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Advanced Financial Accounting

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Advance Financial Accounting (FIN-611)
VU
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
1
Sales/Work-done Revenue
Selling and distribution expenses
After sales service
Discount allowed
Carriage/freight outward
Bad debts
Selling commissions
Advertisement
2
Number of Employees
Salaries and wages
Staff welfare
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Advance Financial Accounting (FIN-611)
VU
Canteen/cafeteria facility
Group insurance
3
Area Occupied
Building rent
Building depreciation
Building insurance
Building repair and maintenance
Air conditioning and heating
Property tax
Inter-com
4
Purchases
of
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.
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Advance Financial Accounting (FIN-611)
VU
Format of departmental profit and loss account
Income statement
For the year ended December 31, 2008
Particulars
A
B
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.
Rs.
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
45
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Advance Financial Accounting (FIN-611)
VU
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.
Rs.
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)
46
Table of Contents:
  1. ACCOUNTING FOR INCOMPLETE RECORDS
  2. PRACTICING ACCOUNTING FOR INCOMPLETE RECORDS
  3. CONVERSION OF SINGLE ENTRY IN DOUBLE ENTRY ACCOUNTING SYSTEM
  4. SINGLE ENTRY CALCULATION OF MISSING INFORMATION
  5. SINGLE ENTRY CALCULATION OF MARKUP AND MARGIN
  6. ACCOUNTING SYSTEM IN NON-PROFIT ORGANIZATIONS
  7. NON-PROFIT ORGANIZATIONS
  8. PREPARATION OF FINANCIAL STATEMENTS OF NON-PROFIT ORGANIZATIONS FROM INCOMPLETE RECORDS
  9. DEPARTMENTAL ACCOUNTS 1
  10. DEPARTMENTAL ACCOUNTS 2
  11. BRANCH ACCOUNTING SYSTEMS
  12. BRANCH ACCOUNTING
  13. BRANCH ACCOUNTING - STOCK AND DEBTOR SYSTEM
  14. STOCK AND DEBTORS SYSTEM
  15. INDEPENDENT BRANCH
  16. BRANCH ACCOUNTING 1
  17. BRANCH ACCOUNTING 2
  18. ESSENTIALS OF PARTNERSHIP
  19. Partnership Accounts Changes in partnership firm
  20. COMPANY ACCOUNTS 1
  21. COMPANY ACCOUNTS 2
  22. Problems Solving
  23. COMPANY ACCOUNTS
  24. RETURNS ON FINANCIAL SOURCES
  25. IASBíS FRAMEWORK
  26. ELEMENTS OF FINANCIAL STATEMENTS
  27. EVENTS AFTER THE BALANCE SHEET DATE
  28. PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
  29. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 1
  30. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 2
  31. BORROWING COST
  32. EXCESS OF THE CARRYING AMOUNT OF THE QUALIFYING ASSET OVER RECOVERABLE AMOUNT
  33. EARNINGS PER SHARE
  34. Earnings per Share
  35. DILUTED EARNINGS PER SHARE
  36. GROUP ACCOUNTS
  37. Pre-acquisition Reserves
  38. GROUP ACCOUNTS: Minority Interest
  39. GROUP ACCOUNTS: Inter Company Trading (P to S)
  40. GROUP ACCOUNTS: Fair Value Adjustments
  41. GROUP ACCOUNTS: Pre-acquistion Profits, Dividends
  42. GROUP ACCOUNTS: Profit & Loss
  43. GROUP ACCOUNTS: Minority Interest, Inter Co.
  44. GROUP ACCOUNTS: Inter Co. Trading (when there is unrealized profit)
  45. Comprehensive Workings in Group Accounts Consolidated Balance Sheet