CHAPTER 12

DEPARTMENTAL ACCOUNTS
LEARNING OUTCOMES
After studying this Chapter, you will be able to–
❑ Allocate common expenditures of the organisation among
various departments on appropriate basis
❑ Deal with the inter-departmental transfers and their accounting
treatment
❑ Calculate the amount of unrealised profit on unsold inter-
departmental stock-in-hand at the end of the accounting year

© The Institute of Chartered Accountants of India

 12.2 ACCOUNTING

Type of Departments

Dependent Independent

Work independently, have

Have inter-department transfers
negligible transfers

Basis of Allocation of Common

Expenditure among different
Departments

Expenses incurred specially

for each department are Common expenses distributed among
charged. the departments on suitable basis.

Inter-department transfers
(forming part of closing inventory)

Cost plus agreed

Cost Market Price
percentage of profit

No unrealised If Cost  If Cost  Elimination of unrealised

Profit exists Market price Market price profit through

Inventory P & L A/c

© The Institute of Chartered Accountants of India

 DEPARTMENTAL ACCOUNTS 12.3

1. INTRODUCTION
If a business consists of several independent activities, or is divided into several
departments, for carrying on separate functions, its management is usually interested
in finding out the working results of each department to ascertain their relative
efficiencies. This can be made possible only if departmental accounts are prepared.
Departmental accounts are of great help and assistance to the managements as they
provide necessary information for controlling the business more intelligently and
effectively. It is also helpful in readily identifying all types of wastages, e.g., wastage of
material or of money; Also, attention is drawn to inadequacies or inefficiencies in the
working of departments or units into which the business may be divided.

2. ADVANTAGES OF DEPARTMENTAL ACCOUNTING

The main advantages of departmental accounting are as follows:
1. Evaluation of performance: The performance of each department can be
evaluated separately on the basis of trading results. An endeavor may be made
to push up the sales of that department which is earning maximum profit.
2. Growth potential of each department: The growth potential of a department
as compared to others can be evaluated.
3. Justification of capital outlay: It helps the management to determine the
justification of capital outlay in each department.
4. Judgement of efficiency: It helps to calculate stock turnover ratio of each
department separately, and thus the efficiency of each department can be
revealed.

5. Planning and control: Availability of separate cost and profit figures for each
department facilitates better control. Thus, effective planning and control can be
achieved on the basis of departmental accounting information.

Basically, an organisation usually divides the work in various departments, which is

done on the principle of division of labour. Each department prepares its separate
accounts to judge its individual performance. This can improve efficiency of each and
every department of the organisation.

© The Institute of Chartered Accountants of India

 12.4 ACCOUNTING

3. METHODS OF DEPARTMENTAL ACCOUNTING

There are two methods of keeping departmental accounts:
3.1 Accounts of all departments are kept in one book only
To prepare such accounts, it will be necessary first, for the income and expenditure of
department to be separately recorded in subsidiary books and then for them to be
accumulated under separate heads in a ledger or ledgers. This may be done by having
columnar subsidiary books and a columnar ledger.
3.2 Separate set of books are kept for each department
A separate set of books may be kept for each department, including complete stock
accounts of goods received from or transferred to other departments or as also sales.
Nevertheless, even when separate sets of books are maintained for different
departments, it will also be necessary to devise a basis for allocation of common
expenses among the different departments, if an organisation is interested in
determining the separate departmental net profit in addition to the gross profit.

Methods of keeping departmental accounts

Accounts of all departments are kept in Separate set of books are kept for each
one book only department

Income and expenditure of department is Each department maintains separate books

separately recorded in subsidiary books and then including complete stock accounts of goods
accumulated under separate heads in a ledger or received from or transferred to other departments
ledgers. This may be done by having columnar or as also sales. Common expenses need to be
subsidiary books and a columnar ledger. allocated to determine profitability.

4. BASIS OF ALLOCATION OF COMMON

EXPENDITURE AMONG DIFFERENT
DEPARTMENTS
Expenses should be allocated among different departments on a rational basis while
preparing departmental accounts.

© The Institute of Chartered Accountants of India

 DEPARTMENTAL ACCOUNTS 12.5

Individual Identifiable Expenses: Expenses incurred specially for a particular

department are charged directly thereto, e.g., insurance charges of stock held by
the department.
Common Expenses: Common expenses, the benefit of which is shared by all the
departments and which are capable of precise allocation are distributed among the
departments concerned on some equitable basis considered suitable in the
circumstances of the case.
Allocation of Expenses
S. No. Expenses Basis
1. Rent, rates and taxes, repairs and Floor area occupied by each
maintenance, insurance of building department (if given) otherwise
on time basis
2. Lighting and Heating expenses Consumption of energy by each
(e.g., energy expenses) department
3. Selling expenses, e.g., discount, bad Sales of each department
debts, selling commission, freight
outward, travelling sales manager’s
salary and other costs
4. Carriage inward/ Discount received Purchases of each department
5. Wages/Salaries Time devoted to each
department
6. Depreciation, insurance, repairs and Value of assets of each
maintenance of capital assets department otherwise on time
basis
7. Administrative and other expenses, Time basis or equally among all
e.g., salaries of managers, directors, departments
common advertisement expenses, etc.
8. Labour welfare expenses Number of employees in each
department
9. PF/ESI contributions Wages and salaries of each
department
Note: There are certain expenses and income, most being of financial nature, which
cannot be apportioned on a suitable basis; therefore, they are recognised in the combined
Profit and Loss Account, for example, interest on loan, profit/loss on sale of investment,
etc.

© The Institute of Chartered Accountants of India

 12.6 ACCOUNTING

5. TYPES OF DEPARTMENTS
There are two types of departments: Dependent and Independent Departments.
5.1 Independent Departments
Departments which work independently of each other and have negligible inter-
department transfers are called Independent Departments.
5.2 Dependent Departments
Departments which transfer goods from one department to another department for
further processing are called dependent departments. Here, the output of one
department becomes the input for the other department. These transfers may be done
at cost or some pre-decided selling price. The price at which this is done is known as
transfer price. In these departments, unloading is required if the transfer price is having
a profit element. The method of eliminating unrealised profit is being discussed in the
succeeding para.

