Method of Departmental accounting

28/06/2022 1 By indiafreenotes

Method 1: When Separate Set of Books are kept for each Department

Under this method of accounting, each department is treated as a separate unit and separate set of books are maintained for each unit. Financial results of each unit are combined at the end of accounting year to know the overall result of the store.

As per this method, each department is taken as an independent unit and it makes its own books of the accounts.

  • This method is suitable for large organizations.
  • Separate books from other departments are maintained.
  • The trading results are deposited with the main accountant to make the account of the whole company.
  • It is very less common among the departmental enterprises.
  • This method is very expensive.

Due to high cost, this method of accounting is followed only by very big business houses or where to do so is compulsory as per the law. Insurance business is one of the best examples, where to follow this system is compulsory.

Method 2: When Separate Set of Books are not Maintained

Accounting in Columnar Books Form

Small trading unit generally uses this system of accounting, where accounts of all departments are maintained together by central accounts department in the columnar books form. Under this method, sale, purchase, stock, expenses, etc. are maintained in a columnar form.

It is necessary that to prepare a departmental Trading and Profit and Loss Account, preparation of subsidiary books of accounts having different columns for the different department is required. Purchase Book, Purchase Return Book, Sale Book, Sales return books etc. are the examples of the subsidiary books.

As per this method, no separate records of each department are maintained, rather joint accounts are maintained of all departments. This method is featured as:

  • No separate books are maintained.
  • This method is suitable for small organizations.
  • The whole accounts are kept by central accounts department.
  • The central Accounts department maintain analytical or Columnar sales book, purchases books are maintained.
  • The columnar trading accounts is maintained to calculate the gross profit and to keeping the records to stock.
  • The indirect expenses are apportioned among the departments on sound basis.
  • The columnar profit and loss account is maintained to calculate net profit of each department.
  • The departments kept some records of sales, purchases or direct expenses at their own but not on double entry system.
  • This method is less expensive.