DEPARTMENTAL ACCOUNTS

SECOND TERM SCHEME OF WORK FOR SS 2 FINANCIAL ACCOUNTING LESSON NOTE

 

SCHEME OF WORK WITH WEEKLY LESSON NOTES FOR SS 2 SECOND TERM FINANCIAL ACCOUNTING

 

 

SUBJECT :

FINANCIAL ACCOUNTING

 

CLASS :

SS 2

 

TOPIC :

DEPARTMENTAL ACCOUNTS

 

WEEK  :

WEEK 9

 

 

PREVIOUS LESSON :

Joint Venture Accounts

 

 

 

 

 

CONTENT

Meaning of Departmental Accounts

Expenses and Apportionment

Final Accounts 

MEANING OF DEPARTMENTAL ACCOUNTS

Usually in a large organizations, the operations is divided into separate departments. This is because such organizations have a large volume of transactions coupled with a wide range of lines of product and as such finds it convenient and for accounting purpose to separate or divide its operations into different departments. This affords the organization easy operations and accountability.

In departmentalized organizations, the accounting process entails keeping separate journal and ledger books for each of the departments such as separate cashbook separate purchases and sales books, separate stocks, separate returns and personal ledgers e.t.c.

At the end of the financial year, the accountants bring together the separate journal and ledger books to integrate, compare and determine the department that performs better than the other (see final accounts).

FINAL ACCOUNTS OF A DEPARTMENTALIZED ENTERPRISE

The trading, profit and loss accounts of each of the departments in a departmentalized organization are  drawn separately but in a combined format called DEPARTMENTAL, TRADING, PROFIT AND LOSS ACCOUNT.

The aim of departmental, trading, profit and loss account is to compare trading result and to assist the owner of the business in formulating policies, having known the departments that perform better and those that perform worse.

NB: The Balance sheet follows normal procedure: not in a combined format. 

Format 

Departmental Trading, Profit and loss Account for the 

year ended 31st Dec. 19xx

            A    B    C    Total            A    B    C    Total

            N    N    N      N            N    N    N      N

Opening stock    x    x    x      x        Sales        x    x    x        x

Add purchases    x    x    x      x        Returns I.R    x    x    x        (x)

Inter dept. T/f    x    x    x      –   

            X    x    x      x

Less clo. Stock    (x)    (x)    (x)      (x)

Cost of sales        x    x    x      x

Gross profit c/d    x    x    x             x

            X    x    x      x            x    x    x        x 

Expenses                        G/P b/d    x    x    x        x

Wages & Salaries    x    x    x        x    Dis. Rec.    x    x    x        x

Rent            x    x    x        x

Commission        x    x    x        x

Depreciation        x    x    x        x

Motor expenses    x    x    x        x

Net profit c/d        x    x    x              x

            X    x    x        x            x    x    x          x

INTER DEPARTMENTAL TRANSFER AND APPORTIONMENT OF EXPENSES 

Inter Departmental Transfer: Sometimes goods purchased by one department may be transferred to another department by reason of sales and such purchases transferred is deducted from the department giving it out and is added to the department receiving it. 

Apportionment of Expenses: Expenses are usually not separated to reflect expenses incurred by each department. As a result of this, there is need for apportionment (i.e division).  Expenses must therefore be adjusted and then apportioned for each of the departments.

Methods 

1. Turnover Basis: This is the use of sales (i.e Turnover as a basis of sharing (i.e sharing ratio).
2. Floor Space Basis: This uses the area of floor space occupied as the basis of sharing i.e sharing ratio.
3. Number of Articles Sold Basis: Ratio used is the items sold.
4. Direct Analysis Basis: Ratio used here is specified.
5. Equality Basis: The ratio used here is the number of departments existing.

Summary

A departmental account refers to a specific accounting record that records financial transactions related to a particular department of an organization. It provides a detailed view of the financial performance of a specific department, including its revenues, expenses, and profits or losses.

Here are four reasons why organizations separate their operations into different departments:

1. Specialization: Departments allow employees to specialize in specific functions, leading to higher productivity and efficiency. For example, a sales department can focus solely on selling products or services, while a production department can focus on manufacturing those products or services.
2. Control: Departments can help an organization maintain control over its operations by providing a clear chain of command and accountability. Each department has its own manager who is responsible for the performance of their department and can make decisions based on their expertise.
3. Resource Allocation: Departments can assist organizations in allocating resources to the most effective areas. For example, an organization can invest more resources in a department that generates the most revenue or has the highest potential for growth.
4. Coordination: Departments allow an organization to coordinate its activities across different functions. For instance, a marketing department can work with a sales department to create effective marketing campaigns that generate more revenue for the organization

EVALUATION

1. What is departmental account?.
2. State four reasons why organizations separate their operations into different departments.