6. INTER-DEPARTMENTAL TRANSFERS
Whenever goods are transferred from or services are provided by one department to
another, their cost should be separately recorded and charged to the department
benefiting thereby and credited to that providing the goods or services. The totals of
such benefits (inter-departmental transfers) should be disclosed in the departmental
Profit and Loss Account, to distinguish them from other items of expenditure.
6.1 Basis of Inter-Departmental Transfers
Goods and services may be charged by one department to another usually on either
of the following three bases:
(i) Cost,
(ii) Current market price,
(iii) Cost plus agreed percentage of profit.
6.2 Elimination of Unrealised Profit
When profit is added in the inter-departmental transfers the loading included in the
unsold inventory at the end of the year is to be excluded before final accounts are
prepared so as to eliminate any anticipatory yet unrealized (internal) profit included
therein.

© The Institute of Chartered Accountants of India

 DEPARTMENTAL ACCOUNTS 12.7

6.3 Stock Reserve

Unrealised profit included in unsold stock at the end of accounting period is eliminated
by creating an appropriate stock reserve by debiting the combined Profit and Loss
Account. The amount of stock reserve will be calculated as:
Transfer price of unsold stock ×Profit included in transfer price
Transfer price

6.4 Journal Entry

At the end of the accounting year, the following journal entry will be passed for
elimination of unrealised profit (creation of stock reserve):
Profit and Loss Account Dr.
To Stock Reserve
(Being a provision made for unrealised profit included in closing stock)
In the beginning of the next accounting year, the aforesaid journal entry will be
reversed as under:
Stock Reserve Dr.
To Profit and Loss Account
(Being provision for unrealised profit reversed.)
6.5 Disclosure in Balance Sheet
The unsold closing stock acquired from another department will appear on the assets
side of the balance sheet as under: (An extract of the assets side of the balance sheet)
Current assets xxx
Stock xxx
Less: Stock reserve xxx
xxx
Illustration 1
Goods are transferred from Department P to Department Q at a price 50% above cost.
If closing stock of Department Q is ` 27,000, compute the amount of stock reserve.

© The Institute of Chartered Accountants of India

 12.8 ACCOUNTING

Solution
`
Closing Stock of Department Q 27,000
Goods send by Department P to Department Q at a price 50% above
cost
Hence profit of Department P included in the stock will be - 9,000
27,00050
=
150
Amount of the Stock Reserve will be ` 9,000.
Working Note:
Dept P transfers goods to Dept Q at a profit of 50% of cost. Hence, if cost is ` 100/-
the profit = ` 50 and Transfer Price = ` 150. Therefore, the profit of Dept P included in
the stock value of Dept Q is one – third of the sale value
Illustration 2
Z Ltd. has three departments and submits the following information for the year ending
on 31st March, 20X1:

A B C Total (`)
Purchases (units) 6,000 12,000 14,400
Purchases (Amount) 6,00,000
Sales (Units) 6,120 11,520 14,976
Selling Price (per unit) ` 40 45 50
Closing Stock (Units) 600 960 36
You are required to prepare departmental trading account of Z Ltd., assuming that the
rate of profit on sales is uniform in each case.
Solution
Departmental Trading Account for the year ended on 31st March, 20X1
Particulars A B C Particulars A B C
` ` ` ` ` `
To Opening Stock 11,520 8,640 12,240 By Sales 2,44,800 5,18,400 7,48,800
(W.N.4) A- 6120 x 40
B- 11,520 x 45
C- 14,976 x 50

© The Institute of Chartered Accountants of India

 DEPARTMENTAL ACCOUNTS 12.9

To Purchases 96,000 2,16,000 2,88,000 By Closing Stock 9,600 17,280 720

(W.N.2) (W.N.4)
To Gross Profit (b.f.) 1,46,880 3,11,040 4,49,280
2,54,400 5,35,680 7,49,520 2,54,400 5,35,680 7,49,520

Working Notes:
(1) Profit Margin Ratio

Selling price of unit purchased: `

Department A 6,000 x 40 2,40,000
Department B 12,000 x 45 5,40,000
Department C 14,400 x 50 7,20,000
Total Selling Price 15,00,000
Less: Purchase (Cost) Value (6,00,000)
Gross Profit 9,00,000
9,00,000
Profit Margin Ratio =  100 = 60%
15,00,000

(2) Statement showing department-wise per unit Cost and Purchase Cost

A B C
` ` `
Selling Price (Per unit) (`) 40 45 50
Less:Profit Margin @ 60% (`) (24) (27) (30)
Profit Margin is uniform for all depts at 60%
Purchase price per unit (`) 16 18 20
Number of units purchased 6,000 12,000 14,400
(Purchase cost per unit x Units purchased) 96,000 2,16,000 2,88,000
(3) Statement showing calculation of department-wise Opening Stock (in
Units)
A B C
Sales (Units) 6,120 11,520 14,976
Add:Closing Stock (Units) 600 960 36
6,720 12,480 15,012
Less:Purchases (units) (6,000) (12,000) (14,400)
Opening Stock (Units) 720 480 612

© The Institute of Chartered Accountants of India

 12.10 ACCOUNTING

(4) Statement showing department-wise cost of Opening Stock and Closing

Stock

A B C
Cost of Opening Stock (`) 720 x 16 480 x 18 612 x 20
` 11,520 8,640 12,240
Cost of Closing Stock 600 x 16 960 x 18 36 x 20
` 9,600 17,280 720

Illustration 3
Brahma Limited has three departments and submits the following information for the
year ending on 31st March, 20X1:
Particulars A B C Total (`)
Purchases (units) 5,000 10,000 15,000
Purchases (Amount) 8,40,000
Sales (units) 5,200 9,800 15,300
Selling price (` per unit) 40 45 50
Closing Stock (Units) 400 600 700
You are required to prepare departmental trading account of Brahma Limited assuming
that the rate of profit on sales is uniform in each case.
Solution
Departmental Trading Account for the year ended 31st March, 20X1
Particulars A B C Particulars A B C
` ` ` ` ` `
To Opening By Sales 2,08,000 4,41,000 7,65,000
Stock 14,400 10,800 30,000 A-5,200 x 40
(W.N.4) B-9,800 x 45
C-15,300×50
By Closing 9,600 16,200 21,000
stock (W.N.4)
To Purchases
(W.N.2) 1,20,000 2,70,000 4,50,000
To Gross
profit
(b.f.) 83,200 1,76,400 3,06,000
2,17,600 4,57,200 7,86,000 2,17,600 4,57,200 7,86,000

