CMA Inter Financial Accounting Group – 1: Departmental Accounting
In this article, we sprinkle on one of the important topic of Financial Accounting of CMA Inter Group – 1 which is Departmental Accounting. So here in this article, you will read about:
i. What the Departmental Accounting is?
ii. Advantages of Departmental Accounting;
iii. Difference between Departmental and Branch Accounting;
iv. Methods of Department Accounts; and
v. Allocation of Department expenses
Let’s dive in the topic starting with understanding what is Department;
A Department is a division or segment established by the parent organization to attain common and specified operational functions. Individually each department is responsible for its profit or loss.
The Department accounts are the set of accounts prepared to evaluate each department or division’s operational performance and trading results. These are prepared at any given time to evaluate the earning capacity and find the operational leakage.
Where a huge business with various trading activities is conducted under one roof, it is generally divided into a number of departments and each department deals with a particular kind of goods or service.
Example 1– a company had two departments, cloth and readymade clothes. The clothes were made by the company itself out of cloth supplied by the cloth department at its usual selling price. However, the overall performance for this type of business depends on departmental efficiency.
Example 2-The Book store sells fiction, non-fiction, and children’s books. The owner knows the overall performance of the store is good and the store is making a profit overall, but he isn’t sure how much profit each of the three segments is making. A departmental accounting system can provide him the information he needs.
As a result, it is desirable to maintain accounts in such a manner that the result of each individual department can be known along with the result as a whole. The system of accounting is known as Departmental Accounting.
A departmental accounting system is an information system that records the financial activities of individual departments in situations where a firm or a company has two or more departments. After all, it would be difficult to assess the performance of an individual department if the financial information of several different departments were put together.
This Accounting System actually helps the proprietors to:
1. Compare the results among the different departments together with their previous results,
2. Formulate policy or take corrective actions in order to extend or to develop the enterprise in the proper line; and
3. Reward the departmental managers on the basis of departmental results.
Watch the video on Departmental Accounting
Advantages of Departmental Accounting:-
1. Individual results of each department can be known i.e. it helps to know whether the department makes a profit or suffers a loss.
2. It helps to compare the performances among all the departments and helps the management to make proper plans of action, policies in order to increase profit after analyzing the results of the operation of various departments.
3. It helps to take a decision on the basis of the results of each department for further investment or disinvestment. It helps to understand which department should be expanded further or which one should be closed down as per the results of the operation.
4. It helps to reward the manager of each department with incentives and remuneration.
5. The trading results of each department may help to assess the performance of each department. The sales of the maximum profit making department may be pushed up by special efforts.
6. The profitability of each department may help the management to taking a decision whether to drop the department or add a new department.
7. The growth prospects of a department can be an evaluation by having a comparison with the other departments.
8. The users of accounting information can be provided with more detailed information like the shareholders, investors, creditors, auditors etc.
9. The overall profits of the organization can be increased by having a friendly competition between different departments.
10. On the basis of the departmental results, department managers and staff can be suitably rewarded. Also, it encourages the management, employees and increases the motivation of the staff as a whole.
11. It helps the management to determine whether the capital invested has been properly utilized or not in every department.
12. It helps to have a comparison of various expenses of each department with the previous period and also with other departments of the same business.
13. It helps to know the efficiency of each department by calculating a stock turnover ratio of each department to disclose the rapid or slow movement of various items of stock.
