Departmental ACCounting

Concept of Departmental Accounting

Although traditional accounting reflects the overall financial performance

(profit/loss) of an entity, it fails to provide the operating performances of each
department. To ensure adequate managerial control and proper decision-making, it
is necessary to ascertain the operating results of each department. The branch of
accounting that gives emphasis on the assessment of the financial performance of
each department of a large organisation is referred to as Departmental
Accounting.

Features of Departmental Accounting

► In the books of accounts, transactions are recorded department-wise. All
expenses and incomes are recognized separately for each department.
► It is an application of Responsibility Accounting system.

► Each department is considered as Responsibility Centre.

► Both external as-well-as internal transactions are recorded.

► It provides information to internal stakeholders of the entity.

► It involves the drafting of Departmental Trading & Profit & Loss Account.

Objectives of Departmental Accounting

To get an analytical idea about the affairs of each department.
To ascertain the true operating result and efficiency of each department
(department profit/loss).
To compare the financial performance among different departments.
To provide data and information to the management for decision-making and policy-
formulation.
Methods of Maintaining Departmental Accounts
Maintenance The amounts of various items of expenses and incomes, etc. are gathered by maintaining the
of same set books of accounts in the tabular or columnar format. Hence, this method is referred to as
of books Columnar or Tabular Method. Accounting Department, centralized in nature, maintains the
entire records. This method is widely accepted because of it is comparatively less expensive.

Maintenance Individual figures of various items of expenses and incomes, etc. are obtained by keeping the
of separate books of each department separately. Hence, this method is referred to as Unitary Method.
set of books Each concerned department maintains their records independently. Although the method is
very expensive, large-sized firms usually practice it.
 Components of Departmental Final Accounts

1. Departmental Trading Account: This account is drafted in columnar format

where each column represents each department. It is prepared for
ascertaining Departmental Gross Profits/Gross Loss of individual
departments. In this account, the direct expenses are debited and direct
incomes are credited.
2. Departmental Profit & Loss Account: This account is also drafted in
columnar format where each column represents each department. It is
prepared for ascertaining Departmental Net Profits / Net Loss of individual
departments. In this account the indirect expenses are debited and allocated
indirect incomes are credited, after considering Gross Profit/Gross Loss of
individual departments.
3. General Profit & Loss Account: This account is drafted for the
determination of Overall Net Profit/ Net Loss of the entity. Indirect
expenses and Indirect incomes that cannot be rationally apportioned between
the departments are debited and credited respectively, after considering
departmental Net Profits/ Net Loss. The format of this account is like the
normal income state i.e no Department specific columns are there.

Format of Departmental Trading Account, Departmental Profit & Loss Account and General Profit
& Loss Account
Departmental Trading & Profit & Loss Account
Dr. for the year ended... Cr

Particulars Dept. I Dept. II Particulars Dept. I Dept. II

To, Opening Stock xx xx By, Sales xx xx
To, Purchases xx xx By, Transfer xx xx
To, Wages xx xx By, Closing Stock xx xx
To, Other Direct Expenses xx xx
To, Transfer xx xx
To, Gross Profit c/d xx xx
xxx xxx xxx xxx
To, Rent xx xx By, Gross Profit b/d xx xx
To, Salaries xx xx By, Indirect Incomes xx xx
To, Depreciation and amortisation xx xx
To, Other Indirect Expenses xx xx
To, General P/L A/c xx xx
[Dept. Net Profit Transferred]

xxx xxx xxx xxx

 General Profit & Loss Account
Dr. for the year ended... Cr

Particulars (`) Particulars (`)

To, General Expenses xx By, Departmental P/L A/c [Net Profit] xx
To, Stock Reserve [Provision on Stock] xx
To, Capital A/c [ Net Profit transferred] xx
xxx xxx

Illustration 1
M/s Unique is a departmental store having three departments – X, Y and Z. Information
regarding threedepartments for the year ended March 31, 2022 are given below:

