Departmental Accounts | CMA Inter Syllabus

Table of contents

---

Departmental Accounting

For effective operation, efficient management and adequate control, many big organisations that deal with various products or services or multiple types of specialized activities, consider each product, service or specialized activities as separate segments or units of the entities. The concerned entity in order to record the details of segments or units rationally split into a few segments or units which are technically referred to as Departments.

Industry	Illustrative Departments
Bank	Forex, Underwriting, credit card
Hospitals	Rooms, medical store, cafeteria
Hotels	Rooms, restaurants, confectionary, gym and spa
Departmental store	Stationery, electronics, grocery
Two-wheelers	Motorcycles, scooters
Automobile	Hatchback, Sedan, SUV, EVs

Management of the concerned entity wants to evaluate the operating results (profit/loss) for each department.

Hence, on the basis of system of Responsibility Accounting, the idea of Departmental Accounting has emerged and has been widely implemented.

Responsibility Accounting: For better performance and control, responsibility and authority are decentralized to each department. A manager or supervisor is assigned to each department to whom the targets and budgets are provided for carrying out the operations. Although all departments are “Cost Centres”, all may not be “Revenue Centres”. At the end of certain period, the performance of the Department/Centre is assessed and suitable measures are taken for betterment.

Concept note: Branch vs Department
Points of Difference	Department	Branch
Concept	A segment or unit into which an entity is rationally divided.	Establishment of a large organisation that is located at different places
Purpose	Enhancement of effective operations, efficient management and proper control.	Primary objective is to boost up the sales revenue of the entity.
Location	Generally, Departments are not separated geographically.	Each branch is set up at different geographical location.
Interrelation	A department can never have a branch on its own.	A branch may consists of numerous departments.

Departmental Accounting

Concept of Departmental Accounting

Although traditional accounting reflects the overall financial performance (profit/loss) of an entity, it fails to provide the operating performances of each department. To ensure adequate managerial control and proper decision-making, it is necessary to ascertain the operating results of each department. The branch of accounting that gives emphasis on the assessment of the financial performance of each department of a large organisation is referred to as Departmental Accounting.

Features of Departmental Accounting

• In the books of accounts, transactions are recorded department-wise. All expenses and incomes are recognized separately for each department.
• It is an application of Responsibility Accounting system.
• Each department is considered as Responsibility Centre.
• Both external as-well-as internal transactions are recorded.
• It provides information to internal stakeholders of the entity.
• It involves the drafting of Departmental Trading & Profit & Loss Account.

Objectives of Departmental Accounting

• To get an analytical idea about the affairs of each department.
• To ascertain the true operating result and efficiency of each department (department profit/loss).
• To compare the financial performance among different departments.
• To provide data and information to the management for decision-making and policy-formulation.

Methods of Maintaining Departmental Accounts

Two approaches are usually followed for obtaining the individual figures of the various items of expenses and incomes. An organisation can follow any one of them.

• Maintenance of same set of books; or
• Maintenance of separate set of books

Maintenance of same set of books	The amounts of various items of expenses and incomes, etc. are gathered by maintaining the books of accounts in the tabular or columnar format. Hence, this method is referred to as Columnar or Tabular Method. Accounting Department, centralized in nature, maintains the entire records. This method is widely accepted because of it is comparatively less expensive.
Maintenance of separate set of books	Individual figures of various items of expenses and incomes, etc. are obtained by keeping the books of each department separately. Hence, this method is referred to as Unitary Method. Each concerned department maintains their records independently. Although the method is very expensive, large-sized firms usually practice it.

Preparation of Departmental Final Accounts

Components of Departmental Final Accounts

Departmental Trading Account: This account is drafted in columnar format where each column represents each department. It is prepared for ascertaining Departmental Gross Profits/Gross Loss of individual departments. In this account, the direct expenses are debited and direct incomes are credited.

