Want to know about Departmental Accounts: Definition, Types & Methods in 2024

A business is generally split up into several departments when it sells different types of goods or carries on several activities under the same roof. Such departments are found in businesses of all sizes (particularly in urban areas). A department is generally a physical part of the rest of the business. It should not be assumed that departmental accounts refer only to departmental stores. They refer to the various facets of a business. Each departmental accounts is treated as a separate profit center, though none of the departmental accounts is separated geographically from the rest of the departments.

This type of organizational subdivision creates a need for internal information about the operating results of each departmental accounts. Since different departments may have different rates of growth, profitability, and degrees of risk, managerial decisions regarding pricing, closure, etc. can be made based on such information. Therefore, the various pros and cons of the actions to be taken to increase the overall profitability of the business concern cannot be properly considered until the departmental profits and losses are known.

Advantages of Departmental Accounting

The advantages of departmental accounting are given in the following:

1. The performance of each department can be determined separately based on business trading results. An endeavor may be made to push up the sales of that department which is earning maximum profit.
2. It helps the management to decide whether to drop a department accounts or add a new one.
3.  The growth potential of a department as compared to others can be evaluated.
4. More detailed information can be provided to the users of the accounting information like the shareholders, investors, creditors, etc.
5. Friendly rivalry between different departments may help to increase the overall profit of the organization.
6. Departmental managers and staff can be rewarded properly based on results.
7. It helps the management to determine the justification of capital outlay in each department.
8. It facilitates the comparison of expense items with those in other departments and the previous period.
9. It helps to calculate the stock turnover ratio of each department separately, and thus the efficiency of each department can be revealed.
10. Departmental accounting information also provides a basis for intelligent planning and control.

Methods of Departmental Accounts

To ascertain the departmental profit accurately, it is necessary to identify the different expenses and revenues of each department. The accounting system must be designed in such a manner that it provides maximum information and is simple to operate.

There are two methods of keeping Departmental Accounts

• where separate sets of books are kept for each department, and where accounts
• of all the departments are kept together in columnar books.

Where Separate Set of Books are kept for Each Department

This method of accounting is employed when the size of the organization is very large or the law of the land requires the maintenance of separate books for each department. For example, in India, the general insurance company is required to prepare separate revenue accounts for each type of business, marine, accidents, etc.

Under this method, each department is regarded as a separate unit and accounts are kept independently. At the year’s end, the trading results of all the departments are combined to get the trading results of the organization as a whole. This method is rarely used and is also expensive in operation.

Where Accounts of All Departments Are Kept Together on Columnar

Books When the size of the organization is small, the entire hook-keeping system for the business as a whole is generally kept by a central accounts department.

A department does not maintain a full double-entry book-keeping system of its own, but some records are normally kept regarding purchases, sales, direct expenses, stock within the department, etc. The central accounts department generally maintains an analytical or columnar Purchase and Sales Day Book to distinguish between the purchases and sales of different departments.

After ascertaining the purchases and sales of each department and also the direct expenses incurred, it only requires a departmental closing stock-taking to prepare a Trading Account for each department.

Frequently Asked Questions