Objective Questions

1. What is a departmental account? a) A record of financial transactions related to a specific department b) A report on the overall financial performance of an organization c) An analysis of market trends in a particular industry d) A record of employee salaries and benefits
2. Why do organizations separate their operations into different departments? a) To promote specialization and efficiency b) To reduce the workload of managers c) To centralize decision-making power d) To minimize the need for employee training
3. Which of the following is not a reason for separating operations into different departments? a) Specialization b) Coordination c) Cost reduction d) Control
4. How can departmental accounts help an organization allocate resources? a) By identifying areas where expenses can be reduced b) By providing a clear view of each department’s financial performance c) By minimizing the need for financial analysis d) By providing a summary of the organization’s overall financial performance
5. What is the role of a departmental manager? a) To oversee the overall financial performance of an organization b) To manage a specific department’s operations and performance c) To coordinate between different departments d) To provide strategic direction to the organization
6. What is a disadvantage of separating operations into different departments? a) Reduced efficiency and productivity b) Increased communication and coordination challenges c) Limited opportunities for employee specialization d) Greater difficulty in tracking financial performance
7. How can departmental accounts help an organization monitor its financial performance? a) By providing a summary of the organization’s overall financial performance b) By identifying areas where expenses can be reduced c) By providing a detailed view of each department’s financial performance d) By minimizing the need for financial analysis
8. Which of the following is a benefit of separating operations into different departments? a) Reduced coordination and communication challenges b) Greater opportunities for employee specialization c) Reduced need for employee training d) Decreased control over operations
9. What is the main reason why organizations promote employee specialization? a) To increase the workload of employees b) To increase overall productivity and efficiency c) To minimize the need for coordination between departments d) To reduce employee turnover
10. Which of the following is not a reason why organizations separate operations into different departments? a) To promote specialization and efficiency b) To centralize decision-making power c) To coordinate between different departments d) To minimize the need for financial analysis

 

ILLUSTRATION 

Below is the trial balance of Akinbode Electronic shop for the year end 31st December, 2006.

                                N                N

Sales: Dept E                                    30,000

          Dept F                                    20,000

Stock (1/1/2006): Dept E                      800

          Dept F                      750

Purchases: Dept E        22,000

        Dept F        18,500

Commission                          1,500

Salaries                                800

Insurance premium                      1,000

Stationery                              450

Discount allowed                          100

Discount received                          350

Sundry expenses                          110

Stock at close: Dept E                      1,100

              Dept F                              900

NOTE

1. The total floor area occupied by each departments is Dept: E (2/5) 

    F (3/5)

1. Apportionment basis are:

1. Commission, discount allowed – sales ratio
2. Discount received – purchases ratio
3. Insurance – floor area
4. Other – equal apportionment 

Solution 

AKINBODE’S DEPARTMENT TRADING, PROFIT AND LOSS ACCOUN FOR THE YEAR END 31SY DEC. 2006

                DEPT E    DEPT F            DEPT E    DEPT F

Stock (1/1/2006)        800            750    Sales        30,000        20,000

Purchases            22,000    18,500

Cost of goods avail.        22,800    19,250

Less stock (31/12)        (1,100)      (900)

Cost of sales                    21,700    17,350

Gross profit c/d        8,300      2,650

                30,000    20,000                30,000        20,000

Expenses                            G/P b/d      8,300      2,650

Commission            900        600    D/R            190        160

Salaries    400              400

Insurance                400        600

Stationeries                 225        225

Discount allowed              60          40

Sundry expenses              55          55

Net profit              6,450        890

                  8,490      2,810              8,490              2,810       

Apportionment Basis

1. Sales Ratio

    Dept. E: 30,000:        Dept. F: 20,000        =    50,000

    =    30,000/50,000        =    20,000/50,000

1. Purchases Ratio

    Dept. E: N22,000        Dept. F: 18,500    =    40,500

    = 22.000/40.500        =    18,500/40,500

1. Floor area already given Dept. E 2/5; Dept. 3/5
2. Other expenses = equally = (÷ 2) or 50%; 50%

Evaluation 

1. Discuss the term inter-departmental transfer.
2. Explain any four bases of apportionment of common expenditure in a profit and loss account of a department store.

