Departmental Accounting: Meaning, Objectives, Expense Allocation & Final Accounts Explained

Departmental Accounts

Departmental accounts refer to the financial statements prepared separately for each department by a business with multiple departments. Departmental accounting is a system under which the profit or loss of each department is calculated individually, along with the total profit or loss of the business as a whole.

A department is a division of a large business organisation that deals with a specific activity based on factors such as:

1. Function: e.g., Sales department, Production department, HR department, Marketing department, Finance department, Administration department.
2. Product: e.g., Grocery, Clothing, Cosmetics, Watches, etc.
3. Process: e.g., in car manufacturing—
• Process A: Metal body
• Process B: Engine fitting
• Process C: Upholstery fitting
• Process D: Accessories installation

All departments operate under one roof, unlike branches, which may be located in distant places. In modern terminology, a department is known as a segment. As per AS-17 (Segment Reporting) issued by ICAI, such divisions are made based on two main factors:

1. Business Segments
2. Geographical Segments

Objectives of Departmental Accounting

The main objectives of departmental accounting are:

1. To ascertain the trading results of each department - This helps determine the individual performance of every department.
2. To compare the performance of different departments - Comparative analysis helps identify strong and weak areas within the organisation.
3. To reward departmental managers based on performance - Accurate departmental results enable fair evaluation and incentivisation.
4. To assist management in formulating policies for each department - Department-specific data helps in making informed managerial decisions.
5. To support expansion-related decisions - Profitability and efficiency insights help the business decide which departments should be expanded, modified, or discontinued.

Importance of Departmental Accounting

1. To determine profit earned by each department - This reveals how much each department contributes to overall profitability.
2. To avoid distortion in overall P&L results - If only a single Profit & Loss Account is prepared, losses of one department may hide behind profits of another. Departmental accounts prevent this.
3. To help decide whether a department should be closed, reorganized, or expanded
4. To determine the commission or incentives of each departmental manager - Rewards can be linked directly to departmental profit.
5. To support management in planning, controlling, and evaluating performance - Department-wise reports strengthen internal decision-making.
6. To provide internal management information - Departmental reports are meant exclusively for internal use and not for external stakeholders.

Allocation of Joint or Common Expenses

Business expenses may be incurred for the benefit of one department or for all departments collectively. These expenses must be allocated properly to ascertain the true profit or loss of each department.

Types of Expenses

1. Direct Expenses - These are expenses incurred specifically for a particular department. Examples:

• Wages of departmental workers
• Department-specific electricity (if separate meters exist)
• Department-specific vehicle or machinery expenses

2. Indirect Expenses - These expenses relate to multiple departments and must be apportioned on an equitable basis. Examples:

• Rent
• Advertisement
• Insurance
• Administrative salaries

Allocation of Indirect Expenses

Indirect expenses should be apportioned based on a reasonable and fair basis. If no ratio is provided, the following common bases are used:

Allocation Based on Sales / Turnover

Used for:

• Advertisement expenses
• Bad debts
• Discount allowed
• Travelling expenses of sales agents
• Warehouse rent
• Selling commission
• Carriage outward

Allocation Based on Space Occupied

Used for:

• Municipal tax
• Rent
• Building insurance

Other Allocations

• Lighting / Heating: If separate meters are not available, allocate based on number of electric points or floor area.
• Labour Welfare Expenses (canteen, dispensary, labour club): Allocate based on wages or number of employees.

Expenses Not to Be Allocated

These are treated as general expenses and recorded in the General Profit & Loss Account instead of departmental accounts:

• Manager’s salary
• Directors’ remuneration
• Interest on loans or debentures
• Dividend
• Income tax

Allocation of Expenses — Classification

To determine the departmental profit or loss accurately, each department must be charged with an appropriate share of the expenses.

1. Actual Expenses - These are expenses directly traceable to a department. Examples:

• Salary to departmental manager
• Electricity with separate meters
• Vehicle expenses used exclusively by a department

2. Common Expenses

These benefit all departments and must be apportioned based on the benefit received. Examples include: rent, administration expenses, insurance, etc.

Basis of Apportionment of Common Expenses

1. Departmental Wages - Used for expenses that vary directly with wages, such as:

• Workers’ health insurance
• ESI contribution
• Workmen’s compensation

2. Capital Value of Assets - Used for expenses like:

• Depreciation
• Fire insurance
• Repairs of machinery

3. Floor Area

Used for:

• Rent and rates
• Lighting
• Night watchman’s wages

4. Number of Workers

Used for:

• Staff welfare expenses
• Canteen expenses
• Time-keeping department expenses

5. Production Hours / Direct Labour Hours

Used for:

• Works manager’s salary
• Overtime
• Interdepartmental transport costs

6. Technical Estimates

Used for:

• Steam consumption
• Power consumption (if technical data is available)

7. Material Purchased - Used when expenses relate to materials, such as:

• Carriage inward
• Storage expenses

8. Financial or Accounting Expenses - These cannot be allocated and must be transferred to the General Profit & Loss Account.

Examples:

• Interest on loan
• Legal fees
• Loss on sale of assets
• Provision for income tax

Chart: Common Bases for Allocation

Item of Expense	Basis of Allocation
Rent and Rates	Floor area
Lighting	Actual consumption / electric points / area
Advertisement	Sales
Sales Commission	Sales
Discount Allowed	Sales
Bad Debts	Actual or sales
Electric Power for Machines	HP of equipment / machine hours
Works Manager’s Salary	Time spent
Depreciation	Value of assets
Air-Conditioning	Floor area
Insurance – Stock	Value of stock
Insurance – Building	Floor area
Insurance – Loss of Profit	Previous year’s profit
Staff Welfare	No. of employees
Printing & Stationery	Sales
Freight Inward	Purchases
Freight Outward	Sales
Repairs to Building	Floor area
Heating	Number of points / areas
Discount Received	Purchases
Delivery Van Expenses	Sales
Travelling Expenses	Sales
Administration Expenses	Time spent / sales ratio
Postage, Telephone, Printing, Stationery	Sales (“What the traffic will bear”)
Workmen’s Compensation	Wages
PF & ESI	Wages
Canteen Subsidy, Medical Benefits	No. of workers

Shop-Soiled Items

Sometimes goods become damaged or soiled and are sold below cost, resulting in a loss.

