Principles of Accounting: Introduction to Departmental Accounts

• It is customary to split a large business into various departments
• For example large retail shops like Pick n’ Pay and OK
• A shop might have:
  • A furniture department e.g. kitchen tables and chairs
  • Home electrical e.g. irons and fridges
  • Refrigerated foods
  • Fruit and Veggies
  • Liquor
  • Cleaning
  • Foodstuffs etc
• It is entirely up to the business in question how it wants to organize itself into departments
• In anycase it might be of interest to management to know how each department is performing
• So in addition to the normal Financial Statements additional Financial Statements can be prepared showing the performance of each department
• Preparation of departmental accounts involve allocating expenses among the various departments

Uses of Departmental Accounts

• Compare the performance of different departments including each department’s past performance
• Make decisions such as close unprofitable departments
• Reward departmental managers and staff according to each’s performance

Apportionment of expenses

• There is nothing really special about preparing departmental accounts when compared to how Financial Statements are prepared
• The sales, stock and purchases figure can be easily established in the real world and are provided in exam questions
• Similarly there are expenses that can easily be attributed to a given department
• There are however expenses that have to be apportioned among the various department
• Apportionment is usually done based on an established rational basis
• For example lighting and cooling expenses can be apportioned based on floor area
• Wages for the restocking lady might be apportioned based on the number of shelves

Statement of Financial Position

• Only a split Income Statement need ever be prepared
• Preparing a split Statement of Financial Position would be not only difficult but stupid
• The result would hardly be useful
• What would be the point or even basis of splitting a business’s non-current assets between departments?
• How would you split the van?
• So the usual Statement of Financial position is created

Interdepartmental transfers

• It is often the case that an item purchased by one department may end up being sold in another department
• In such instances the cost of the item must be deducted from the original department and added to the purchases of the beneficiary department

You can look at an example of how to prepare departmental accounts here.

To access more topics go to the Principles of Accounts Notes.