Particulars X (` ) Y (` ) Z (` )
Opening Stock 72000 48000 40000
Furniture 40,000 40,000 20,000
Purchases 2,64,000 1,76,000 88,000
Sales 3,60,000 2,70,000 1,80,000
Closing stock 90,000 35,000 42,000
Sundry Debtors 30,000 20,000 20,000
Floor area occupied by each department (in sq. ft) 6,000 5,000 4,000
Number of employees 50 40 30
Electricity Consumed (in units) 600 400 200

The Balances of other revenue items in the books for the year given below
(
in `)

Particulars (` ) Particulars (` )
Carriage Inwards 6,000 Discount Received 3,600
Carriage Outwards 5,400 Employees Welfare Expenses 4,800
Discount Allowed 4,500 Rent, Rates &Taxes 15,000
Advertisement 5,400 Electricity charges 6,000
Wages 96,000 Depreciation on furniture 2,000
After providing Provision for Bad Debts at 5%, prepare Departmental Trading and Profit and Loss
Account
 Solution
M/s Unique

Departmental Trading and Profit & Loss Account

Dr. for the year ended 31.03.2022 Cr.

Particulars X (`) Y (`) Z (`) Particulars X (`) Y (`) Z (`)

To, Opening Stock 72,000 48,000 40,000 By, Sales 3,60,000 2,70,000 1,80,000
To, Purchases 2,64,000 1,76,000 88,000 By, Closing Stock 90,000 35,000 42,000
To, Carriage Inwards (WN:1) 3,000 2,000 1,000
To, Gross Profit c/d 1,11,000 79,000 93,000
4,50,000 3,05,000 2,22,000 4,50,000 3,05,000 2,22,000
To, Rent, Rates & Taxes (WN:1) 6000 5000 4000 By, Gross Profit b/d 1,11,000 79,000 93,000
To, Wages (WN:1) 40,000 32,000 24,000
To, Carriage Outwards (WN:1) 2,400 1,800 1,200 By, Discount Received 1800 1200 600
To, Discount Allowed (WN:1) 2,000 1,500 1,000
To, Electricity Expenses 3,000 2,000 1,000

Particulars X (`) Y (`) Z (`) Particulars X (`) Y (`) Z (`)

To, Advertisement (WN:1) 2,400 1,800 1,200
To, Depreciation (WN:1) 800 800 400
(WN:1)
To, Employees Welfare 2000 1600 1200
Expenses (WN:1)
To, Provision for Bad Debt 1500 1000 1000
(WN:2)
To, General P/L A/c ( Dept. NP 52,700 32,700 58,600
transferred)
1,12,800 80,200 93,600 1,12,800 80,200 93,600

Working Notes
1. Allocation of unallocated income and expenses

Item of Expenses (` ) Basis Ratio X (` ) Y (` ) Z (`)

Carriage Inwards 6000 Purchases 3:2:1 3,000 2,000 1,000

Rent, Rates & Taxes 15,000 Floor area 6:5:4 6,000 5,000 4,000
Wages 96,000 Number of employees 5:4:3 40,000 32,000 24,000
Carriage Outwards 5,400 Sales 4:3:2 2,400 1,800 1,200
Discount Allowed 4,500 Sales 4:3:2 2,000 1,500 1,000
Electricity expenses 6,000 Electricity consumed 3:2:1 3,000 2,000 1,000
Advertisement 5,400 Sales 4:3:2 2,400 1,800 1,200
Depreciation on Furniture 2,000 Value of Furniture 2:2:1 800 800 400
Employees Welfare Expenses 4,800 Number of employees 5:4:3 2,000 1,600 1,200
Discount Received 3,600 Purchases 3:2:1 1,800 1,200 600
 2. Provision for Bad Debt
Dept. X: ` 30,000 × 5% = ` 1,500,
Dept. Y: ` 20,000 × 5% = ` 1,000, Dept. Z: ` 20,000 × 5% = ` 1,000

Inter-Departmental Transfer
When goods/services are transferred from one department (Transferor
Department) to another department (Transferee Department), it is known as
Inter-Departmental Transfer and such transfers are considered to be as
“Purchases” of the Transferee Department and “Sales” of the Transferor
Department.
Valuation of Transfer: It can be done on of the following three basis

At Cost ● Transferor Department transfers goods/services to Transferee Department at “Cost to

the Transferor Department”.
● If part of goods transferred remains in the closing inventory of Transferee Department,
then the creation of “Provision for Unrealised Profit” is not required.

