DEPARTMENTAL ACCOUNTING



INTRODUCTION: - When a business deals in different finds of articles or services under one roof, it is divided into number of divisions which are known as departments. This is generally done to have smooth and efficient running of business. A department is a physical part of the rest of the business. It is like decentralization of business activities. Each department is given freedom to take decision relation to purchases, pricing, adding of new products ect. The accounting system is so devised as to enable the management to find out turnover, expenses and profit of each department separately.

OBJECTIVES:- When all the divisions of a business are located under one roof and separate trading, profit and loss accounts of various departments of an organization are prepared, the information available there from is helpful to the management to find out relative performance of departments. The following are the objectives of departmental accounting.

2)      To determine the profitability of each department and compare it with previous year’s result and also with the other departments of the same concern.

3)      To provide information regarding which department has high operation expenses so that policy may be formulated to control such expenses.

4)      To help the management in deciding which department shall be expanded to maximize profitability of the business.

5)      To provide information regarding improving efficiency of departments with lower profit or losses.

6)      Which departments are to be closed because of lower sales volume and high operating costs.

7)      When departmental manager’s are to be paid commission on the basis of profit achieved by their department.

8)      To generate information which may be helpful for planning, control, evaluation of their departments.

9)      To help the proprietor in formulating policy to expend the business on proper lines so as to optimize the profits of the concern.


10)   When a business is dealing in different types of goods or services, it is not enough to prepare one trading profit and loss account for the entries business. It may show profit made by the whole business but still there may be loss in some of the departments which reduces the overall profits of the business. Such departments must be closed down. Because of this reason separate trading profit and loss account of each department shall be prepared.

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