DEPARTMENTAL ACCOUNTS

1.0 INTRODUCTION

Big businesses, more especially those in the distributive activities, usually departmentalize themselves for efficiency and effectiveness of operations. Some may divide themselves into units known as subsidiaries or just branches. This Unit discusses the concept, advantages and principles of departmental accounting.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

1. appreciate what Departmental account is and its aim 
2. explain the advantages of using departmental accounts 
3. observe the principles of departmental account 
4. prepare departmental accounts for incorporation into the final accounts. 

3.0 MAIN CONTENT

3.1 Departmental Accounting System

3.1.1 The Concept of Departmental Accounting

Departmentalization enables big firms to determine clearly the areas needing special attention for the achievement of overall objectives. The units or departments needing more funds and more attention than others and the one(s) contributing more toward goal attainment could be identified with good departmentalization. The purpose is basically to find out the performance and capability of the units or departments with a view to making adjustments for the achievement of the firm’s objectives.

Each unit, department or subsidiary is given the free usage of some of the assets of the firm and some responsibilities which can be profit making, revenue generation or cost control. As expenses are incurred by the firm on behalf of all its departments, indirect expenses are to be apportioned to the departments, if each department is to present financial statement or if the statement is to be prepared by the company on departmental basis.

Departmental accounting is about the preparation of final accounts taking into consideration divisional performance before the overall performance. With that system of accounting, companies that departmentalize can easily reach conclusion as to their ‘very well’ performing units, averagely or moderately performing units. Departmental accounting aims at separating the several activities of a business in order to compare results and to assist the proprietors/owners in formulating policies. For example, laundry, catering,… can be required to prepare their accounts separately to deal with each department separately as departmental performance is evaluated

3.2 Advantages of Departmental Accounts

Some of the advantages of departmental accounts are:

1. The gross profit of each department can be ascertained. 
2. Unprofitable departments will be revealed 
3. The result of operations can be used to determine the remuneration of managers of each department. 
4.  The progress of each department can be monitored for appropriate actions to be taken. 

3.3 Principles of Departmental Accounting

Preparation of final accounts of a departmentalized business requires the following:

1. that the gross profit or loss and the net profit or loss of each department be determined separately before taking the total to the appropriate account or the balance sheet of the business; and
2.  that there should be some bases of apportioning gains and expenses to the departments or units of the business and that should be done as fair and equitable as possible. 

Sometimes control accounts have to be resorted to in order to determine the creditors’ or debtors’ value to the business. In any case, as the departmental values are shown, the total figures, for the business as a whole are to be summed up.

SELF ASSESSMENT EXERCISE 3

1. Discuss the two main issues to be taken care of in preparing final accounts of a departmentalized business. 
2. Why should total figures still be shown after departmentalization? 

4.0 CONCLUSION

Departmental account helps in knowing the performance of each department by comparing results of the relevant departments/units within a departmentalized company; this assists the proprietors/owners to know which of the departments/units perform better than others and also helps in deciding whether or not to continue operating some departments by the company.

5.0 SUMMARY

In this Unit, students are sensitized on what departmental accounting system is all about, highlighting its concept, advantages, and principles and the procedures of departmental accounting. Departmental account helps in performance evaluation particularly in organizations having decentralized system.