At Cost plus Profit Transferor Department transfers goods/services to Transferee Department at a value
higher than the Cost. Hence, it is referred as ‘Cost plus Profit’.
Departments which produce or render intermediate goods/services usually follows this
method to ensure that the Transferor Department gets due credit (in the form of profit-
booking) out of such transfer.
If part of goods transferred remains in the closing inventory of Transferee Department,
then the creation of “Provision for Unrealised Profit” is required.
At Normal Selling Transferor Department transfers goods/services to Transferee Department at ‘Normal
Price Selling Price’ i.e prevailing Market Price.
Departments which produce or render marketable goods/services usually follows this
method to ensure that the Transferor Department gets due credit (in the form of profit-
booking) out of such transfer.
Actual profit earning capacity remains undisclosed to the stakeholders.
If part of goods transferred remains in the closing inventory of Transferee Department,
then the creation of “Provision for Unrealised Profit” is required.

Steps for calculation of amount of Provision for Unrealised Profit

Step I: Identification of the ‘Value of Transferred Stock’ included in the Closing Stock of the
Transferee Department
Step II: Ascertainment of the Gross Profit Rate (GP Rate) on Sales of the Transferor Department
Step III: Apply the GP Rate to the ‘Value of Transferred Stock’
Provision for Unrealised Profit = Value of Transferred Stock (of Transferor Dept.) × GP Rate(of
Transferee Dept.)
 Accounting of Transfer:
Transactions Journal Entry
On transfer of goods/ services Transferee Department A/c Dr.
To, Transferor Department A/c
Creation of Provision for Unrealised Profit On Closing Stock
General Profit & Loss A/c
To, Provision for Unrealised Profit A/c
On Opening Stock ( in subsequent period)
Provision for Unrealised Profit A/c
To, General Profit & Loss A/c

Illustration 2

A firm has two departments – Raw Materials and Manufacturing. The finished goods are
produced by the Manufacturing Department with raw materials supplied by Raw Materials
department at selling price. Using the following information prepare Departmental Trading
and Profit and Loss Account for the year ended on31st March 2022.

Raw Materials Dept. (`) Manufacturing Dept. (`)

Opening Stock 1,20,000 20,000
Purchases 8,00,000 6,000
Sales 8,80,000 1,80,000
Manufacturing Expenses -- 24,000
Selling Expenses 1,600 800
Raw Materials transferred to Manufacturing Dept. 1,20,000 --
Closing Stock 80,000 24,000
Cost of the closing stock of the manufacturing department consists of 25% for manufacturing
expenses and 75%for raw materials. In the preceding year Raw Materials Department earned
gross profit at the rate of 10%. Salariesof ` 5,000 and Insurance Premium of ` 1,600 are allocated
between the two departments on the basis of sales ratio. Find out the Net Profit of the firm as a
whole.
Solution :
Dr. Departmental Trading and Profit & Loss Account for the year ended
31.3.2022 Cr.

Raw Manufac- Raw Manufac-

Particulars Particulars
Materials turing Materials turing
To, Opening Stock 1,20,000 20,000 By, Sales 8,80,000 1,80,000
To, Purchases 8,00,000 6,000 By, Transfer (Transferred 1,20,000 -
To, Transfer (Received from - 1,20,000 to MF)
RM) By, Closing Stock 80,000 24,000
To, Manufacturing Expenses - 24,000

Raw Manufac- Raw Manufac-

Particulars Particulars
Materials turing Materials turing
To, Gross Profit c/d 1,60,000 34,000
10,80,000 2,04,000 10,80,000 2,04,000
To, Salaries (44:9) 4,150 850 By, Gross Profit b/d 1,60,000 34,000
To, Selling Expenses 1,600 800
To, Insurance Premium 1328 272
(44:9)
To, General P/L A/c 1,52,922 32,078
(Dept. Net Profit
transferred)
1,60,000 34,000 1,60,000 34,000

General Profit & Loss Account for the year ended

31.3.2022 Cr.

Particulars (` ) Particulars (` )
To, Stock Reserve ( WN:1) 1380 By, Departmental Profit & Loss A/c 1,52,922

To, Capital A/c (NP transferred) 1,83,620 Raw Materials Manufacturing 32,078
1,85,000 1,85,000

Working Notes:

1. Unrealized Profit in unsold stock:

Profit rate on transferred goods = GP rate of Raw Materials Dept.

