Meaning of Departmental Accounting
Departmental accounting is a system of accounting which maintains a separate book of account for every department or branch of a business enterprise. It is one where accounts are prepared and maintained for different departments of an organization on an individual basis for evaluating their results in a fair manner. These individual books of account are then consolidated together with accounts of head office for preparation of financial statements of business. Departmental accounting aims at recording all the expenses and revenues of each department in a separate book of accounts. It enables in measuring the profitability of every branch and detect if any department is underperforming than their capability.
Such accounting information system is suitable for organization operating in diversified range of activities. Departmental accounting is an efficient tool for monitoring the expenses and performance of business where several products are produced by different branches under same roof. For example, a textile industry may be producing many fabrics such as woolen, cotton and jute.
Concept of Departmental Accounting
Departmentalization is very beneficial for large scale organization for managing their activities and attainment of desired goals. Good departmentalization enables firms to easily identify their most crucial branches playing more important role in achieving results. It enables in bringing all necessary adjustments from time to time in case of any variation by finding out performance of each department. Departmental accounting is more favorable for these type of large scale firms than a single centralized accounting system. Single accounting system fails to properly account for divisional performance and therefore comparison of results at department level can’t be made. Companies implementing departmental accounting are easily able to categorize their departments into well performing, average performing and moderate performing units. This type of accounting assist managers in formulating effective policies.
Objectives of Departmental Accounting
Main objectives of departmental accounting are as given below: –
- Evaluation of individual performance of branches which facilitates in doing comparison of results.
- Detects financial position of every department in organization.
- Formulation of proper plans and strategies after knowing results of each branch.
- Calculation of remuneration and commission of managers of every department after knowing result of operations.
- Deciding appropriate actions after measuring the performances of all divisions.
- Assist in cost control by providing full detail information about business organization.
- Efficient management of cost of all departments by proper allocation of cost to various departments.
- Promotes healthy competitive spirit among distinct branches that leads to enhance the profitability.
- Assist in taking decisions related to expansion and shutting down of business departments in accordance to their results.
Methods of Departmental Accounting
There are two methods that are used in departmental accounting: –
- Where a separate set of books is maintained for every department.
- Where all departmental accounts maintain columnar-wise collectively.
Where individual set of books is maintained
It is method under which every branch of an organization is regarded as separate unit and therefore individual book of accounts are prepared and maintained for every unit. At the end, financial result of every department is calculated and consolidated to find the overall performance and net result of whole organization.
This method of departmental accounting involves huge costs and is preferred only by large scale organizations or where is required by the law. Companies involved in insurance business are the one which are compulsorily required to implement this system of accounting.
Where all departmental accounts are maintained columnar-wise collectively
Under this technique of departmental accounting, accounts of all branches are maintained collectively in columnar form by central accounts department. In this method for every department a departmental trading and profit and loss account is opened in columnar way altogether. There is a separate column for “Total” for finding out the results of different departments both on individual and collective basis. Balance sheet is however prepared in a combining form.
For incorporation of purchase and sale of goods, a subsidiary book of accounts is prepared with different columns for different departments. Various subsidiary books prepared are Purchase book, Sales book, Purchase return and Sales return book. Cash book with separate columns of cash purchase and cash sale is also maintained in case of large volumes of purchase and sales done on cash basis.
Principles of Departmental Accounting
Final accounts of departmentalized organization are prepared keeping in mind the following principles: –
- Determination of gross profit or loss and net profit or loss of every unit of business should be done separately before taking total amount to balance sheet or appropriate account of organization.
- Bases of appropriating gains and losses to each and every unit should be given fairly.
Advantages of Departmental accounting
Most significant advantages of departmental accounting are described in points given below: –
- Facilitates interdepartmental comparison:-Departmental accounting is one which enables managers in doing a performance comparison of various departments of business. A separate book of accounts is prepared for every unit which records revenue and expenses of these units on an individual basis. Profit is calculated and compared with one another for determining their performance level.
- Formulation of policies:- Formulation of proper plans and policies is an important role played by departmental accounting. Managers get detailed information about every unit through the individual book of accounts. They analyse these set of books for determining the efficiency level of various departments. Proper knowledge of every business unit enables them to take proper actions for increasing profitability.
- Assist in Expansion and Shut down decisions:- Departmental accounting plays an inefficient role in deciding the expansion and shutting down of different departments of an organization. Managers through an individual set of books are able to detect which units have a more important role in business operations and which one plays the least role. They can easily decide on the basis of results that which units should be expanded further and which one should be closed.
- Reveal the success or failures of units:- This accounting determines the success rate and failure of every department within the organization. Every expense and income of these departments are properly recorded for calculating its real profitability. Amount of revenue generated by these units gives a clear idea about the one that is successful in their role and one that fails to meet their goals.
- Benefits to Auditors and Investors:- It supplies all revenant information in a correct manner about each unit of business to auditors and investors. Auditors can easily access to the account of each individual unit for knowing all expenses and revenues and thereby enables them in verifying the correctness of financial statements. Investors can get a clear view of portability and overall value of an organization.
- Determine managers commission:- Departmental accounting assist in the fair calculation of manager’s commission working within different departments of the business. Commissions are paid to managers on the basis of profit earned by their respective departments. Proper accounts that are maintained separately for every unit yield right amount of their profit levels.
- Promote competitive spirit:- It promotes a sense of completive spirit among all staff working within an organization. All operations of each business unit is properly monitored under this system of accounting. Team members are rewarded on the basis of performance of their departments which is revealed by the departmental book of accounts. This motivates staff to work efficiently for improving the overall performance.
- Enhance profitability:- Departmental accounting has an efficient role in increasing the profitability of the business organization. This system of accounting closely monitor every aspect of cost and revenues of organization related to various units for avoiding any errors and frauds. It ensures that all resources are efficiently utilized with minimum wastage. These separate account books assist managers in determining performance level from time to time and taking corrective actions which leads to raising the profit level.