Departmental Profit & Loss Account: This account is also drafted in columnar format where each column represents each department. It is prepared for ascertaining Departmental Net Profits / Net Loss of individual departments. In this account the indirect expenses are debited and allocated indirect incomes are credited, after considering Gross Profit/Gross Loss of individual departments.

General Profit & Loss Account: This account is drafted for the determination of Overall Net Profit/ Net Loss of the entity. Indirect expenses and Indirect incomes that cannot be rationally apportioned between the departments are debited and credited respectively, after considering departmental Net Profits/ Net Loss. The format of this account is like the normal income state i.e no Department specific columns are there.

Format of Departmental Trading Account, Departmental Profit & Loss Account and General Profit & Loss Account

Departmental Trading & Profit & Loss Account for the year ended... 

Particulars	(₹)	(₹)	Particulars	(₹)	(₹)
To, Opening Stock	xx	xx	By, Sales	xx	xx
To, Purchases	xx	xx	By, Transfer	xx	xx
To, Wages	xx	xx	By, Closing Stock	xx	xx
To, Other Direct Expenses	xx	xx
To, Transfer	xx	xx
To, Gross Profit c/d	xx	xx
	xxx	xxx		xxx	xxx
To, Rent	xx	xx	By, Gross Profit b/d	xx	xx
To, Salaries	xx	xx	By, Indirect Incomes	xx	xx
To, Depreciation and amortisation	xx	xx
To, Other Indirect Expenses	xx	xx
To, General P/L A/c	xx	xx
[Dept. Net Profit Transferred]
	xxx	xxx		xxx	xxx

General Profit & Loss Account for the year ended...

Particulars	(₹)	Particulars	(₹)
To, General Expenses	xx	By, Departmental P/L A/c [Net Profit]	xx
To, Stock Reserve [Provision on Stock]	xx
To, Capital A/c [ Net Profit transferred]	xx
	xxx		xxx

Steps for Preparation of Departmental Final Accounts

Step I. Determination of Departmental Gross Profit/Loss

Items	Treatment
Directly allocable Direct Expenses	Debited to Departmental Trading A/c
Direct Expenses that cannot be directly allocated	Apportion the expenses on some suitable basis and debit them to Departmental Trading A/c.
Directly Allocable Direct Incomes	Credited to Departmental Trading A/c
Goods transferred from one department to other department	Debited to Transferee(Receiving) Department and credited to Transferor (Sending)Department. (Journal: Transferee Department A/c  Dr.  To Transferor Department A/c)
After determining Departmental Gross Profit/Loss, it is transferred to Departmental Profit & Loss A/c.

Step II: Determination of Departmental Net Profit/Loss

Items	Treatment
Directly allocable IndirectExpenses	Debited to Departmental Profit & Loss A/c
Direct Expenses that cannot be directly allocated	Apportion the expenses on some suitable basis and debit them to Departmental Profit & Loss A/c.
Directly Allocable Indirect Incomes	Credited to Departmental Profit & Loss A/c
Indirect Incomes that cannot be directly allocated	Apportion the Incomes on some suitable basis and credit them to Departmental Profit & Loss A/c.
After determining Departmental Net Profit/Loss, it is transferred to General Profit & Loss A/c.

 Step III: Determination of Overall Net Profit/Loss of the concern

Items	Treatment
Indirect Expenses that could not be allocated to departments	Debited to General Profit & Loss A/c.
Indirect Incomes that could not be allocated to departments	Credited to General Profit & Loss A/c.
Provision for Unrealised Profit (if any)	On Closing Inventory, debit them to General Profit &  Loss A/c and on Opening Inventory, credit them to .General Profit &  Loss A/c
By, Balancing General Profit & Loss A/c, Consolidated or Overall Net Profit / Loss is ascertained.

Certain Specific Transactions

Items of Income

● Incomes which are directly allocable to a specific department are credited to the respective department.