= { Gross profit /( Sales + Transfer)} × 100

= { 1,60,000 / (8,80,000 + 1,20,000) } × 100
= 16%
Value of the goods of Manufacturing dept. included in the Closing stock of Raw Materials
Dept.
 = ` 24,000 × 75% = ` 18,000
Unrealized Profit in Closing Stock = ` 18,000 × 16% = ` 2,880
Value of the goods of Manufacturing dept. included in the Opening stock of Raw Materials
Dept.
= `. 20,000 * 75% = ` 15,000
Unrealised Profit in Opening Stock = ` 15,000 × 10% = ` 1,500
Net Stock Reserve = ` 2,880 – ` 1,500 = ` 1,380

Illustration 3

A & Co. has two departments P & Q. department P sells goods to department Q at normal selling prices.
From the

following particulars, prepare departmental Trading & PL account for the year ended 31.03.2022 and also
ascertain
the net profit to be transferred to Balance Sheet:

Department P Department Q
Particulars
(` ) (` )
Opening stock 5,00,000 NIL
Purchases 28,00,000 3,00,000
Goods from P NIL 8,00,000
Wages 3,50,000 2,00,000
Travelling expenses 20,000 1,60,000
Closing stock at cost to the department 8,00,000 2,09,000
Sales 30,00,000 2,00,0000
Printing & Stationery 30,000 25,000

The following expenses incurred for both the departments were not apportioned between the
departments:
Salaries ` 33,000, advertisement expenses ` 1,20,000,General expenses ` 5,00,000,Depreciation is to be
charged
@30% on the machinery worth ` 96,000.
The advertisement expenses of the departments are to be apportioned in the turnover ratio.
Salaries and depreciation are to be apportioned in the ratio 2:1 and 1:3 respectively. General
expenses are to be apportioned in the ratio 3:1.
 Solution:- A & Co.

Departmental Trading and P/L Account

Dr. for the year ended 31.03.2018 Cr.
Deptt. P Deptt. Q Deptt. P Deptt. Q
Particulars Total (`) Particulars Total (`)
(` ) (` ) (` ) (` )
To, Opening Stock 5,00,000 Nil 5,00,000 By, Sales 30,00,000 20,00,000 50,00,000
To, Purchases 28,00,000 3,00,000 31,00,000 By, Goods 8,00,000
transferred to Q
To, Goods from P 8,00,000 By, Closing Stock 8,00,000 2,09,000 10,09,000
To, Wages 3,50,000 2,00,000 5,50,000
To, Gross Profit c/d 9,50,000 9,09,000 18,59,000
46,00,000 22,09,000 60,09,000 46,00,000 22,09,000 60,09,000
To, Travelling 20,000 1,60,000 1,80,000 By, Gross Profit b/d 9,50,000 9,09,000 18,59,000
Expenses
To, Printing & 30,000 25,000 55,000
Stationery

Deptt. P Deptt. Q Deptt. P Deptt. Q

Particulars Total (`) Particulars Total (`)
(` ) (` ) (` ) (` )
To, Salaries (2:1) 2,20,000 1,10,000 3,30,000
To, Advertisement 72,000 48,000 1,20,000
Expenses (3:2)
To, General 3,75,000 1,25,000 5,00,000
Expenses (3:1)
To, Depreciation 7,200 21,600 28,800
(1:3)
To, Net Profit c/d 2,25,800 4,19,400 6,45,200
9,50,000 9,09,000 18,59,000 9,50,000 9,09,000 18,59,000
To, Provision for 38,000 By, Net Profit b/d 6,45,200
unrealised profit on
closing stock (note
2)
To, Capital A/c (net 6,07,200
profit transferred)