© The Institute of Chartered Accountants of India

 DEPARTMENTAL ACCOUNTS 12.11

Working Notes:
(1) Profit Margin Ratio
Selling price of units purchased: `
Department A (5,000 units х ` 40) 2,00,000
Department B (10,000 units х ` 45) 4,50,000
Department C (15,000 units х ` 50) 7,50,000
Total selling price of purchased units 14,00,000
Less: Purchases (8,40,000)
Gross profit 5,60,000
Gross profit 5,60,000
Profit margin ratio = ×100 =  100 = 40%
Selling price 14,00,000

(2) Statement showing department-wise per unit cost and purchase cost

Particulars A B C
Selling price per unit (`) 40 45 50
Less: Profit margin @ 40% (`) (16) (18) (20)
[Profit margin is uniform for all depts]
Purchase price per unit (`) 24 27 30
No. of units purchased 5,000 10,000 15,000
Purchases (purchase cost per unit x units 1,20,000 2,70,000 4,50,000
purchased)
(3) Statement showing calculation of department-wise Opening Stock
(in units)

Particulars A B C
Sales (Units) 5,200 9,800 15,300
Add: Closing Stock (Units) 400 600 700
5,600 10,400 16,000
Less: Purchases (Units) (5,000) (10,000) (15,000)
Opening Stock (Units) 600 400 1,000
(4) Statement showing department-wise cost of Opening and Closing Stock
Particulars A B C
Cost of Opening Stock (`) 600 х 24 400 х 27 1,000 х 30
14,400 10,800 30,000

© The Institute of Chartered Accountants of India

 12.12 ACCOUNTING

Cost of Closing Stock (`) 400 х 24 600 х 27 700 х 30

9,600 16,200 21,000
Illustration 4
M/s Omega is a departmental store having three departments X, Y and Z. The
information regarding three departments for the year ended 31st March, 20X1 are given
below:

X Y Z
` ` `
Opening Stock 36,000 24,000 20,000
Purchases 1,32,000 88,000 44,000
Debtors at end 15,000 10,000 10,000
Sales 1,80,000 1,35,000 90,000
Closing stock 45,000 17,500 21,000
Value of furniture in each department 20,000 20,000 10,000
Floor space occupied by each department (in sq. ft.) 3,000 2,500 2,000
Number of employees in each Department 25 20 15
Electricity consumed by each department (in units) 300 200 100

The balances of other revenue items in the books for the year are given below:

Amount (`)
Carriage inwards 3,000
Carriage outwards 2,700
Salaries 48,000
Advertisement 2,700
Discount allowed 2,250
Discount received 1,800
Rent, Rates and Taxes 7,500
Depreciation on furniture 1,000
Electricity expenses 3,000
Labour welfare expenses 2,400

You are required to prepare Departmental Trading and Profit and Loss Account for the
year ended 31st March, 20X1 after providing provision for Bad Debts at 5%.

© The Institute of Chartered Accountants of India

 Solution
Departmental Trading & Profit and Loss Account for the year ended 31st March, 20X1
in Books of M/s Omega
Particulars Deptt.X Deptt.Y Deptt.Z Total Particulars Deptt.X Deptt.Y Deptt.Z Total
` ` ` ` ` ` ` `
To Stock (opening) 36,000 24,000 20,000 80,000 By Sales 1,80,000 1,35,000 90,000 4,05,000
To Purchases 1,32,000 88,000 44,000 2,64,000 By Stock (closing) 45,000 17,500 21,000 83,500
To Carriage Inwards 1,500 1,000 500 3,000
To Gross Profit c/d
(b.f.) 55,500 39,500 46,500 1,41,500 ________ _________ ________ ________
2,25,000 1,52,500 1,11,000 4,88,500 2,25,000 1,52,500 1,11,000 4,88,500
To Carriage Outwards 1,200 900 600 2,700 By Gross Profit b/d 55,500 39,500 46,500 1,41,500
To Electricity 1,500 1,000 500 3,000 By Discount received 900 600 300 1,800

© The Institute of Chartered Accountants of India

To Salaries 20,000 16,000 12,000 48,000
To Advertisement 1,200 900 600 2,700
To Discount allowed 1,000 750 500 2,250
To Rent, Rates and 3,000 2,500 2,000 7,500
Taxes
To Depreciation 400 400 200 1,000
To Provision for Bad 750 500 500 1,750
DEPARTMENTAL ACCOUNTS

Debts @ 5% of
debtors
To Labour welfare 1,000 800 600 2,400
expenses
To Net Profit (b.f.) 26,350 16,350 29,300 72,000
56,400 40,100 46,800 1,43,300 56,400 40,100 46,800 1,43,300
12.13
 12.14 ACCOUNTING

Working Note:

Basis of allocation of expenses

Carriage inwards Purchases (3:2:1)
Carriage outwards Turnover (4:3:2)
Salaries No. of Employees (5:4:3)
Advertisement Turnover (4:3:2)
Discount allowed Turnover (4:3:2)
Discount received Purchases (3:2:1)
Rent, Rates and Taxes Floor Space occupied (6:5:4)
Depreciation on furniture Value of furniture (2:2:1)
Labour welfare expenses No. of Employees (5:4:3)
Electricity expense Units consumed (3:2:1)
Provision for bad debts 5% of respective debtors balance

Illustration 5
M/s X has two departments, A and B. From the following particulars prepare the
consolidated Trading Account and Departmental Trading Account for the year ending
31st December, 20X1:
A B
` `
Opening Stock [consisting of purchased goods -at cost] 20,000 12,000
Purchases 92,000 68,000
Sales 1,40,000 1,12,000
Wages 12,000 8,000
Carriage 2,000 2,000
Closing Stock:
(i) Purchased goods 4,500 6,000
(ii) Finished goods 24,000 14,000

© The Institute of Chartered Accountants of India

 DEPARTMENTAL ACCOUNTS 12.15

Purchased goods transferred:

by B to A 10,000
by A to B 8,000
Finished goods transferred:
by A to B 35,000
by B to A 40,000
Return of finished goods:
by A to B 10,000
by B to A 7,000
You are informed that purchased goods have been transferred mutually at their
respective departmental purchase cost and finished goods at departmental market price
and that 20% of the finished stock (closing) at each department represented finished
goods received from the other department.
Solution
M/s X
Departmental Trading A/c for the year ending 31st December, 20X1
Deptt. Deptt. Deptt. Deptt.
A. B A B
` ` ` `
To Stock 20,000 12,000 By Sales 1,40,000 1,12,000
To Purchases 92,000 68,000 By Purchased Goods 8,000 10,000
transferred
To Wages 12,000 8,000 By Finished goods 35,000 40,000
transferred
To Carriage 2,000 2,000 Return of finished 10,000 7,000
Goods
To Purchased By Closing Stock:
Goods
transferred 10,000 8,000 Purchased Goods 4,500 6,000
To Finished 40,000 35,000 Finished Goods 24,000 14,000
Goods
transferred

© The Institute of Chartered Accountants of India

 12.16 ACCOUNTING

To Return of 7,000 10,000

finished
Goods
To Gross profit 38,500 46,000
c/d (b.f.)
2,21,500 1,89,000 2,21,500 1,89,000

Consolidated Trading Account for the year ending 31st December, 20X1
` `
To Opening Stock 32,000 By Sales 2,52,000
To Purchases 1,60,000 By Closing Stock:
To Wages 20,000 Purchased Goods 10,500
To Carriage 4,000 Finished Goods 38,000
To Stock Reserve 2,196
To Gross Profit c/d 82,304
3,00,500 3,00,500

Working note:
Deptt. A Deptt. B
Sale 1,40,000 1,12,000
Add: Transfer 35,000 40,000
1,75,000 1,52,000
Less: Returns (7,000) (10,000)
Net Sales plus Transfer 1,68,000 1,42,000
38,500 46,000
Rate of Gross profit 100 = 22.916% 100 = 32.394%
1,68,000 1,42,000
Closing Stock out of transfer 4,800 2,800
(20% of closing stock)
Unrealised Profit 4,800 × 32.394% = 1,555 2,800 × 22.916% = 641

© The Institute of Chartered Accountants of India

 DEPARTMENTAL ACCOUNTS 12.17

Illustration 6
Department P sells goods to Department S at a profit of 25% on cost and to Department
Q at a profit of 15% on cost. Department S sells goods to P and Q at a profit of 20% and
30% on sales respectively. Department Q sells goods to P and S at 20% and 10% profit
on cost respectively.
Departmental Managers are entitled to 10% commission on net profit subject to
unrealised profit on departmental sales being eliminated. Departmental profits after
charging Manager's commission, but before adjustment of unrealised profits are as
below:
`
Department P 90,000
Department S 60,000
Department Q 45,000

Stock lying at different Departments at the end of the year are as below:

Figures in `
DEPARTMENTS
P S Q
Transfer from P - 18,000 14,000
Transfer from S 48,000 - 38,000
Transfer from Q 12,000 8,000 -
Find out correct Departmental Profits after charging Managers' Commission.
Solution
Calculation of correct Departmental Profits

Department Department Department

P (`) S (`) Q (`)
Profit after charging Manager’s 90,000 60,000 45,000
Commission
Add: Manager’s Commission (1/9) 10,000 6,667 5,000
1,00,000 66,667 50,000
Less: Unrealised profit on Stock (5,426) (21,000) (2,727)
(WN)

© The Institute of Chartered Accountants of India

 12.18 ACCOUNTING

Profit Before Manager’s 94,574 45,667 47,273

Commission
Less: Manager’s Commission 10% (9,457) (4,567) (4,727)
Correct Profit after Manager’s 85,117 41,100 42,546
Commission

Working Notes:

Department P Department S Department Q Total

(`) (`) (`) (`)
Unrealised Profit
of:
Department P - 25/125X18,000 15/115X14,000
=3,600 =1,826 5,426
Department S 20/100X48,000 - 30/100X38,000
=9,600 =11,400 21,000
Department Q 20/120X12,000 10/110X8,000
=2,000 =727 2,727

Illustration 7
M/s. Suman Enterprises has two Departments, Finished Leather and Shoes. Shoes are
made by the Firm itself out of leather supplied by Leather Department at its usual
selling price. From the following figures, prepare Departmental Trading and Profit &
Loss Account for the year ended 31st March, 20X3:
Finished Leather Shoes Department
Department
(`) (`)
Opening Stock (As on 01.04.20X2) 30,20,000 4,30,000
Purchases 1,50,00,000 2,60,000
Sales 1,80,00,000 45,20,000
Transfer to Shoes Department 30,00,000 -
Manufacturing Expenses - 5,00,000
Selling Expenses 1,50,000 60,000
Rent and Warehousing 5,00,000 3,00,000
Stock on 31.03.20X3 12,20,000 5,00,000

© The Institute of Chartered Accountants of India

 DEPARTMENTAL ACCOUNTS 12.19

The following further information are available for necessary consideration:

(i) The stock in Shoes Department may be considered as consisting of 75% of
Leather and 25% of other expenses.
(ii) The Finished Leather Department earned a Gross Profit @ 15% in 20X1-X2.
(iii) General expenses of the business as a whole amount to ` 8,50,000.
Solution
Departmental Trading and Profit and Loss Account
for the year ended 31st March, 20X3
Particulars Finished Shoes Total Particulars Finished Shoes Total
leather leather
(`) (`) (`) (`) (`) (`)
To Opening stock 30,20,000 4,30,000 34,50,000 By Sales 1,80,00,000 45,20,000 2,25,20,000
To Purchases 1,50,00,000 2,60,000 1,52,60,000 By Transfer
to shoes
Deptt. 30,00,000 - 30,00,000
To Transfer from 30,00,000 30,00,000 By Closing 12,20,000 5,00,000 17,20,000
Leather stock
Department
To Manufacturing 5,00,000 5,00,000
expenses
To Gross profit 42,00,000 8,30,000 50,30,000
c/d (b.f.)
2,22,20,000 50,20,000 2,72,40,000 2,22,20,000 50,20,000 2,72,40,000
To Selling 1,50,000 60,000 2,10,000 By Gross 42,00,000 8,30,000 50,30,000
expenses profit b/d
To Rent & 5,00,000 3,00,000 8,00,000
warehousing
To Net profit
(b.f.) 35,50,000 4,70,000 40,20,000
42,00,000 8,30,000 50,30,000 42,00,000 8,30,000 50,30,000

General Profit and Loss Account

Particulars Amount Particulars Amount

(`) (`)
To General expenses 8,50,000 By Net profit 40,20,000
To Unrealised profit (Refer W.N.) 26,625
To General net profit (Bal. fig.) 31,43,375
40,20,000 40,20,000

© The Institute of Chartered Accountants of India

 12.20 ACCOUNTING

Working Note:
Calculation of Stock Reserve
Rate of Gross Profit of Finished leather Department, for the year 20X2-X3
Gross Profit
= x 100 = [(42,00,000)/ (1,80,00,000 + 30,00,000)] x100 = 20%
Total Sales
Closing Stock of Finished leather in Shoes Department = 75%
i.e. ` 5,00,000 x 75% = ` 3,75,000
Stock Reserve required for unrealised profit @ 20% on closing stock
` 3,75,000 x 20% = ` 75,000
Stock reserve for unrealised profit included in opening stock of Shoes dept. @ 15%
i.e. (` 4,30,000 x 75% x 15%) = ` 48,375
Additional Stock Reserve required during the year = ` 75,000 – ` 48,375 =
` 26,625

7. MEMORANDUM STOCK AND MEMORANDUM

MARK UP ACCOUNT METHOD
This method is generally used to have an appropriate control on stock movement
of various departments. Please note that the departments prepare only
memorandum accounts and hence these are just control accounts. Under this
method every department maintains:
• A Memorandum Stock Account which records all stock movements:
opening balance, purchases, stock transfers, shortages and sales. It is
prepared at selling price (i.e. even the purchases and opening / closing
balances are adjusted by adding the mark-up), and
• A Memorandum Mark-up Account which is prepared for loading or mark-
up on cost (selling price – cost price) in the memorandum stock account.
Various accounting adjustments that are required to be made under this method
are as follows:-
1. Opening stock is recorded on the debit side of the Memorandum Stock A/c
at selling price (Cost + Mark-up) and the respective Mark-Up is noted on the

© The Institute of Chartered Accountants of India

 DEPARTMENTAL ACCOUNTS 12.21

credit side of the Mark-Up Account. Accordingly, any Mark-down (lowering

of cost) will have reverse impact.
2. Similarly, any purchases (debit) or stock transfers (debit or credit) are also
recorded at selling price itself in the Memorandum Stock Account and its
corresponding mark-up is recorded in the Memorandum Mark-up A/c.
3. Any sales are credited to the Memorandum Stock A/c and they are anyways
at selling price and hence no loading is required and no mark-up is required
to be noted in the Mark-up A/c accordingly.
4. Any theft or shortage or loss of stock is also credited to the Memorandum
Stock A/c at its cost-plus mark-up i.e. at selling price and the corresponding
mark-up is debited to the Memorandum Mark-up Account.
5. Management may decide to make an ad-hoc amount of mark up on any of
the stock and accordingly the adjustment has to be recorded in both the
memorandum accounts. Similarly, if the selling price of any goods is reduced
below its normal selling price, the reduction ‘marked down’ is adjusted both
in the Stock Account and the Departmental Mark-up Account.
6. At the end of the period, mark-up on the closing stock (which shall be the
balancing figure of Memorandum Stock A/c) is also recorded in the
Memorandum Mark-up A/c. Accordingly, the balance remaining in the Mark-
up A/c should reflect profit or loss for the period (which can also be verified
by calculating the mark-up % on sales).
Illustration 8
Gram Udyog, a retail store, has two departments, ‘Khadi and Silks’ for each of which
stock account and memorandum ‘mark up’ accounts are kept. All the goods supplied
to each department are debited to the stock account at cost plus a ‘mark up’, which
together make-up the selling-price of the goods and the sale proceeds of the goods
are credited in the account. The amount of ‘mark-up’ is credited to the
Departmental Mark up Account. If the selling price of any goods is reduced below
its normal selling price, the reduction ‘marked down’ is adjusted both in the Stock
Account and the Departmental ‘Mark up’ Account. The rate of ‘Mark up’ for Khadi
Department is 33-1/3% of the cost and for Silks Department it is 50% of the cost.

© The Institute of Chartered Accountants of India

 12.22 ACCOUNTING

The following figures have been taken from the books for the year ended December
31, 20X1:
Khadi Deptt. Silks Deptt.

` `
Stock as on January 1st at cost 10,500 18,600
Purchases 75,900 93,400

Sales 95,600 1,25,000

(1) The stock of Khadi on January 1, 20X1 included goods the selling price of which
had been marked down by ` 1,260. These goods were sold during the year at
the reduced prices.
(2) Certain stock of the value of ` 6,900 purchased for the Khadi Department were
later in the year transferred to the Silks department and sold for ` 10,350. As a
result, though cost of the goods is included in the Khadi Department the sale
proceeds have been credited to the Silks Department.
(3) During the year 20X1 to promote sales the goods were marked down as follows:

Cost Marked down

` `
Khadi 5,600 360
Silk 10,000 2,000
All the goods that were marked down were sold except those with Silks of the
value worth ` 5,000 (that were marked down by ` 1,000).

(4) At the time of stock-taking on December 31, 20X1 it was discovered that Khadi
cloth of the cost of ` 390 was missing and it was decided that the amount be
written off.

You are required to prepare for both the departments for the year 20X1.
(a) The Memorandum Stock Account; and
(b) The Memorandum Mark up Account.