This loss is:

• Debited to General Profit & Loss Account, and
• Credited to the Trading Account of the concerned department

This is treated as an abnormal loss.

Final Accounts (Departmental Accounts)

At year-end, a Departmental Trading and Profit & Loss Account is prepared in a columnar format with separate columns for each department.

This shows:

• Department-wise Gross Profit
• Department-wise Net Profit
• Total profit of the business

Items not allocable to departments (e.g., income tax, directors’ remuneration) are transferred to the General Profit & Loss Account. Only one balance sheet is prepared for the entire business, not department-wise.

Format of Departmental Accounts

Departmental Trading and profit & loss account

Particulars	Dept. A	Dept. B	Dept. C	Particulars	Dept. A	Dept. B	Dept. C

Balance Sheet  - Combined balance sheet is prepared for the business as a whole, not separately for each department. It is prepared as usual.

Advantages of Departmental Accounts

1. Facilitates comparison of efficiency across departments For example, comparing the performance of the mobile department with the laptop department.
2. Provides clear knowledge of operational efficiency Helps identify which departments are performing well and which require improvement.
3. Helps in framing sound business policies Decisions regarding pricing, budgeting, resource allocation, and expansion become more reliable.
4. Acts as an incentive for departmental managers Transparent performance measurement motivates managers to improve results.

Illustration (Allocation of expenses) - A business house has three departments. The particulars for the year ended on 30th June, 1999 given below:

Particulars	Dept. A (₹)	Dept. B (₹)	Dept. C (₹)
Stock on 1–7–98	20,500	17,000	45,000
Purchases	1,25,000	42,000	76,000
Purchase returns	8,000	3,000	1,000
Sales	2,65,000	82,000	1,66,000
Sales returns	5,000	2,000	6,000
Wages	40,000	15,000	12,000
Stock on 30–6–99	16,500	21,900	40,800

Other Expenses were as follows:

• Salaries₹30,000, Divide these in the ratio 6 : 4 : 5
• Advertisement ₹ 10,000, Bad Debts ₹ 5,000 and Trade Expenses ₹ 22,500
• Rent, Rates and Insurance ₹ 6,000, Space occupied: A = 2/5, B = 2/5, C = 1/5
• General Expenses ₹ 18,000, To be divided equally

Prepare Departmental Trading and Profit & Loss A/c showing profits of each department. Departmental Trading Account For the year ended 30th June, 1999

Particulars	Dept. A (₹)	Dept. B (₹)	Dept. C (₹)
Opening Stock	20,500	17,000	45,000
Add: Purchases	1,25,000	42,000	76,000
Less: Purchase Returns	(8,000)	(3,000)	(1,000)
Net Purchases	1,17,000	39,000	75,000
Add: Wages	40,000	15,000	12,000
Goods Available for Sale	1,77,500	71,000	1,32,000
Less: Closing Stock	(16,500)	(21,900)	(40,800)
Cost of Goods Sold (COGS)	1,61,000	49,100	91,200
Sales	2,65,000	82,000	1,66,000
Less: Sales Returns	(5,000)	(2,000)	(6,000)
Net Sales	2,60,000	80,000	1,60,000
GROSS PROFIT	99,000	30,900	68,800

GROSS PROFIT:

• Dept. A: ₹ 99,000
• Dept. B: ₹ 30,900
• Dept. C: ₹ 68,800

ALLOCATION OF EXPENSES

1. Salaries ₹30,000 (ratio 6:4:5) - Sum = 15

• A = 12,000
• B = 8,000
• C = 10,000

2. Advertisement ₹10,000 (allocated by sales ratio) - Net Sales ratio = A 260000: B 80000: C 160000 = 52%: 16%: 32%

• A = 5,200
• B = 1,600
• C = 3,200

3. Bad Debts ₹5,000 (by sales ratio)

• A = 2,600
• B = 800
• C = 1,600

4. Trade Expenses ₹22,500 (by sales ratio)

• A = 11,700
• B = 3,600
• C = 7,200

5. Rent, Rates & Insurance ₹6,000 (Allocation by space ratio 2/5: 2/5: 1/5)

• A = 2,400
• B = 2,400
• C = 1,200

6. General Expenses ₹18,000 (equally)

• A = 6,000
• B = 6,000
• C = 6,000

Profit & loss account Of Showing Departmental Profits

Particulars	Dept. A (₹)	Dept. B (₹)	Dept. C (₹)
Gross Profit	99,000	30,900	68,800
Less: Salaries	12,000	8,000	10,000
Less: Advertisement	5,200	1,600	3,200
Less: Bad Debts	2,600	800	1,600
Less: Trade Expenses	11,700	3,600	7,200
Less: Rent, Rates & Insurance	2,400	2,400	1,200
Less: General Expenses	6,000	6,000	6,000
TOTAL EXPENSES	39,900	22,400	29,200
NET PROFIT	59,100	8,500	39,600

FINAL DEPARTMENTAL PROFITS

1. Dept. A Profit → ₹ 59,100
2. Dept. B Profit → ₹ 8,500
3. Dept. C Profit → ₹ 39,600

Related Posts

Previous

Next