Working notes:
1. Gross profit ratio of department P = ` 9,50,000/` (30,00,000 + 8,00,000) × 100 = 25%
2. Proportionate P department’s stock in department Q
(Purchase from department P/total purchases of department Q) × total stock of department Q
= ` (8,00,000/11,00,000) × ` 2,09,000 = ` 1,52,000
 Unrealised profit = 25% of ` 1,52,000 = ` 38,000

Illustration 4
A Ltd. manufacturing electronic components operates with two departments. Transfer made
between the departments of both purchased goods and manufactured finished goods. Goods
purchased are transferred at cost and manufactured goods are transferred only at selling price as
is the case with open market.
Transactions for the year ended Mar. 31, 2022 are given below:

Particulars Dept. X (`) Dept. Y (`)

Opening Stock 20,000 15,000
Sales 1,90,000 1,35,000
Wages 12,500 7,500
Purchases 1,00,000 80,000
Closing stock:
Purchased goods 2,000 5,000
Manufactured goods 7,000 8,000

The following were the transfers from Dept. X to Dept. Y: Purchased goods ` 6,000 and finished
goods ` 20,000; and from Dept. Y to Dept. X: Purchased goods ` 5,000 and finished goods `
35,000. Stocks were valued at cost tothe department concerned. It is estimated that the closing
stock of manufactured goods of Dept. Y consists of 20%for goods received from Dept. X.
You are required to prepare Departmental Trading Account and A Ltd.’s Trading Account for the year ended
Mar.
31, 2022. Also show the reconciliation of the profits ascertained from these accounts.

Solution :
A Ltd.

Departmental Trading Account

Dr. for the year ended 31.3.2022 Cr.
Particulars X (` ) Y (` ) Particulars X (` ) Y ( `)
To, Opening Stock 20,000 15,000 By, Sales 1,90,000 1,35,000
To, Purchases 1,00,000 80,000 By, Transfer [Goods sent]:
To, Transfer [Goods received]: Purchased goods 6,000 5,000
Purchased goods 5,000 6,000 Finished goods 20,000 35,000
Finished goods 35,000 20,000 By, Closing Stock:
To, Wages 12,500 7,500 Purchased goods 2,000 5,000
To, Departmental Profit [Bal. 52,500 59,500 Manufactured goods 7,000 8,000
Fig.]
2,25,000 1,88,000 2,25,000 1,88,000
 Trading Account
Dr. for the year ended 31.3. 2022 Cr.

Particulars (`) Particulars (`)

To, Opening Stock [20,000 + 15,000] 35,000 By Sales [1,90,000 + 1,35,000] 3,25,000
To, Purchases [1,00,000 + 80,000] 1,80,000 By Closing Stock:
To, Wages [12,500 + 7,500] 20,000 Purchased goods [2,000 + 5,000] 7,000
To, Gross Profit [Bal. Fig.] 1,11,110 Manufactured goods[WN: 1] 14,110
3,46,110 3,46,110

Reconciliation of Profits:
The departmental profits ascertained from the Departmental Trading & P/L A/c and the company’s
Gross Profit
determined from the Company’s Trading A/c can be reconciled as under:
Gross Profit of the company = Profit of Dept. X + Profit of Dept. Y – Unrealised profit in Unsold stock
= ` 52,500+ ` 59,500 – ` (490+400) = ` 1,11,110

Working Notes:
1. Value of closing stock of manufactured goods:

Dept. X (`) Dept. Y (`)

‘Profit rate of the transferor’on ‘transferred goods’
Gross Profit
× 100
Sales + Transfer of Finished Goods
Value of ‘transferred goods’ included in closing ` 1,400 ` 1,600
stock [7,000 × 20%] [8,000 × 20%]
Less: Unrealised profits included in closing ` 490 ` 400
stock [1,400 × 35%] [1,600 × 25%]
[Transferred goods × Profit rate of transferor]
Total cost of closing stock of manufactured goods = [7,000 + 8,000] – [ 490 + 400] = ` 14,110
 Illustration 5
Samudra & Co. a partnership firm has three departments viz. K, L, M which are under the charge of the
Partners
B, C and D respectively. The following Consolidated P&L Account is given below :