14. The information provided by departmental accounts may be helpful to the management for future planning and control.
Difference between Departmental accounting and branch accounting is as follows:
|S.No.||DEPARTMENT ACCOUNTING||BRANCH ACCOUNTING|
|1.||Departments are located under the same roof of the main organization.||Branches are located separately in different places from the main organization.|
|2.||All accounts are maintained at one place and departmental trading and profit and loss account is prepared accordingly||In the case of a branch, all branch accounts are kept at Head Office except cash; customer register and stock register are maintained at a branch.|
|3.||Departments are not geographically separated from each other. Thus the problem of allocation of common expenses between different departments arises and it is a tough job.||As branches are geographically separated from each other so there is no need to allocate common expenses between different branches.|
|4.||The problem of conversion of foreign currency into home currency does not arise.||The problem of conversion of foreign figures of a branch may arise at the time of finalization of accounts of the head office.|
|5.||The question of adjustments and reconciliation of accounts does not arise in departmental accounts because there is no central account division.||In the case of an independent branch, some adjustments and reconciliations are required to be done at the end of the year. To find out the net result of organization the reconciliation of branches is the main job.|
|6.||Departmental trading with their head office is conducted under the same roof although each department deals with a separate line of activity.||Branch trading is carried out in different parts of the country under the head office dealing with usually the same line of activity.|
|7.||The accounts maintained are Departmental trading and profit and loss account, General profit and loss account||The accounts maintained are Branch stock account, Branch adjustment account, Branch debtors account, Branch expenses account.|
|8.||These are comparatively less expensive as a small team of accountants can be appointed to maintain the accounts.||Branch accounts are expensive to maintain as it involves a big team of accountants to maintain accounts for each branch.|
Methods of Department Accounts:
The two methods of departmental accounts are:
1. Singular Method –
Under this method of accounting treatment, each department or division is treated like separate establishments and a separate set of accounts is maintained to each department/ division to find out trade efficiency. Accounts of each individual department are independently maintained. The departmental results of all the departments are collected and taken into consideration to find out the overall result of the organisation. This method is also known as an independent method or unitary method.
2. Columnar Method –
It is said to be a consolidation method. Under this method of accounting treatment, common books of accounts are maintained for all the departments of the organization. A Departmental Trading and Profit and Loss Account is prepared for each individual department in a columnar form together with a separate column for ‘Total’ so as to ascertain the individual result of the different departments and also as a whole. But the Balance Sheet is prepared in a combined form.
And in order to include the purchase and sale of goods, the subsidiary books and also the nominal accounts into the ledger must be ruled out with extra columns for each department in arriving at the desired departmental figures to prepare departmental final accounts. If there is a larger volume of cash purchase and cash sales, the Cash Book also must maintain separate columns for cash purchases and cash sales of various departments.
A Trading account in columnar form is prepared to know the department wise gross profit or loss of the concern. Classification may also be done on a function basis in a business-like Production department, Finance department, Purchase department, Sales department, etc.
Allocation of Department Expenses:
1. Some expenses, which are specially incurred for a particular department, may be charged directly to the respective department. For example, hiring charges of transport for the delivery of goods to the client may be charged to the selling and distribution department.
2. Some expenses may be allocated according to their uses. For example, electricity expenses may be divided according to the units used by each department or by sub-meter of each department.
Examples of some expenses which are not directly related to any particular department may be dividing as follows −
1. Cartage Freight Inward expenses may be divided according to the purchase of each department.
2. Depreciation may be divided according to the value of assets employed in each department.
3. Repairs and Renewal Charges of the assets may be divided according to the value of the assets used by each department.
4. Managerial Salaries should be divided according to the time spent by the manager in each department.
5. Building Repair and Insurance, Rents & Taxes, etc.− All the expenses related to the building should be divided according to the floor space occupied by each department.
6. Selling and Distribution Expenses− All the expenses relating to selling and distribution expenses should be divided according to the sales of each department, such as freight outward, salary and commission paid to salesmen, after-sales services expenses, bad debts, and discounts, etc.
7. Insurance of Plant & Machinery− the value of such Plant & Machinery in each department is the basis of the insurance.
8. Employee/worker Insurance− Charges of group insurance should be divided according to the direct wage expenses of each department.
9. Power & Fuel will be allocated according to the working hours and power of the machine.
Read another CMA Inter article on Pension Funds
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Tag- Financial Accounting; Departmental Accounts; Advantages of Departmental Accounting; Accounting System; CMA Inter Financial accounting group -1
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