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PPT MADE BY –
PRASHAM MAKWANA
TYBFM
132
INTRODUCTION
•DEPARTMENTAL ACCOUNTING IS BASICALLY KEEPING
THE SEPARATE BOOK OF ACCOUNTS OF THE
INDIVIDUAL DEPARTMENT. IF A BUSINESS CONSISTS OF
SEVERAL INDEPENDENT ACTIVITIES OR DIVIDED INTO
SEVERAL DEPARTMENTS FOR CARRYING OUT ITS
FUNCTIONS, ITS MANAGEMENT IS USUALLY
INTERESTED IN FINDING OUT THE WORKING RESULTS
OF EACH DEPARTMENT TO ASCERTAIN THEIR RELATIVE
EFFICIENCIES. THIS CAN BE MADE POSSIBLE ONLY IF
DEPARTMENTAL ACCOUNTS ARE PREPARED.
•DEPARTMENTAL ACCOUNTS ARE OF GREAT HELP AND
ASSISTANCE TO THE MANAGEMENT AS THE
INFORMATION FOR CONTROLLING THE BUSINESS
MORE INTELLIGENTLY AND EFFECTIVELY.
•IMPORTANCE OF DEPARTMENTAL ACCOUNTING

Departmental accounting helps us to understand which department should be

expanded further or which one should be closed down as per the results of the
operation.  If also helps to encourage a healthy competitive spirit among the
various departments which, ultimately, helps to increase profits of the firm as a
whole.

 Why do you need a departmental  account?

In order to ascertain the profit or loss made by each department, it is desirable
to prepare separate Trading and Profit and Loss Account for each department.
The preparation of such Trading and Profit and Loss Account separately for
each department enables to compare the results of trading activities
 MANNER IN ACCOUNTING

1. sales/purchase return:-

In this method, accounts of each department are maintained separately. Each department pre­pares Trading and Profit and Loss Account. Finally, the profit or loss of each department
is trans­ferred to the (General) Profit and Loss Account for all the departments. The independent departmen­tal book-keeping is an expensive one.

2. Stock:-

In this method, there is a single set of books. All accounts of all the departments are maintained together, but in a columnar or tabular form. In order to enable the preparation of
departmental trading and profit and loss accounts, various subsidiary books, such as purchases, sales, returns books, are prepared in a columnar form and this shows the record, in
detail, for each department.

3. Expenses:-

When the books and accounts are maintained on a columnar basis, Trading and Profit and Loss Account can also be prepared on columnar basis. 

A) direct expense - There arises no difficulty in finding out gross profit and net profit for each department separately.

B) Indirect expense :- From the analytical ledger accounts and subsidiary books department-wise figures are readily available.

C)Other common expenses or losses- If an item of expenses definitely  identified with a particular department, it can be termed as direct expenses with reference to the department.
 INTER-DEPARTMENTAL TRANSFERS
TRANSFER VALUE ENTRIES FOR TRANSFER FOR CLOSING STOCK STOCK RESERVE
•Cash discount
The price at which one General Profit and Loss A/c     Dr. The opening stock
•Selling costs (not in
department supplies goods      To stock reserve A/c appears on the debit side
to another department or internal transfers) of trading account and to
•Margin of profit
when some services are AT THE BEGINNING reduce it to its cost the
•Standard costs.
rendered by department to OF THE YEAR stock reserve
the another department is is transferred to the
known as Transfer Price. It Stock reserve A/c     Dr. credit side. The closing
      To General profit and loss A/c
refers to the charge made stock assumed to be out
for goods and services sold of the goods of this year
internally. It may be market and the profit element at
price if one is available. the rate of G.P. of
current.t year.
 STOCK RESERVE

PROFIT & LOSS ACCOUNT 

      TO STOCK RESERVE A/c
BEING THE RESERVE CREATED FOR UNREALISED PROFITS INCLUDED IN CLOSING STOCK.

BALANCE SHEET AS AT.....

LIABILITIES ₹ ASSETS                      ₹ ₹
CURRENT ASSETS
CLOSING STOCK
(TRANSFER VALUE)       
 XX
LESS: STOCK RESERVE
(LOAD)                            XX

= CLOSING STOCK
(STOCK) XXX

NEXT YEAR

STOCK RESERVE A/c      Dr.

