Lesson Notes By Weeks and Term - Senior Secondary 3

Term: 1^st Term

Week: 9

Class: Senior Secondary School 3

Age: 17 years

Duration: 40 minutes of 2 periods each

Date:       

Subject:      Financial accounting

Topic:-       Departmental account I

SPECIFIC OBJECTIVES: At the end of the lesson, pupils should be able to

1. Define departmental accounts
2. Discuss the advantage and need for departmental account

INSTRUCTIONAL TECHNIQUES: Identification, explanation, questions and answers, demonstration, videos from source

INSTRUCTIONAL MATERIALS: Videos, loud speaker, textbook, pictures

INSTRUCTIONAL PROCEDURES

PERIOD 1-2

NOTE

DEPARTMENTAL ACCOUNT

The most important objective of accounting is the segregation and recording of transactions of buying selling, production, distribution and administration of business organizations. There are several organizations whose business involves the separation or division of the organization to different units, sections or departments. Thus, a departmental account is aimed at segregating and reporting on several activities of a business with multiple divisions in order to:

• Compare results of trading activities
• Assist the owner(s) in planning and decision-making process
• Evaluate the performance of the departmental managers and reward them based on the results produced.

Departments may be classified according to their functions, for example buying, selling, production or manufacturing, or may be based on subsidiary services such as transport, packaging, repairs, maintenance etc.

In order to achieve the targets of departmental accounts, it is important that the accounting system be devised in a way that allows the trading results of each department of an organization to be accurately ascertained as regards the turnover, expenses and profits. Separate records must be kept for purchases and sales of each department. Stock of each department must be taken separately and proper records of all transfers from one department to another adequately kept. Any expenses that can be allocated directly to any department must be charged to it, while other expenses are apportioned using some reasonable basis.

Where the number of departments in an organization is small, it is convenient to use columnar forms of bought-and-sold day books, return books etc., each having a total column from which the posting is made to the personal accounts and detail columns, and the total posted to the respective accounts in the impersonal ledger at the end of each month or for a specific chosen period.

Allocation of Joint Expenses

There are some common expenses incurred by an organization for which all or some of the departments are beneficiary. These expenses to be shared among the departments involved using an appropriate parameter for each expense.

1. All expenses incurred specifically for a department will be charged directly to it, for example maintenance of motor vehicle charged to transport department.
2. Any expense incurred for the benefit of all departments and capable of precise allocation will be charged accordingly, for example lighting can be charged using meterage.
3. Expenses incurred for the benefit of all departments not capable of precise allocation can be treated and charged as follows:
4. Selling expenses can be charged on a sale basis using either the value of items sold or units or quantities sold.
5. Administration expenses such as rent and rates may be apportioned to give approximately true results on the basis or area, windows used, cubic content, average stock held or sold and so on.
6. Heating and lighting in absence of use of separate meter may be apportioned on the basis of (1) points wired (2) lamp used and (3) area of inversely to the number of windows. Many other expenses such as insurance and advertising may be apportioned exactly or approximately on the basis of nature and function of the expenditure, whereas depreciation will normally be allocated on the basis of assets employed in each department.
7. Where expenses incurred on behalf of all departments have no know basis of apportionment, it is very usual to determine and bring down the departmental balance of profits and apportion the expenses equally against it, so that the management will not misguided by the arbitrary nature of the apportionments and at same time management will be able to ascertain the approximate net profit of each department.
8. A charge (which does not represent an actual item of expenditure) is often made for interest and this is usually based on the estimated amount of average capital employed by each department. In real sense, this does not affect the total net profit, since it is only an internal adjustment. A debit is made to each department as the share of interest and a total credit to profit and loss account.

Inter-Departmental Transfers

It is nearly impossible for a department of an organization to work and function effectively in isolation form other departments in the same organisation. Hence it is usual for departments to transfer goods and render service to one another. Where goods, the employment of staff or the performance of services are exchanged between departments, these should be separately recorded and shown as separate items in the departmental columns of the trading and profit and loss account. The transfer of goods is done either at cost or at the loaded price. Where it is done at loaded price, adequate care must be taken to eliminate from the total results the unrealized profit. This is so because such profit is not realized by the organization until the goods have been disposed to outside purchases.

Advantages of Departmental Account

Maintaining the departmental account has some of the following benefits to an organization:

• It assists an organization to easily determine the profitability to each department.
• It makes it possible for an organization to quickly determine the department earning the highest profit and to plan with little effort to increase its sales.
• It assists management to determine the necessary amount to commit to capital expenditure in departments of the organization.
• It can be used to determine the performance bonus for managers by using their departmental results.
• It allows an organization to be able to identify the department requiring re-organization or possible closing down.

EVALUATION:    1. Define departmental accounting

2. State the need for departmental accounting
3. Outline three advantages of departmental accounting

CLASSWORK: As in evaluation

CONCLUSION: The teacher commends the students positively