what are the objectives of departmental accounting?
Answers
Answer:
Departmental stores have many types of stores under a single roof, for example one departmental store may have a cosmetic store, shoe store, stationery store, readymade departmental store, grocery stores, medicines, and many more.
It is essential to know the profit and loss account of each departmental store at the end of the accounting year. However, it can be done by maintaining the department wise Trading & Profit and Loss account.
Objectives of Departmental Accounting
Following are the main objectives of the departmental accounting −
To know the financial position of each and every department separately, it is helpful to make a comparison.
Calculate commission of the managers department wise.
Evaluate performance, planning, and control.
Advantages of Departmental Accounting
Following are the advantages of a department accounting −
It is helpful in evaluating the result of each department.
It helps to know the profitability of each department.
Investors and outsiders may know the detailed information.
It is helpful in making comparison of each expenses (same department) of the different accounting years and different expenses (other departments) of the same accounting year.
Methods of Departmental Account
There are two methods of keeping Departmental Accounts −
Separate Set of Books for each department
Accounting in Columnar Books form
Separate Set of Books for each Department
Under this method of accounting, each department is treated as a separate unit and separate set of books are maintained for each unit. Financial results of each unit are combined at the end of accounting year to know the overall result of the store.
Due to high cost, this method of accounting is followed only by very big business houses or where to do so is compulsory as per the law. Insurance business is one of the best examples, where to follow this system is compulsory.
Accounting in Columnar Books Form
Small trading unit generally uses this system of accounting, where accounts of all departments are maintained together by central accounts department in the columnar books form. Under this method, sale, purchase, stock, expenses, etc. are maintained in a columnar form.
It is necessary that to prepare a departmental Trading and Profit and Loss Account, preparation of subsidiary books of accounts having different columns for the different department is required. Purchase Book, Purchase Return Book, Sale Book, Sales return books etc. are the examples of the subsidiary books.
Explanation:
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Departmental Accounting refers to maintaining accounts for one or more branches or departments of the company. Revenues and expenses of the department are recorded and reported separately. The departmental accounts are then consolidated into accounts of the head office to prepare financial statements of the company.
The departmental stores are the example of large-scale retail selling just under a single roof. Different departments involve in different goods to be sold out. To calculate the net result of the whole organization, full-fledged trading, and profit, and loss account are to prepare. But to evaluate individual department, it will be creditworthy to prepare individual trading and profit and loss account.
For example, a textile mill which is having head office and factory. Separate accounts are maintained for production facilities and then the final results are sent to the head office which then incorporates by the head office in their accounts. Maintenance of separate accounts for each branch of a bank or financial institution also falls under the category of departmental accounting. The bank then prepares its financial statement after consolidating accounts of all branches.
A departmental accounting system is an accounting information system that records the activities and financial information about the department. Departmental Accounting is a vital one for large prosperous business organizations. It controls wastage & misusing, compensates the employee in terms of profit and commission, compares performance and progress of year to year or department to department or similar type of firm to firm.
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