  TO P&L A/c
FEATURES

• THE ACCOUNTS ARE PREPARED SEPARATELY FOR EACH

DEPARTMENT.
• EACH DEPARTMENT IS TAKEN AS PROFIT CENTER.
• PLANNING AND BUDGETING IS DONE SEPARATELY FOR EACH
DEPARTMENT BASED ON ITS OWN ACCOUNTING RECORDS.
• THE ACCOUNTS OF VARIOUS DEPARTMENTS ARE
CONSOLIDATED TO PROVIDE A WHOLE VIEW OF THE
COMPANY.
This Photo by Unknown author is licensed under CC BY-NC.
• DEPARTMENTAL ACCOUNTING IS GENERALLY ADOPTED BY
THE MULTI NATIONAL CORPORATIONS.
OBJECTIVS FOR INTER DEPARTMENTAL
ACCOUNTING 
• ASSESSING OPERATIONAL EFFICIENCY : THE MAIN AIM OF
DEPARTMENTAL ACCOUNTING IS TO ASSESS THE OPERATIONAL EFFICIENCY
OF EACH DEPARTMENT SEPARATELY. EACH DEPARTMENT PREPARE ITS OWN
ACCOUNTS AND THIS LEADS TO KNOWING ITS PROFITABILITY POSITION
SEPARATELY FROM OTHERS. ALSO THE STOCK TURNOVER RATIO AND
OTHER RATIOS ARE CALCULATED SEPARATELY THAT TELLS ABOUT ITS
EFFICIENCY.

• OPEN OR SHUT DEPARTMENT : DEPARTMENTAL ACCOUNTING HELPS TO

KNOW ABOUT THE PROFIT OR LOSS INCURRED BY EACH DEPARTMENT.
AFTER ANALYZING THE WHOLE FINANCIAL POSITION OF THE DEPARTMENT
FROM ITS ACCOUNTS, THE DECISION CAN BE TAKEN WHETHER TO SHUT THE
DEPARTMENT OR NOT.
This Photo by Unknown author is licensed under CC BY-NC-ND.
 OBJECTIVES 

•DETAILED INFORMATION ABOUT CONCERN: IN DEPARTMENTAL ACCOUNTING, FIRSTLY ACCOUNTS ARE

MADE ON THE BASIS OF THE DEPARTMENTS AND THEN ARE CONSOLIDATED TO MAKE ACCOUNTS OF
COMPANY AS A WHOLE. BY DOING THIS, WE CAN GET DETAILED INFORMATION ABOUT ALL THE
DEPARTMENTS.
•IMPROVEMENT IN OVERALL PROFIT OF THE BUSINESS: THE FRIENDLY RIVALRY AMONG ALL THE
DEPARTMENTS INDUCES THEM TO WORK IN THE BEST POSSIBLE WAY. EFFICIENCY AT EACH DEPARTMENT
LEVEL LEADS TO THE EFFICIENCY OF THE WHOLE COMPANY. THIS MAKES IMPROVEMENT IN OVERALL
PROFIT OF THE BUSINESS.

•INTER-DEPARTMENTAL COMPARISON IS POSSIBLE: DEPARTMENTAL ACCOUNTING HELPS IN COMPARING

ONE DEPARTMENT WITH THE OTHER. IT HIGHLIGHTS THE POSITIVE POINTS OF EACH DEPARTMENT. INTER-
DEPARTMENTAL COMPARISON INDUCES OFFICIALS OF DEPARTMENTS TO PERFORM BETTER.
ADVANTAGES 

• EVALUATION OF INCREASE IN EFFICIENCY: WHEN SEPARATE PROFIT AND LOSS IS CALCULATED 

FOR EACH DEPARTMENT, WE CAN MEASURE THE EFFICIENCY OF EACH DEPARTMENT. WE CAN TAKE
STEPS TO INCREASE THE EFFICIENCY BY DECREASING THE EXPENSES OF LESS PROFITABLE
DEPARTMENTS OR BY CLOSING THE DEPARTMENTS WHICH ARE RUNNING INTO THE LOSSES.
• COMPARISON BECOMES EASY: THE DEPARTMENTAL ACCOUNTING MAKES THE BOARD OF
DIRECTORS ABLE TO MAKE COMPARISON OF THE DEPARTMENTS ON THE BASIS OF THE:
• EXPENSES INCURRED
• TARGETS REALIZED
• REVENUE EARNED
• RESULTS OF DIFFERENT DEPARTMENTS CAN BE COMPUTED AND IT BECOMES EASY TO LOCATE THE
SHORTCOMINGS WHICH WILL HELP IN IMPROVEMENT OF THE RESULTS.
MAKING OF ACCOUNTS

