DEPARTMENTAL ACCOUNTS 2

<< DEPARTMENTAL ACCOUNTS 1

BRANCH ACCOUNTING SYSTEMS >>

Advance Financial Accounting (FIN-611)

LESSON # 10

DEPARTMENTAL ACCOUNTS

Some times departments prefer to buy goods from their internal departments for this

prices are charged equal to the normal selling prices or a department may transfer at it

original cost price. Since each department is considered as a separate profit centre, it is

necessary to have separate records for inter-departmental transfer of goods or even

services.

The department which transfers the goods considers its transfers as equal to sales and

the department which receives the goods considers it as equal to its purchases and put

it in the cost of goods sold. Generally a periodical analysis sheet is prepared to record

these departmental transfers:

Transferring

Receiving Departments

Departments

Date

X (Rs) Y (Rs)

Z (Rs)

X (Rs)

Y (Rs)

Z (Rs)

April 3 (from X to Y)

400

----

400

----

April 10 (from Y to X)

----

500

----

500

----

April 20 (from Z to Y)

----

300

----

300

----

April 30 (from X to Z)

200

----

200

Total

600

500

300

500

700

200

At the end of the period the inter-departmental transfers are recorded by recording the

following accounting entry:

Receiving Department

Dr. (at transfer price)

500

700

200

Transferring Department Cr. (at transfer price)

600

500

300

Advance Financial Accounting (FIN-611)

Solved Problem:

A firm has two departments X and Y. Department Y (manufacturing department)

receives goods from department X as its raw material. Department X supplies the

goods to Y at cost price. From the following information prepare a Departmental

Income Statement for the year ended on 31 December 2007:

Rupees

Opening Stock (1-1-2007)

250,000

75,000

Purchases (Outside supplier)

1,000,000

20,000

Sales (Outside customer )

1,200,000

300,000

Closing stock (31-12-07)

150,000

50,000

Other Information:

1. Depreciation is charged on building @ 20% p.a. Cost of building is Rs. 105,000

and occupancy ratio is 2/3 and 1/3 for X and Y respectively.

2. X department transferred goods Rs. 250,000 to department Y.

3. Manufacturing expenses Rs. 10,000.

4. Selling expenses Rs. 15,000.

5. General expenses Rs. 58,000.

Solution:

Income Statement for the year ended December 31, 2007

Particulars

X (Rs).

Y (Rs).

Total (Rs).

Sales

1,200,000

300,000

1,500,000

Transfer to Y

250,000

----

250,000

Total Revenue

1,450,000

300,000

1,750,000

Less Cost of goods sold

Opening stock

250,000

75,000

325,000

Add Purchases

1,000,000

20,000

1,020,000

Less closing stock

150,000

50,000

200,000

Transfer from X

----

250,000

Manufacturing expenses

----

10,000

Total cost

1,100,000

305,000

1,405,000

Gross profit

350,000

(5,000)

345,000

Less Selling expenses

12,000

3,000

15,000

Deprecation

14,000

7,000

21,000

Net profit

324,000

(15,000)

309,000

Less General expenses

58,000

Net profit of business

251,000

Working:

Selling expense Rs. 15,000

Advance Financial Accounting (FIN-611)

X (Rs)

Y (Rs)

Sales

1,200,000

300,000

Sales ratio

X =15,000 X 12/15 = 12,000

Y =15,000 X 3/15 = 3,000

Depreciation expense

Building 105,000 X 20/100 = Rs. 21,000

X (Rs)

Y (Rs)

Deprecation

2/3

1/3

X =21,000 X 2/3 = 14,000

Y =21,000 X 1/3 = 7,000

BRANCH ACCOUNTING

Introduction

Large business entities open up branches in diversified geographic segments such as

towns and cities and even in different countries. Segmenting their business

geographically facilitate the business to market its products/services over a large

territory and thus increase its profits. Here we must make this distinction that

departments are business segments whereas, branches are geographic segments.

A branch may be defined as a segment of an enterprise that is geographically

separated from the rest of the entity, controlled by a head office, and generally

carrying on the same or substantially same activities as of the entity.

For example in our daily life we observe branches of banks, bakeries, shoes stores,

schools, hotels and restaurants etc.

It is worth mentioning here that a branch is not a separate legal entity, it is simply a

segment of an entity. From accounting perspective, a branch is identified as a profit

centre and if it is an independent branch then it becomes an investment centre.

To have clear picture of the performance, profits of each branches are calculated

separately and then are consolidated in the accounts of the head office. Depending

upon the size of the branch the decision is taken regarding the accounting system to be

implemented there. Had the branch size is small there would have been single entry

system. Where the branch size is considerable large and it can afford a complete

accounts department there we will follow the double entry accounting system, such

are often independent branches.

Classification of Branches

For accounting purposes branches are classified as under:

1. Foreign Branch (not part of our syllabus)

2. Domestic Branch

a. Independent branch (investment centre)

Advance Financial Accounting (FIN-611)

b. Dependent branch (profit centre)

i. Whole-sale branch

ii. Retail branch

Classification

Domestic branch

Foreign branch

Independent

Dependent

Dependent Branch

Retail sale branch

Whole sale branch

Debtors system

Income statement system / Final account system

Stock & Debtors system

Independent Branch

This is the type of branch which maintains its own set of books. The method of

accounting is the double entry book keeping.

Branch manager of such a branch is given certain powers for decision making

regarding procurement, selling, advertising, staffing, pricing, and even for purchasing

of fixed assets. These branches are taken as an investment centre.

Dependent Branch

This is the type of branch which does not maintain its own set of books. All records are

maintained by the head office, which is concerned with the branch profits only.

Branch manager of such a branch is not given decision making powers, the manager

acts according to the instruction and policies directed by the head office.

Table of Contents: