Floor space occupied ratio:

Jewellery

Hairdressing

Clothing

1/5

1/2

3/10

Rent

Jewellery

3,500 x 1/5 =

700

Hairdressing

3,500 x 1/2 =

1,750

Clothing

3,500 x 3/10 =

1,050

Air conditioning & lighting

Jewellery

2,000 x 1/5 =

400

Hairdressing

2,000 x 1/2 =

1,000

Clothing

2,000 x 3/10 =

600

Repair expenses

Jewellery

4,800 x 18/54 =

1,600

Hairdressing

4,800 x 18/54 =

800

Clothing

4,800 x 18/54 =

2,400

Trendy Store

Departmental Trading and profit and Loss Accounts

For the year ended 31 December 2008

Jewellery

Hairdressing

Clothing

Rs.

Sales and work done

18,000

9,000

27,000

Cost of goods or materials:

2,000

3,000

Stock 01.01.2008

1,500

15,000

Add Purchases

11,000

3,000

Less Stock 31.12.2008

(3,000) (10,000)

(4,000)

(14,000)

(2,000)

(2,500)

Gross Profit

8,000

7,000

13,000

Less Expenses

Wages

6,000

2,800

5,000

Rent

1,050

700

1,750

Administration Expenses

2,400

1,600

800

Air conditioning & lighting

600

400

1,000

General expenses

200 (8,750)

600

(5,900)

(10,650)

400

Net Profit / (Loss)

2,350

2,100

(1,750)

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