Dr. Profit and Loss

Account Cr.
Particulars (`) Particulars (`)

To, Opening Stocks (Note i) 81,890 By, Sales (Note vii) 4,00,000
To, Purchases (Note ii) 2,65,700 By, Closing Stocks (Note viii) 89,000
To, Salaries and Wages 48,000 By, Discounts Received (Note x) 800
(Note iii)
To, Rent Expenses (Note iv) 10,800
To, Selling Expenses (Note v) 14,400
To, Discount Allowed (Note v) 1,200
To, Depreciation (Note vi) 750
To, Net Profit for the year 67,060

4,89,800 4,89,800
From the above account and the following additional information, prepare the Departmental
P&L Account for the year ended 31st March, 2013.
(i) Break up of Opening Stock Department wise is: K - ` 37,890; L - ` 24,000 and M - ` 20,000.
(ii) Total Purchases were as under: K - ` 1,40,700; L - ` 80,600; M - ` 44,400.
(iii) Salaries and Wages include ` 12,000 wages of Department M. The balance Salaries
should be apportioned to the three departments as 4:4:1.

(iv) Rent is to be apportioned in the ratio of floor space which is as 2:2:5.

(v) Selling Expenses and Discount Allowed are to be apportioned in the ratio of Turnover.
(vi) Depreciation on assets should be equally charged to the three departments.
(vii) Sales made by the three departments were: K - ` 1,80,000; L - ` 1,30,000 and M - ` 90,000.
(viii) Break up of Closing Stock Department wise is: K - ` 45,100; L - ` 22,300 and M - `
21,600. The Closing Stock of Department M includes ` 5,700 goods transferred from
Department K. However, Opening Stockdoes not include any goods transferred from
other departments.
(ix) Departments K and L sold goods worth ` 10,700 and ` 600 respectively to Department M.
(x) Discounts received are traceable to Departments K, L and M as ` 400; ` 250 and ` 150 respectively.
(xi) Partners are to share the profits as under: (a) 75% of the Profits of Departments K, L and M
to the respective Partner in Charge, (b) Balance Profits to be credited as 2:1:1.
 Solution:

Dr. Departmental P&L Account for the year ended 31st March,
2022 Cr.

Particulars K (` ) L (`) M (` ) Particulars K (` ) L (`) M ( `)

To, Opening Stock 37,890 24,000 20,000 By, Sales 1,80,000 1,30,000 90,000
To, Purchases 1,40,700 80,600 44,400 By, Transfer 10,700 600 —
To, Inter-Dept Trf — — 11,300 By, Closing Stock 45,100 22,300 21,600
To, Wages — — 12,000
To, Gross Profit c/d 57,210 48,300 23,900
2,35,800 1,52,900 1,11,600 2,35,800 1,52,900 1,11,600
To, Salaries (4:4:1) 16,000 16,000 4,000 By, Gross Profit b/d 57,210 48,300 23,900
To, Rent (2:2:5) 2,400 2,400 6,000 By, Discounts 400 250 150
To, Selling Exp 6,480 4,680 3,240 Received

To, Disc. (18:13:9) 540 390 270

To, Depreciation 250 250 250
To, Net Profit c/d 31,940 24,830 10,290

57,610 48,550 24,050 57,610 48,550 24,050

Computation of Stock Reserve

From the above profits, Stock Reserve should be eliminated on the Closing Stock.
 GP Rate in Department K = `(57,210 × 100) / `1,90,700 = 30%.
 Stock Reserve = 30% on ` 5,700 = ` 1,710.

Profit and Loss Appropriation Account Cr.

Particulars (`) Particulars (`)

To, Stock Reserve 1,710 By, Profit b/d 67,060

To, Profits transferred to Capital: (31,940 + 24,830 + 10,290)
B : 75% of 31,940 23,955
C : 75% of 24,830 18,623
D : 75% of 10,290 7,718 50,296
To, Balance profits trfd in 2: 1: 1
B : 50% of 15,054 7,527
C : 25% of 15,054 3,763
D : 25% of 15,054 3,764
(bal.fig) 15,054
67,060 67,060