Method of Departmental Accounting

Departmental Accounting is the practice of maintaining separate financial records for each department within an organization. It allows businesses to track the performance, profitability, and expenses of individual departments, facilitating better decision-making, cost control, and resource allocation. This system is particularly beneficial for organizations with multiple divisions, helping evaluate their contributions to overall business success.

Methods of Departmental Accounting

1. Columnar Method

In this method, the accounts of all departments are maintained in a single set of books. A separate column is allocated for each department under income, expenses, and assets/liabilities. It simplifies the preparation of the final accounts while showing the performance of each department individually.

2. Separate Books Method

Each department maintains its own set of books for recording transactions. At the end of the accounting period, the head office consolidates all departmental accounts to prepare the overall financial statements. This method provides detailed and independent performance data for each department.

3. Allocation of Common Expenses

In both methods, common expenses like rent, utilities, and salaries are allocated to departments based on a rational basis. For example:

• • Floor Area Basis: For rent or maintenance costs.
  • Sales Basis: For selling expenses.
  • Time Spent Basis: For shared administrative expenses.

4. Inter-Departmental Transfers

Transactions involving the transfer of goods or services between departments are recorded at cost or a mutually agreed price. These entries ensure proper credit and charge allocation, avoiding double counting.

5. Departmental Trading and Profit & Loss Accounts

Separate trading and profit & loss accounts are prepared for each department. These accounts highlight the revenue, expenses, and profits attributable to each department, ensuring clarity and performance evaluation.

6. Consolidated Final Accounts

The consolidated accounts represent the overall performance of the organization. After evaluating individual departmental accounts, they are merged to prepare the balance sheet and profit and loss account for the entire business.

Key Considerations

• Accurate allocation of common expenses is crucial for reliability.
• A consistent method of recording inter-departmental transfers should be followed.

• Regular monitoring ensures alignment with organizational objectives.