1. Accounting for departments

2. Accounting for departments
If the business has two or more departments, it is important to calculate the contribution made by each department to the business as a whole.

3. Accounting for departments
Departmental final accounts show the performance of each department separately.
Where the accounts show that a department is not making a profit, changes can be made to try to improve the results.

4. Accounting for departments
The main objectives of the accounting for department are:
Providing data about each department in the organisation.
Determining the financial position of each department.
Determining the cooperation between all the department in achieving the organisation’s overall objectives

5. The different transactions for the departments
(1) The purchases and their returns.
(2) The sales and their returns.
(3) The internal transfer between the departments.
(4) The expenses.

6. (1) The purchases and their returns.
(a) cash
Purchases ××××
Department A ××
Department B ××
Department C ××
Cash ××××

7. (1) The purchases and their returns.
(b) on account
Purchases ××××
Department A ××
Department B ××
Department C ××
A/P ××××

8. (1) The purchases and their returns.
At the end of the year:
Trading account ××××
Purchases ××××
Department A ××
Department B ××
Department C ××

9. (1) The purchases and their returns.
(2) The return purchases
A/P ××××
Purchases ××××
Department A ××
Department B ××
Department C ××
Notice that the return purchases deduct from the purchases and the net purchases will appear in the trading accounts

10. (2) The sales and their returns
(a) Cash
Cash ××××
Sales ××××
Department A ××
Department B ××
Department C ××

11. (2) The sales and their returns
(b) On account
A/R ××××
Sales ××××
Department A ××
Department B ××
Department C ××

12. (2) The sales and their returns
At the end of the year:
Sales ××××
Department A ××
Department B ××
Department C ××
Trading account ××××

13. (2) The sales and their returns
(3) The sales return
Sales ××××
Department A ××
Department B ××
Department C ××
A/R ××××
Notice that the return sales deduct from the sales and the net sales will appear in the trading accounts

14. (3) The internal transfer between the departments.
All the transferring are recorded through “transfer account” which will be debited by the good that transferred to one department.
And credited by the goods that transferred from one department.

15. (3) The internal transfer between the departments.
For example:
If the department (A) transferred goods to department (B),
Transferred account (B) ××××
Transferred account (A) ××××

16. (3) The internal transfer between the departments.
Methods of pricing goods transferred
Cost method
Cost plus mark-up method

17. (3) The internal transfer between the departments.
(1) Cost method
All the transferred goods are recorded by cost.
In the records of transferring department
Transfer account ××××
(Transferred department)
Good transferred ××××

18. (3) The internal transfer between the departments.
(1) Cost method
In the records of transferred department
Good transferred ××××
Transfer account ××××
(Transferring department)
The transferred goods not effect on the all company’s accounts.

19. (3) The internal transfer between the departments.
(2) Cost plus mark-up method
All the transferred goods are recorded by cost plus mark-up(profit).
The transferred goods are treated as “sales” in the records of transferring department.
The transferred goods are treated as “purchases” in the records of transferred department.

20. (3) The internal transfer between the departments.
(2) Cost plus mark-up method
In the records of transferring department
Transfer account ××××
(Transferred department)
Sales ××××

21. (3) The internal transfer between the departments.
(2) Cost plus mark-up method
In the records of transferred department
Purchase ××××
Transfer account ××××
(Transferring department)

22. (4) The Expenses. There are three types of expenses:
Direct expense related to each department.
Indirect expense (common) between all the department.
General expenses.

23. (4) The Expenses. Direct expenses related to each department.
They related to each department.
They are easy to be determined.
They should trace to each department.
Examples: The salaries of employees in each department.

24. (4) The Expenses. (2) Indirect expense between all the department.
They include:
(a) Expenses that are easy to allocate between the department.
Such as: electricity and rent.
(b) Expenses that are difficult to allocate between the department.
Such as: manufacturing costs, managerial costs and selling and distribution costs.

25. (4) The Expenses. (3) General expenses.
There is no identifiable base for allocating these expenses.
Examples: the salaries and bonuses of board of directors and the other managerial department.

26. Example 1
Ahmed Company has three departments (A,B,C), the following data were taken form the trial balance of this company at the end of 2009.
Credit Debit
Purchase A B C

27. Credit Debit Sales A B C Salaries A B C Goods transferred (from A to B)

28. Credit Debit
Rents
General expenses
Common Expenses
Additional information:
(1) The transferred method is Cost plus mark-up method and the mark – up is 25%.
(2) Rents are allocated on the basis of the floor area (2:1:2).
Required: Prepare the departmental profit and loss account of Ahmed company for the year ended 2009.

29. Solution
Before preparing P/L account, we should calculate the gross profit as follow:
Gross profit = Sales + purchase returns – purchase – sales return
For department A = – – 0= 60000
For department B = – – 0= 10000
For department C = – – 0= 30000

30. Departmental P/L for the year 2009 (In 000)
A B C Total
Gross Profit
Less:
Salaries (11) (24) (15) (50)
Rent (8) (4) (8) (20)
Net Profit for
each d (18)
General expenses (15)
Common Expenses (10)
Net Profit for the company

31. Example 2
Nangolo Stores has two departments. Department A sells meat, and department B sells fruit and vegetables.
The following balances were taken from the books of Nangolo Stores on 31 October 2007:
Gross profit for the year ended 31 October 2007:
Department A $21700
Department B

32. Expenses for the year ended 31 October 2007:
- Wages of sales assistants
Department A $ 7000
Department B
- Rent $ 3600
- Advertising
- Insurance
- Carriage outwards

33. Additional information :
(1) The sales for the year ended 31 October 2007 were:
Department A $ 60000
Department B
(2) Department A occupies 2/3 of the total store.
(3) The expenses are to be apportioned as follows:
- Rent and insurance : on the basis of the floor area.
- Advertising and carriage outward: on the basis of sales.

34. Required:
Prepare the departmental profit and loss account of Nangolo Stores for the year ended 31 October 2007.

35. Solution Departmental P/L for the year 2007 A B Total
Gross Profit
Less:
Wages (7000) (4700) (11700)
Rent (2400) (1200) (3600)
Adv (900) (300) (1200)
Insurance (600) (300) (900)
Carriage outwards (1200) (400) (1600)
Net Profit (1000)

36. Notice that:
Expenses are apportioned as follow:
A B
- Rent (Floor area) × × 1
- Insurance (F. A.) 900× × 1
Adv (Sales) × ×