● Incomes which are common for more than one department are apportioned rationally over all departments

Income Items common for more than one department	Basis of Apportionment
Discount Received	Net Purchases i.e Purchases less Returns Outward (if any)
Sales Commission	Net Sales i.e Sales less  Returns Inward (if any)

Other Indirect Incomes which are of financial in nature viz. Dividend received, Interest earned on Deposits, Profit on sale of fixed assets are credited of General P/L A/c, as these items relate the organisation as whole and cannot be apportioned over the departments.

Items of Expenses

● Expenses which are directly allocable to a specific department are debited to the respective department.

● Expenses which are common for more than one department are apportioned rationally over all departments.

Expense Items common for more than one department	Basis of Apportionment
Commission to Purchase Manager, Carriage inwards	Purchases
Selling expense, Commission to salesman, bad debts, Discount allowed	SalesValue of Fixed Assets
Depreciation, Insurance, Repairs and Maintenance	Value of Fixed Assets
Rent and rates, Insurance, Heating	Floor area occupied
Power	Horse power (HP) or HP × Hours Worked

Other indirect expenses which are of general nature viz. General charges, Sundry charges, MD’s Remuneration, Miscellaneous expenses etc. as well as expenses which are of financial in nature viz. Bank Charges, Interest on loan/debentures, are debited to General P/L A/c as these items relate the organisation as whole and cannot be apportioned over the departments.

Illustration 14 

M/s Unique is a departmental store having three departments – X, Y and Z. Information regarding three departments for the year ended March 31, 2022 are given below:

Particulars	X(₹)	Y(₹)	Z(₹)
Opening Stock	72000	48000	40000
Furniture	40,000	40,000	20,000
Purchases	2,64,000	1,76,000	88,000
Sales	3,60,000	2,70,000	1,80,000
Closing stock	90,000	35,000	42,000
Sundry Debtors	30,000	20,000	20,000
Floor area occupied by each department (in sq. ft)	6,000	5,000	4,000
Number of employees	50	40	30
Electricity Consumed (in units)	600	400	200

The Balances of other revenue items in the books for the year given below 

Particulars	(₹)	Particulars	(₹)
Carriage Inwards	6,000	Discount Received	3,600
Carriage Outwards	5,400	Employees Welfare Expenses	4,800
Discount Allowed	4,500	Rent, Rates &Taxes	15,000
Advertisement	5,400	Electricity charges	6,000
Wages	96,000	Depreciation on furniture	2,000

After providing Provision for Bad Debts at 5%, prepare Departmental Trading and Profit and Loss Account.

Solution: 

M/s Unique

Departmental Trading and Profit & Loss Account

 for the year ended 31.03.2022

Particulars	X (₹)	Y(₹)	Z(₹)	Particulars	X (₹)	Y(₹)	Z(₹)
To, Opening Stock	72,000	48,000	40,000	By, Sales	3,60,000	2,70,000	1,80,000
To, Purchases	2,64,000	1,76,000	88,000	By, Closing Stock	90,000	35,000	42,000
To, Carriage Inwards (WN:1)	3,000	2,000	1,000
To, Gross Profit c/d	1,11,000	79,000	93,000
	4,50,000	3,05,000	2,22,000		4,50,000	3,05,000	2,22,000
To, Rent, Rates & Taxes (WN:1)	6000	5000	4000	By, Gross Profit b/d	1,11,000	79,000	93,000
To, Wages (WN:1)	40,000	32,000	24,000	By, Discount Received	1800	1200	600
To, Carriage Outwards (WN:1)	2,400	1,800	1,200
To, Discount Allowed (WN:1)	2,000	1,500	1,000
To, Electricity Expenses	3,000	2,000	1,000
To, Advertisement (WN:1)	2,400	1,800
To, Depreciation (WN:1)	800	800	400
To, Employees Welfare Expenses (WN:1)	2000	1600	1200
To, Provision for Bad Debt (WN:2)	1500	1000	1000
To, General P/L A/c ( Dept. NP transferred)	52,700	32,700	58,600
	1,12,800	80,200	93,600		1,12,800	80,200	93,600

Working Notes

1. Allocation of unallocated income and expenses

Item of Expenses	(₹)	Basis	Ratio	X(₹)	Y(₹)	Z(₹)
Carriage Inwards		Purchases	3:2:1	3,000	2,000	1,000
Rent, Rates & Taxes		Floor area	6:5:4	6,000	5,000	4,000
Wages		Number of employees	5:4:3	40,000	32,000	24,000
Carriage Outwards		Sales	4:3:2	2,400	1,800	1,200
Discount Allowed		Sales	4:3:2	2,000	1,500	1,000
Electricity expenses		Electricity consumed	3:2:1	3,000	2,000	1,000
Advertisement		Sales	4:3:2	2,400	1,800	1,200
Depreciation on Furniture		Value of Furniture	2:2:1	800	800	400
Employees Welfare Expenses		Number of employees	5:4:3	2,000	1,600	1,200
Discount Received		Purchases	3:2:1	1,800	1,200	600

2. Provision for Bad Debt
 

Dept. X: ₹ 30,000 × 5% = ₹ 1,500, 

 Dept. Y: ₹ 20,000 × 5% = ₹ 1,000, Dept. Z: ₹ 20,000 × 5% = ₹ 1,000

Inter-Departmental Transfer

When goods/services are transferred from one department (Transferor Department) to another department (Transferee Department), it is known as Inter-Departmental Transfer and such transfers are considered to be as “Purchases” of the Transferee Department and “Sales” of the Transferor  Department. 

Valuation of Transfer: It can be done on of the following three basis

At Cost	● Transferor Department transfers goods/services to Transferee Department at “Cost to the Transferor Department”. ● If part of goods transferred remains in the closing inventory of Transferee Department, then the creation of “Provision for Unrealised Profit” is not required.
At Cost plus Profit	Transferor Department transfers goods/services to Transferee Department at a value higher than the Cost. Hence, it is referred as ‘Cost plus Profit’. Departments which produce or render intermediate goods/services usually follows this method to ensure that the Transferor Department gets due credit (in the form of profitbooking) out of such transfer. If part of goods transferred remains in the closing inventory of Transferee Department, then the creation of “Provision for Unrealised Profit” is required.
At Normal Selling Price	Transferor Department transfers goods/services to Transferee Department at ‘Normal Selling Price’ i.e prevailing Market Price. Departments which produce or render marketable goods/services usually follows this method to ensure that the Transferor Department gets due credit (in the form of profitbooking) out of such transfer. Actual profit earning capacity remains undisclosed to the stakeholders. If part of goods transferred remains in the closing inventory of Transferee Department, then the creation of “Provision for Unrealised Profit” is required.

Provision for Unrealised Profit

Based on the concept of Responsibility Accounting, more often than not, departments are considered as ‘Profit Centres’ and hence, goods are transferred from Transferor Department to Transferee Department at a value which is higher than the cost. The value may be Normal Selling Price or may be higher/lower than Selling Price, but the value will definitely include an element of profit to ensure that the Transferor Department gets due credit (in the form of profit booking). After receiving the goods, Transferee Department carry out necessary processes and eventually transfer/sell them to other department/market. At the end of certain period, it may be found that the closing inventory of Transferee Department holds a part of goods which were earlier received from Transferor Department. It means that part of goods which were transferred from Transferred Department has remained unsold although the profit on it has been booked by the Transferor Department. This leads to the concept of  Unrealised Profit.

Unrealised Profit refers to the profit booked (but not earned) by the transferor department out of inter-departmental transfers. Although the due credit is given to Transferor Department and the profit is reflected in the Transferor Department’s Profit, this profit cannot be considered as earned/realized by the entity as it is not yet earned from any outside party.

As per the Concept of Prudance, unrealized profit is needed to be adjusted. Hence, “Provision for Unrealised Profit” is maintained both on closing stock as well as on the subsequent opening stock. Moreover, it needs to noted that such Provision is required to be created on goods received at higher than cost from all predecessor departments and not only the immediately preceding department.