© The Institute of Chartered Accountants of India

 DEPARTMENTAL ACCOUNTS 12.23

Solution
Silk Stock Account

20X1 ` 20X1 `
To Balance b/d By Sales A/c 1,25,000
To Cost 18,600 By Mark-up A/c 2,000
Mark-up @50% 9,300 27,900 By Balance c/d (b.f.) 51,350
To Purchases 93,400
Mark-up @50% 46,700 1,40,100
To Khadi A/c 6,900
Mark-up@50% 3,450 10,350
1,78,350 1,78,350
Silk Mark-up Account

20X1 ` 20X1 `
To Stock A/c 2,000 By Balance b/d 9,300
To Profit & Loss A/c (b.f.) 41,000 By Stock A/c 46,700
To Balance c/d [(1/3* of {51,350 16,450 By Stock A/c 3,450
+ 1,000}) – 1,000]
59,450 59,450
* 1/2 on cost is equal to 1/3 on sales
Working Notes:
Verification of Profit `
Sales 1,25,000
Add: Mark down in goods sold 1,000
1,26,000
Gross Profit 1/3 42,000
Less: Mark down (1,000)
Gross profit as per books 41,000

© The Institute of Chartered Accountants of India

 12.24 ACCOUNTING

Khadi Stock Account

20X1 ` ` 20X1 ` `
To Balance b/d By Sales 95,600
(10,500+2,240#) 12,740 Silk Dept. 6,900
To Purchases 75,900 Mark-up 2,300 9,200
A/c @ 33-
1/3%
Mark up @ 33- 25,300 1,01,200 By Loss of 390
1/3% stock A/c
Mark-up 130 520
A/c @ 33-
1/3%
By Mark-up 360
A/c
By Balance 8,260
c/d (b.f.)
1,13,940 1,13,940

# [(10,500 x 33-1/3%) – 1,260] = ` 2,240

Khadi Mark-up Account
20X1 ` 20X1 `
To Stock A/c (transfer) 2,300 By Balance b/d
To Stock A/c (re-sale) 130 (3,500 – 1,260) 2,240
To Stock A/c (mark down) 360 By Stock A/c 25,300
To Profit & Loss A/c 22,685
To Balance (1/4 of ` 8,260) 2,065
27,540 27,540

Working Note:
Verification of Profit `
Sales as per books 95,600
Add: Mark-down (1,260+360) 1,620
97,220
Gross Profit on fixed selling price @ 25% on ` 97,220 24,305
Less: Mark down (1,620)
22,685

© The Institute of Chartered Accountants of India

 DEPARTMENTAL ACCOUNTS 12.25

SUMMARY
• Aspects of Departmental Accounting
(i) Computation of unrealised profit if inter-department transfers form
part of closing stock.
(ii) Preparation of departmental trading and profit and loss account.
(iii) Monitoring stock movements with help of memorandum stock and
mark-up accounts.
• Methods of maintaining departmental accounts
There are two methods of keeping departmental accounts:
(i) When accounts of all departments are kept at in one book only
(ii) When separate set of books are kept for each department.
• Classification of Departments: (i) Dependent departments and (ii) Independent
departments.
• Basis of allocation of departmental expenses:
S.No. Expenses Basis
1. Rent, rates and taxes, Floor area occupied by each
repairs and maintenance, department (if given) otherwise on time
insurance of building basis
2. Lighting and Heating Consumption of energy by each
expenses department
3. Selling expenses, Sales of each department
4. Carriage inward/ Discount Purchases of each department
received
5. Wages/Salaries Time devoted to each department
6. Maintenance of capital Value of assets of each department
assets otherwise on time basis
7. Administrative expenses Time basis or equally among all
departments
8. Labour welfare expenses Number of employees in each
department
9. PF/ESI contributions Wages and salaries of each department

© The Institute of Chartered Accountants of India

 12.26 ACCOUNTING

• There are certain expenses and income, most being of financial nature, which
cannot be apportioned on a suitable basis; therefore, they are recognised in the
combined Profit and Loss Account, for example, interest on loan, profit/loss on
sale of investment, etc.
• Goods and services may be charged by one department to another usually on
any of the three basis: (i) Cost, (ii) Current market price, (iii) Cost plus
percentage of profit.
• When profit is added in the inter-departmental transfers, the loading included
in the unsold stock at the end of the year is to be excluded before final accounts
are prepared so as to eliminate any anticipatory or unrealized profit included
therein. This is done by creating an appropriate stock reserve by debiting the
combined Profit and Loss Account.

© The Institute of Chartered Accountants of India

 DEPARTMENTAL ACCOUNTS 12.27

TEST YOUR KNOWLEDGE

MCQs
1. Departmental accounting helps in
(a) Evaluation of trading results of each department separately.
(b) Effective planning and control on each department.
(c) Both (a) and (b)
2. Selling commission expense is apportioned among departments in the
proportion of
(a) Average stock carried by each department.
(b) Number of units sold by each department.
(c) Sales of each department.
3. If Department A transfers goods to Department B at a price of 50% above
cost, what will be the amount of stock reserve on unsold stock worth `9,000
of Department B?
(a) 3,000.
(b) 4,500.
(c) 1,500.
4. Goods and services may be charged by one department to another on
(a) Market price.
(b) Cost plus agreed percentage of profit.
(c) Both (a) and (b)
5. Administrative expenses are apportioned among various departments on
basis of
(a) Time spent by employees in each department.
(b) Value of assets of each department.
(c) Sales of each department.

© The Institute of Chartered Accountants of India

 12.28 ACCOUNTING

6. Depreciation on assets is apportioned among various departments on basis

of
(a) Value of assets of each department.
(b) Purchases of each department.
(c) Sales of each department.
7. Expense of rent is apportioned among various departments on basis of
(a) Sales of each department.
(b) Floor area occupied by each department.
(c) Either (a) or (b).
8. When profit is added in inter-departmental transfers, unrealised profit
included in the closing stock at the year end (before preparing final accounts)
is eliminated by
(a) Creating an appropriate stock reserve.
(b) Debiting the combined profit and loss account.
(c) Both (a) and (b).
9. If an organisation is interested in determining the separate departmental net
profit, then
(a) Accounts of all departments are kept in one book only.
(b) Separate set of books are kept for each department.
(c) Departments transfer goods to each other for further processing.
10. M/s XYZ is a departmental Store having 2 departments A and B. M/s XYZ paid
` 4,00,000/- towards interest on loan (loan taken for the business). Please
advise the basis of allocation of interest expenses between the departments.
(a) Allocated on basis of Sales of each department.
(b) Allocated on basis of value of assets of each department.
(c) Not allocated to individual department, recognized in the combined
Profit and Loss account.

© The Institute of Chartered Accountants of India

 DEPARTMENTAL ACCOUNTS 12.29

11. Which of the following is not the one of the basis generally used by
departments to make the inter-departmental transfer of goods:
(a) Cost
(b) Cost plus % of profit
(c) Variable Cost
12. Which of the following expenses may not be proportioned amongst the
departments using any suitable basis:
(a) Carriage Inward
(b) Profit on Sale of Investments
(c) Labour welfare expenses
Theoretical Questions
1. Explain the significance of having departmental accounts for a business
entity.
2. How will you allocate the following expenses among different departments?
(i) Rent, rates and taxes, repairs and maintenance, insurance of building.
(ii) Lighting and Heating expenses (e.g. energy expenses)
(iii) Selling expenses.
Practical Problems
Question 1
Department A sells goods to Department B at a profit of 50% on cost and to
Department C at 20% on cost. Department B sells goods to A and C at a profit of 25%
and 15% respectively on sales. Department C charges 30% and 40% profit on cost to
Department A and B respectively.
Stock lying at different departments at the end of the year are as under:
Department A Department B Department C
` ` `
Transfer from Department A - 45,000 42,000
Transfer from Department B 40,000 - 72,000
Transfer from Department C 39,000 42,000 -

Calculate the unrealised profit of each department and also total unrealised profit.

© The Institute of Chartered Accountants of India

 12.30 ACCOUNTING

Question 2
Department X sells goods to Department Y at a profit of 25% on cost and to
Department Z at 10% profit on cost. Department Y sells goods to X and Z at a profit of
15% and 20% on sales, respectively. Department Z charges 20% and 25% profit on cost
to Department X and Y, respectively. Department Managers are entitled to 10%
commission on net profit subject to unrealized profit on departmental sales being
eliminated. Departmental profits after charging Managers’ commission, but before
adjustment of unrealized profit are as under:
`
Department X 36,000
Department Y 27,000
Department Z 18,000
Stock lying at different departments at the end of the year are as under:
Dept. X Dept. Y Dept. Z
` ` `
Transfer from Department X — 15,000 11,000
Transfer from Department Y 14,000 — 12,000
Transfer from Department Z 6,000 5,000 —
Find out the correct departmental Profits after charging Managers’ commission
Question 3
Department R sells goods to Department S at a profit of 25% on cost and
Department T at 10% profit on cost. Department S sells goods to R and T at a profit
of 15% and 20% on sales respectively. Department T charges 20% and 25% profit
on cost to Department R and S respectively.
Department managers are entitled to 10% commission on net profit subject to
unrealized profit on departmental sales being eliminated. Departmental profits
after charging manager’s commission, but before adjustment of unrealized profit
are as under:
`
Department R 54,000

© The Institute of Chartered Accountants of India

 DEPARTMENTAL ACCOUNTS 12.31

Department S 40,500
Department T 27,000
Stock lying at different departments at the end of the year are as under:

Deptt. R Deptt. S Deptt. T

` ` `
Transfer from Department R - 22,500 16,500
Transfer from Department S 21,000 - 18,000
Transfer from Department T 9,000 7,500 -

Find out the correct departmental profits after charging manager’s commission.
Question 4
A firm has two departments--Sawmill and Furniture. Furniture is made with wood
supplied by the Sawmill department at its usual selling price. From the following
figures prepare Departmental Trading and Profit and Loss Account for the year 20X2:

Sawmill Furniture
` `
Opening Stock on1st January, 20X2 1,50,000 25,000
Sales 12,00,000 2,00,000
Purchases 10,00,000 7,500
Supply to Furniture Department 1,50,000 --
Selling expenses 10,000 3,000
Wages 30,000 10,000
Stock on 31st December, 20X2 1,00,000 30,000

The value of stocks in the furniture department consist of 75 per cent wood and 25
per cent other expenses. The Sawmill Department earned Gross Profit at 15 per
cent in 20X1. General expenses of the business as a whole came to ` 55,000.
Question 5
Martis Ltd. has several departments. Goods supplied to each department are debited
to a Memorandum Departmental Stock Account at cost, plus a fixed percentage (mark-
up) to give the normal selling price. The mark-up is credited to a memorandum
departmental 'Mark-up account', any reduction in selling prices (mark-down) will

© The Institute of Chartered Accountants of India

 12.32 ACCOUNTING

require adjustment in the stock account and in mark-up account. The mark up for
Department A for the last three years has been 25%. Figures relevant to Department A
for the year ended 31st March, 20X2 were as follows:
Opening stock as on 1st April, 20X1, at cost ` 65,000
Purchase at cost ` 2,00,000
Sales ` 3,00,000
It is further ascertained that :
(1) Shortage of stock found in the year ending 31.03.20X2, costing ` 1,000 were
written off.
(2) Opening stock on 01.04.20X1 including goods costing ` 6,000 had been sold
during the year and bad been marked down in the selling price by ` 600. The
remaining stock had been sold during the year.
(3) Goods purchased during the year were marked down by ` 1,200 from a cost of
` 15,000. Marked-down stock costing ` 5,000 remained unsold on 31.03.20X2.
(4) The departmental closing stock is to be valued at cost subject to adjustment for
mark-up and mark-down.
You are required to prepare:
(i) A Departmental Trading Account for Department A for the year ended 31st
March, 20X2 in the books of Head Office.
(ii) A Memorandum Stock Account for the year.
(iii) A Memorandum Mark-up Account for the year.

ANSWERS/ SOLUTIONS
MCQs
1. (c) 2. (c) 3. (a) 4. (c) 5. (a) 6. (a)
7. (b) 8. (c) 9. (b) 10. (c) 11. (c) 12. (b)
Theoretical Questions
1. The main advantages of departmental accounting are:
(i) Evaluation of performance;
(ii) Growth potential of each department

© The Institute of Chartered Accountants of India

 DEPARTMENTAL ACCOUNTS 12.33

(iii) Justification of capital outlay;

(iv) Judgement of efficiency and
(v) Planning and control.
2.