Summary

1. Errors that would affect the agreement of the trial balance: a) Errors of omission: transactions that were not recorded in the books of accounts b) Errors of commission: incorrect entries made while recording transactions c) Errors of principle: transactions recorded in the wrong account d) Errors of original entry: incorrect amounts entered in the books of accounts e) Errors of reversal: transactions recorded with the wrong debit/credit
2. Three classifications of ledger accounts: a) Personal accounts: accounts related to individuals, such as customers or suppliers b) Real accounts: accounts related to assets or liabilities, such as land or loans c) Nominal accounts: accounts related to expenses or revenue, such as salaries or sales
3. Ten accounts found in the nominal ledger: a) Sales b) Rent c) Salaries d) Advertising e) Insurance f) Utilities g) Interest expense h) Depreciation i) Cost of goods sold j) Income tax expense
4. The purpose of departmental accounts: Departmental accounts are used to track the financial performance of individual departments within an organization. They provide a detailed view of each department’s revenue, expenses, and profits or losses, allowing the organization to identify areas for improvement and allocate resources effectively
5. Six items each found in the asset and liability sides of the balance sheet of a sole trader:
   Assets:
   a) Cash and cash equivalents
   b) Accounts receivable
   c) Inventory
   d) Property, plant, and equipment
   e) Prepaid expenses
   f) Investments

   Liabilities:
   a) Accounts payable
   b) Loans payable
   c) Accrued expenses
   d) Taxes payable
   e) Unearned revenue
   f) Long-term debt

 

READING ASSIGNMENT 

1. Essential Financial Accounting by O.A. Longe page 160-171
2. Comprehensive Accounting for S.S. by J.U. Anyaele

Objective Questions

1. What is the purpose of the trial balance? a) To identify errors in the books of accounts b) To record financial transactions c) To calculate the organization’s profits and losses d) To provide a summary of the organization’s financial position
2. Which of the following is a type of ledger account? a) Nominal account b) Balance sheet account c) Income statement account d) Asset account
3. What is the purpose of the balance sheet? a) To provide a summary of the organization’s profits and losses b) To calculate the organization’s net income c) To show the organization’s financial position at a specific point in time d) To show the organization’s revenue and expenses over a period of time
4. Which of the following is an example of a current asset? a) Land b) Buildings c) Equipment d) Inventory
5. Which of the following is an example of a long-term liability? a) Accounts payable b) Short-term loans c) Long-term loans d) Accrued expenses
6. What is the purpose of the income statement? a) To show the organization’s financial position at a specific point in time b) To provide a summary of the organization’s profits and losses c) To calculate the organization’s net income d) To show the organization’s revenue and expenses over a period of time
7. Which of the following is an example of a revenue account? a) Salaries b) Advertising c) Rent d) Sales
8. Which of the following is an example of a contra account? a) Accumulated depreciation b) Accounts receivable c) Inventory d) Prepaid expenses
9. What is the purpose of the cash flow statement? a) To provide a summary of the organization’s profits and losses b) To show the organization’s financial position at a specific point in time c) To show the organization’s revenue and expenses over a period of time d) To show the organization’s cash inflows and outflows over a period of time
10. Which of the following is an example of a current liability? a) Accounts payable b) Long-term loans c) Bonds payable d) Notes payable

GENERAL EVALUATION QUESTIONS

1. Explain five errors that would affect the agreement of the trial balance
2. List and explain three classifications of ledger accounts
3. List ten accounts found in the nominal ledger
4. State the purpose of departmental accounts
5. List six items each found in the asset and liability sides of the balance sheet of a sole trader

      

WEEKEND ASSIGNMENT

Use the information provided below to answer question 1 – 4

WB LTD is departmentalized as follows: 

                        DEPARTMENT

                W        X        Y        Z

Purchases                625,000    375,000    125,000    325,000

The company use purchases figure to apportion the following expenses to the various departments’ expenses: 

                                Amount

                                    N 

Commission paid                          9,000

Salaries                                60,000

General expenses                        20,000

Insurance                                   1,000

1. What is the proportion of commission paid to be charged to dept W? 

    (a) N3,879 (b) N,2328 (c) N 2,017 (d) N776

2. How much of the commission paid shall be charged to dept Z? (a) N 431 (b) N 776 

    (c) N 2,017 (d) N 2,328

3. What is the proportion of salary to be charged to dept X? (a) N25,862 

    (b) N15,517 (c) N13,448 (d) N5,173

4. What is the proportion of general expenses to be charged t dept “Y” 

    (a) N8,621 (b) N5,172 (c) N1,724 (d) N776

5. Insurance premium on business premises should be apportioned on the basis of (a) sale 

    (b) purchases (c) carriage outwards (d) floor space occupied per department 

THEORY

1. List six items of expenses and their basis of apportionment into departments.
2. State and explain four advantages of department accounts.