what is Accounting for department of Activity?

Accounting for department of Activity

Concept

Today's modern life is very mechanical and complex especially in big cities. In this situation, the resident of such cities expects expect all the goods and services under a single roof. The departmental stores are the example of large scale retail selling just under a single roof. Different departments are involved for different goods to be sold out. In other words, when business grows and sells various kinds of goods or provides variety of activities under the same rood, it needs to be split up into a number of departments. These departmentsgenerally found in business of almost all size. A department is usually, a unit of the rest of the business and functions as a physical part of it. Each department is considered a separate profit center though, geographically, each department is an integral part of the rest of the departments.

To calculate the net result of the whole organization, a full fledgling trading and profit and loss account is to be prepared. But to evaluate individual department, it will be credit worthy to prepare individual trading and profit and loss account. Such individual accounts will help to evaluate individual department, then such accounting system is termed as department accounting.

Objectives of accounting for department of activity

Department accounting system is used to calculate operating results i.e., profit or loss of individual department as well as the net result of the whole organization. The main objectives of departmental accounting are:

1. To record income and expenditure of each department.
2. To find out profit or loss of each department.
3. To checkout interdepartmental performance on the basis of trading results.
4. To evaluate the performance of the department with previous period result.
5. To assist the management for making decision to drop an existing department or add a new department
6. To assist management for cost control.

Difference between Branch and Department

Following are the main differences in between branch and department:

Types of accounting Procedures of Departmental Accounting

Departmental accounting can be prepared by using the following two methods:

1. Separate unit method
2. Analytical method

Separate unit method: this is method is used in abig organization which have hugs amount of transactions. Under this method, each and every department prepares their individual books of accounts separately. This method follows the principle of 'departmental trading and profit and loss account. Similarly, at the end of accounting period, consolidated account is prepared to exhibit the consolidated result of the organization. This method is not useful for small organizations.

Analytical method: this method is known as columnar basis method. Under this method, each account constrains individual column for each department. Similarly, various subsidiary books are prepared containing individual column for each department and such subsidiary books make easy to prepare departmental trading and profit and loss account. In other words, under this method, it is convenient to prepare departmental trading and profit and loss account using columnar or analytical purchase day book and sales day book for recording credit purchase and credit sales of each department and so as other subsidiary books. This method is useful, if the numbers of departments are small.

Departmental Trading and profit and loss account

At the end of accounting period, departmental trading and profit and loss account is prepared including individual column for each department on it. Such departmental trading and profit and loss account is prepared by using the following format:

Allocation of Common expenses

Expenses directly related to a particular department can be charged directly to that department. For example, salary of employees of a particular department or bad debts from the sale of a particular department can be charged to the concerned department directly. Similarly, the expenses which have a direct bearing with the sales should be apportioned on the basis of net sales. For example, advertisement expense should be apportioned on the basis of departmental sales to outside customers. But there are some other common or joint indirect expense, which should be apportioned on the most logical basis. The nature of the expenses and nature of the business will determine the basis for apportionment of expenses. The bases for apportionment of some important expenses are given below:

Inter-department Transfer

When a department supplies goods to another department, then it is called inter-department transfer. Since each department is considered as a separate profit center, it is necessary to have separate records for inter-departmental transfer. Generally, the following journal entry is made in the case of such transfer:

Supplying department shows such inter-department transfer on credit side of its Trading account treating them as sales. Similarly, receiving department treats such transfer as purchase and is shown on debit side of its trading account.

Transfer price can be cost based or market based. They are discussed below:

1.      Inter-departmental transfersat cost price

Under cost-based transfer pricing, the price may be based on actual cost, total cost or standard cost. Marginal cost is also sometimes used as a basis of ascertaining transfer price. Standard cost is preferred to actual cost since the inefficiency of one department cannot be passed on to another department. While transferring goods at cost price, no adjusting entry is needed.

• Inter-departmental transfers at selling or market price

When goods are transferred from one department to another at a price higher than its cost price, then it is called inter-departmental transfer at selling price. The accounting treatment of such inter-departmental transfer at selling price is exactly the same as stated above in the case of cost price except with regard to stock at the beginning and at the end of such transferred goods. The amount of profit included on these opening and closing stock is called unrealized profit and that must be adjusted by passing the following some additional adjusting entries.

Adjusting entry for unrealized profit included in closing stock:

Adjusting entry for unrealized profit included in opening stock:

Review of Theoretical concept

Explain inter department transfer.

When a department suppliers goods to another department, then it is called inter-department transfer. Since each department is considered as a separate profit center, it is necessary to have separate records for inter-departmental transfer. Generally, the following journal entry is made in the case of such transfer:

Supplying department shows such inter-department transfer on credit side of its trading account treating them as sales similarly, receiving department treats such transfer as purchase and is shown on debit side of its trading account transfer price can be cost based or market based.

Difference between branch and department.

Following are the main difference in between branch and department: