SECOND TERM E-LEARNING NOTE
SUBJECT: FINANCIAL ACCOUNTING CLASS: SS 2
SCHEME OF WORK
WEEK TOPIC
1 – 2 Departmental Accounts
3 – 4 Manufacturing Accounts
5 Capital and Revenue Expenditure
6 – 7 Disposal of Fixed Assets
8 Accounting Concepts and Conventions
9 – 10 Introduction to Accounting Ratios
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
a. Turnover Basis: This is the use of sales (i.e Turnover as a basis of sharing (i.e sharing ratio).
b. Floor Space Basis: This uses the area of floor space occupied as the basis of sharing i.e sharing ratio.
c. Number of Articles Sold Basis: Ratio used is the items sold.
d. Direct Analysis Basis: Ratio used here is specified.
e. 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
- The total floor area occupied by each departments is Dept: E (2/5)
F (3/5)
- Apportionment basis are:
- Commission, discount allowed – sales ratio
- Discount received – purchases ratio
- Insurance – floor area
- 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
a. Sales Ratio
Dept. E: 30,000: Dept. F: 20,000 = 50,000
= 30,000/50,000 = 20,000/50,000
b. Purchases Ratio
Dept. E: N22,000 Dept. F: 18,500 = 40,500
= 22.000/40.500 = 18,500/40,500
c. Floor area already given Dept. E 2/5; Dept. 3/5
d. 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
- Explain five errors that would affect the agreement of the trial balance
- List and explain three classifications of ledger accounts
- List ten accounts found in the nominal ledger
- State the purpose of departmental accounts
- 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.