S. No. Expenses Basis

1. Rent, rates and taxes, Floor area occupied by each
repairs and maintenance, department (if given) otherwise on
insurance of building time basis
2. Lighting and Heating Consumption of energy by each
expenses (e.g., energy department
expenses)
3. Selling expenses Sales of each department

Practical Problems
1. Calculation of unrealised profit of each department and total unrealised
profit
Dept. A Dept. B Dept. C Total
` ` ` `
Unrealised Profit
of:
Department A 45,000 x 50/150 42,000 x 20/120
= 15,000 = 7,000 22,000
Department B 40,000 x .25 72,000 x .15
= 10,000 = 10,800 20,800
Department C 39,000 x 30/130 42,000 x 40/140
= 9,000 = 12,000 21,000
63,800

2. Calculation of correct Profits

Department Department Department
X Y Z
` ` `
Profit after charging managers’ 36,000 27,000 18,000
commission

© The Institute of Chartered Accountants of India

 12.34 ACCOUNTING

Add back: Managers’ 4,000 3,000 2,000

commission (1/9)
40,000 30,000 20,000
Less: Unrealised profit on (4,000) (4,500) (2,000)
stock (Working Note)
Profit before Manager’s 36,000 25,500 18,000
commission
Less: Commission for
Department
Manager @ 10% (3,600) (2,550) (1,800)
Departmental Profits after 32,400 22,950 16,200
manager’s commission

Working Note:
Stock lying with

Dept. X Dept. Y Dept. Z Total

` ` ` `
Unrealised Profit
of:
Department X 1/5×15,000 1/11×11,000 4,000
=3,000 =1,000
Department Y 0.15×14,000 0.20×12,000 4,500
=2,100 =2,400
Department Z 1/6×6,000 =1,000 1/5×5,000 2,000
=1,000

3. Correct departmental profits

Departments
R S T
` ` `
Profit before adjustment of unrealised profits 54,000 40,500 27,000
Add : Managerial commission (1/9) 6,000 4,500 3,000
60,000 45,000 30,000

© The Institute of Chartered Accountants of India

 DEPARTMENTAL ACCOUNTS 12.35

Less: Unrealised profit on stock (Refer W.N.) (6,000) 6,750) (3,000)

54,000 38,250 27,000
Less: Managers’ commission @ 10% (5,400) (3,825) (2,700)
Profit after adjustment of unrealised profits 48,600 34,425 24,300

Working Notes:
Value of unrealised profit
`
Transfer by department R to
S department (22,500 25/125) = 4,500
T department (16,500 10/110) = 1,500 6,000
Transfer by department S to
R department (21,000  15/100) = 3,150
T department (18,000  20/100) = 3,600 6,750
Transfer by department T to
R department (9,000  20/120) = 1,500
S department (7,500  25/125) = 1,500 3,000

4. Department Trading and Profit and Loss Account

Particulars Saw mill Furniture Particulars Saw mill Furniture

` ` ` `
To opening 1,50,000 25,000 By sales 12,00,000 2,00,000
stock
To purchase 10,00,000 7,500 By transfer to 1,50,000
furniture dept.
To wages 30,000 10,000 By Closing stock 1,00,000 30,000
To transfer - 1,50,000
from saw
mill
To gross 2,70,000 37,500
profit
14,50,000 2,30,000 14,50,000 2,30,000

© The Institute of Chartered Accountants of India

 12.36 ACCOUNTING

To selling 10,000 3,000 By Gross Profit 2,70,000 37,500

expenses
To Net Profit 2,60,000 34,500
2,70,000 37,500 2,70,000 37,500

General Profit & Loss Account

Particulars Amount ` Particulars Amount `

To general Expenses 55,000 By Net Profit from
Saw Mill 2,60,000
Furniture 34,500
To stock reserve (WN2) 4,500 By stock reserve 2,813
(opening WN-1)
To Net Profit 2,37,813
2,97,313 2,97,313

Working Notes:
1. Calculation of Stock Reserve (opening), assuming FIFO
` 25,000 x 75% wood x 15% = ` 2,813
2. Calculation of closing stock reserve
Gross Profit Rate of Saw Mill of 20X2:
` 2,70,000 / (12,00,000 + 1,50,000) x 100 = 20%

` 30,000x 75% x 20% = ` 4,500

5. (i) Department Trading Account
For the year ending on 31.03.20X2 in the books of Head Office

Particulars ` Particulars `
To Opening Stock 65,000 By Sales 3,00,000
To Purchases 2,00,000 By Shortage 1,000
To Gross Profit c/d (b.f.) 58,880 By Closing Stock 22,880
3,23,880 3,23,880

© The Institute of Chartered Accountants of India

 DEPARTMENTAL ACCOUNTS 12.37

(ii) Memorandum stock account (for Department A) (at selling price)

Particulars ` Particulars `
To Balance b/d 81,250 By Profit & Loss A/c 1,000
(` 65,000 + 25% of (Cost of Shortage)
` 65,000)
To Purchases 2,50,000 By Memorandum 250
(` 2,00,000 + 25% of Departmental Mark-up
` 2,00,000) A/c (Load on Shortage)
(` 1,000 x 25%)
By Memorandum 1,200
Departmental Mark-up
A/c (Mark-down on
Current Purchases)
By Debtors A/c (Sales) 3,00,000
By Memorandum 600
Departmental Mark-up
A/c (Mark Down on
Opening Stock)
By Balance c/d (b.f.) 28,200
3,31,250 3,31,250

(iii) Memorandum Departmental Mark-up Account

Particulars ` Particulars `
To Memorandum 250 By Balance b/d 16,250
Departmental Stock (` 81,250 x 25/125)
A/c (` 1,000 × 25/100)
To Memorandum 1,200 By Memorandum 50,000
Departmental Stock A/c Departmental Stock
A/c
To Memorandum 600 (` 2,50,000 x 25/125)
Departmental Stock A/c
To Gross Profit transferred 58,880
to Profit & Loss A/c
To Balance c/d [(` 28,200
+ 400*) x 25/125 - ` 400] 5,320
66,250 66,250
*[` 1,200 ×5,000/15,000] = ` 400

© The Institute of Chartered Accountants of India

 12.38 ACCOUNTING

Working Notes:
(i) Calculation of Cost of Sales
`
A Sales as per Books 3,00,000
B Add: Mark-down in opening stock (given) 600
C Add: mark-down in sales out of current Purchases
(` 1,200 x 10,000 /15,000) 800
D Value of sales if there was no mark-down (A+B+C) 3,01,400
E Less: Gross Profit (25/125 of ` 3,01,400) subject to
Mark Down (` 600 + ` 800) (60,280)
F Cost of sales (D-E) 2,41,120
(ii) Calculation of Closing Stock
`
A Opening Stock 65,000
B Add: Purchases 2,00,000
C Less: Cost of Sales (2,41,120)
D Less: Shortage (1,000)
E Closing Stock (A+B-C-D) 22,880
Note: It has been assumed that mark up (given in question) is determined
as a percentage of cost.

© The Institute of Chartered Accountants of India