Illustrations on Preparation of Departmental Trading and Profit and Loss Account including inter Departmental Transfers at Cost Price only

In departmental accounting, a company can operate multiple departments, each of which handles different functions. The preparation of the Departmental Trading and Profit & Loss Account involves separating the income and expenses of each department, and considering inter-departmental transfers at cost price to evaluate the profitability and performance of each department.

Example:

Let’s assume a company has two departments:

1. Department A (Production Department)
2. Department B (Sales Department)

The company also has a set of common expenses that are shared by both departments. Below is the financial information for the year ended March 31st.

Step-by-Step Calculation and Journal Entries:

1. Department A (Production)
   • Department A sends goods to Department B at cost price.
   • The cost of the goods transferred from Department A to Department B is ₹50,000.

Departmental Trading Account for Department A (Production)

Departmental Trading Account for Department B (Sales)

Departmental Profit & Loss Account (Department A – Production)

Departmental Profit & Loss Account (Department B – Sales)

Key Points to Remember:

1. Inter-Departmental Transfers at Cost Price:

   • When goods are transferred from Department A (Production) to Department B (Sales) at cost price, the value of the transferred goods is recorded in both departments as ₹50,000.
   • The transfer is considered a cost to the receiving department and a sale to the sending department. This ensures that the cost price of the goods is maintained in the financial statements.

2. Profit Calculation:

   • The gross profit for each department is calculated based on the sales and cost of goods sold (COGS).
   • In this case, Department A’s gross profit is calculated as ₹35,000 (₹80,000 sales – ₹50,000 cost of goods sold).
   • For Department B, the gross profit is ₹95,000 (₹150,000 sales – ₹50,000 transferred goods cost).
3. Expenses:
   • Both departments incur their respective expenses for running the operations. These expenses are accounted for in the Profit & Loss Account for each department.
   • The net profit for Department A is ₹15,000 (Gross Profit of ₹35,000 – Expenses of ₹20,000).
   • The net profit for Department B is ₹80,000 (Gross Profit of ₹95,000 – Expenses of ₹15,000).

4. Common Expenses Allocation:

   • In this example, we assume the expenses have already been apportioned based on the department’s needs or activities.
   • For a more accurate calculation, the allocation of common expenses such as rent and salaries can be made based on specific department usage or square footage.