Lesson Notes By Weeks and Term - Senior Secondary School 2

SUBJECT: FINANCIAL ACCOUNTING

CLASS:  SS 2

DATE:

TERM: 2nd TERM

 

WEEK ONE AND TWO

TOPIC: DEPARTMENTAL 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.

EVALUATION

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

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.

READING ASSIGNMENT 

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

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.