Meaning of Departmental Account
When an organization operates different segment, each segments is referred to a department. Departmental account aims at separating the several activities of a business, in order to compare results and to assist the proprietor in formulating policies.
The preparation of departmental accounts will show which department is most profitable and may guide in decision making process as to which department must be close down in some organization. Some departments may deliberately run at a loss to attract customers by using cheap prices.
Advantages of departmental account
- The gross profit of each department can be ascertained.
- Unprofitable departments will be revealed
- The result of operation can be used to pay the managers of each department.
- The progress of each department can be monitored.
- Method of apportionment of expenses
The expenses must be apportioned to the departments,the expenses must be adjusted before apportionment . It is sometimes difficult to determine the most accurate and equitable method of apportioning the expenses. The following methods can be used as a basis of apportionment.
Basis of apportionment
- Turnover basis
- Floor space basis
- Number of articles sold basis.
- Direct analysis basis.
- Presentation of final account
The usual method is to set the trading,profit and loss accounts,using separate columns for each department,with an additional column to record the total of all department.
Format of departmental trading profit and loss account
Inter-departmental transfer
The goods purchased by one department may be transferred to another department. In such a situation,the value of purchase must be deducted from the original department while it must be added to the departmental receiving it.
Manager’s commission
There may be difficulty as to the commission to the managers.since the profit is not known and the commission is charged on the profit,reference must be made to the accounting ratio.the formula is given as
Percentage commission/100+percentage commission x profit before commission
Balance sheet
The balance sheet follows the normal procedure.the balance sheet is not usually separated into departmental assets and liabilities except it is stipulated
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