• IT ENABLES TO COMPARE THE PERFORMANCE OF ONE

DEPARTMENT WITH THAT OF ANOTHER AND TO MEA­SURE THE
PROGRESS OF THE DEPARTMENT ITSELF BY COMPARING YEAR-
WISE PERFORMANCE.
• IT ENABLES TO MEASURE THE PROFITABILITY OF EACH
DEPARTMENT. IN THE ABSENCE OF DEPARTMENTAL
ACCOUNTING, IF THERE IS A LOSS, THE BUSINESSMAN THINKS
THAT THE WHOLE BUSINESS IS AT LOSS. THUS HE MAY STOP
THE BUSINESS AND MAY START A NEW BUSINESS, BECAUSE HE
IS UNABLE TO UNDERSTAND THE PERFORMANCE OF EACH
DEPARTMENT. BUT, BY PREPARING DEPARTMENTAL ACCOUNTS
SEPARATELY, THE CONTRIBUTION OF PROFIT MADE BY EACH
DEPARTMENT CAN BE KNOWN.
•IT HELPS IN FORMULATING NEW POLICIES AND TO ADOPT NEW AND LATEST TECHNIQUES
IN THE DEPART­MENTS, THEREBY FURTHER PROFITABILITY OF THE DEPARTMENT CAN BE
EXPECTED.
•DEPARTMENTAL MANAGERS OF THE PROFIT-MAKING DEPARTMENT CAN BE ENCOURAGED
BY ADOPTING A METHOD OF COMMISSION ON THE BASIS OF DEPARTMENTAL PROFIT. THIS
STEP WILL FURTHER BOOST THE PROFIT-MAKING DEPARTMENT.
•THUS A GOOD PROFIT- MAKING DEPARTMENT CAN BE DEVELOPED AND THE DEPARTMENT
WHICH GIVES SMALL MARGIN OF PROFIT OR NO PROFIT CAN BE CLOSED DOWN. IT IS ALSO
POSSIBLE TO CHECK THE PROFIT OF A DEPARTMENT, NOT TO BE EATEN AWAY BY THE
DEPARTMENT WHICH MAKES NO PROFIT.
 • Independent basis : - In this method, accounts of each
department are maintained separately. Each department pre­
pares Trading and Profit and Loss Account. Finally, the profit
or loss of each department is trans­ferred to the (General) Profit
•PROCEDURE and Loss Account for all the departments. The independent
departmen­tal book-keeping is an expensive one.
• Columnar basis: - In this method, there is a single set of books.
All accounts of all the departments are maintained together,
but in a columnar or tabular form. In order to enable the
preparation of departmental trading and profit and loss
accounts, various subsidiary books, such as purchases, sales,
returns books, are prepared in a columnar form and this shows
the record, in detail, for each department.
 ALLOCATION OF EXPENSES

•NORMALLY, ALL DIRECT EXPENSES ARE CHARGED TO THE

RESPECTIVE DEPARTMENTS, IN CASE OF INDIRECT OR GENERAL
EXPENSES, PROPER ALLOCATION AMONG THE DEPARTMENTS
MUST BE MADE IN ORDER TO ASCERTAIN THE PROFIT AND LOSS
MADE BY EACH DEPARTMENT. EACH DEPARTMENT IS CHARGED
WITH PROPER BUSINESS EXPENSES.
•SOME EXPENSES CANNOT BE APPORTIONED AND NO BASIS OF
APPORTIONMENT IS PRACTICABLE. FOR IN­STANCE, INTEREST ON
LOAN, INCOME TAX, SALARY TO GENERAL MANAGER, SHARE
TRANSFER EXPENSES, BANK CHARGES, AUDIT FEES ETC. HERE
THESE EXPENSES CAN SAFELY BE TRANSFERRED TO GENERAL
PROFIT AND LOSS ACCOUNT.
•SIMILARLY, INCOME OF GENERAL
NATURE SUCH AS INTEREST ON
CALLS-IN-ARREARS, INTEREST ON
INVEST­MENT, FEES ON SHARE
TRANSFER ETC. CREDITED TO
GENERAL PROFIT AND LOSS
ACCOUNT. THE DEPARTMENTAL
TRADING ACCOUNT SHOWS THE
GROSS PROFIT OR LOSS AND
DEPARTMENTAL PROFIT AND LOSS
ACCOUNT SHOWS THE NET PROFIT
OR LOSS EARNED OR SUFFERED BY
EACH DEPARTMENT
Q. A firm had two departments, cloth and
readymade clothes. The clothes were made by the
firm itself out of cloth supplied by the cloth
department at its usual selling price.
From the following figures prepare
departmental Trading and Profit and Loss
Accounts for the year ended 31st March.
2012:

ILLUSTRATIO
N
DEPARTMENT
AL P&L