Steps for calculation of amount of Provision for Unrealised Profit

Step I: Identification of the ‘Value of Transferred Stock’ included in the Closing Stock of the Transferee Department

Step II: Ascertainment of the Gross Profit Rate (GP Rate) on Sales of the Transferor Department

Step III: Apply the GP Rate to the ‘Value of Transferred Stock’

Provision for Unrealised Profit = Value of Transferred Stock (of Transferor Dept.) × GP Rate(of Transferee Dept.)

Accounting of Transfer: 

Transactions	Journal Entry
On transfer of goods/ services	Transferee Department A/c
	To, Transferor Department A/c
Creation of Provision for Unrealised Profit	On Closing Stock
	General Profit & Loss A/
	To, Provision for Unrealised Profit A/c
	On Opening Stock ( in subsequent period)
	Provision for Unrealised Profit A/c
	To, General Profit & Loss A/c

 Illustration 15

A firm has two departments – Raw Materials and Manufacturing. The finished goods are produced by the Manufacturing Department with raw materials supplied by Raw Materials department at selling price. Using the following information prepare Departmental Trading and Profit and Loss Account for the year ended on 31st March 2022.

	Raw Materials Dept. (₹)	Manufacturing Dept. (₹)
Opening Stock	1,20,000	20,000
Purchases	8,00,000	6,000
Sales	8,80,000	1,80,000
Manufacturing Expenses		24,000
Selling Expenses	1,600	800
Raw Materials transferred to Manufacturing Dept.	1,20,000
Closing Stock	80,000	24,000

Cost of the closing stock of the manufacturing department consists of 25% for manufacturing expenses and 75% for raw materials. In the preceding year Raw Materials Department earned gross profit at the rate of 10%. Salaries of ₹ 5,000 and Insurance Premium of ₹ 1,600 are allocated between the two departments on the basis of sales ratio. Find out the Net Profit of the firm as a whole.

Solution:

Departmental Trading and Profit & Loss Account for the year ended 31.3.2022    

Dr.					Cr.
Particulars	Raw Materials	Manufacturing	Particulars	Raw Materials	Manufacturing
To, Opening Stock	1,20,000	20,000	By, Sales	8,80,000	1,80,000
To, Purchases	8,00,000	6,000	By, Transfer (Transferred to MF)	1,20,000
To, Transfer (Received from RM)		1,20,000	By, Closing Stock	80,000	24,000
To, Manufacturing Expenses		24,000
To, Gross Profit c/d	1,60,000	34,000
	10,80,000	2,04,000		10,80,000	2,04,000
To, Salaries (44:9)	4,150	850	By, Gross Profit b/d	1,60,000	34,000
To, Selling Expenses	1,600	800
To, Insurance Premium (44:9)	1328	272
To, General P/L A/c (Dept. Net Profit transferred)	1,52,922	32,078
	1,60,000	34,000		1,60,000	34,000

General Profit & Loss Account for the year ended 31.3.2022

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Stock Reserve ( WN:1)	1380	By, Departmental Profit & Loss A/c	1,52,922
To, Capital A/c (NP transferred)	1,83,620	Raw Materials Manufacturing	32,078
	1,85,000		1,85,000

Working Notes:

1. Unrealized Profit in unsold stock:

Profit rate on transferred goods = GP rate of Raw Materials Dept.

= { Gross profit /( Sales + Transfer)} × 100

= { 1,60,000 / (8,80,000 + 1,20,000) } × 100

= 16%

Value of the goods of Manufacturing dept. included in the Closing stock of Raw Materials Dept.

= ₹ 24,000 × 75% = ₹ 18,000

Unrealized Profit in Closing Stock = ₹ 18,000 × 16% = ₹ 2,880

Value of the goods of Manufacturing dept. included in the Opening stock of Raw Materials Dept.

= ₹. 20,000 * 75% = ₹ 15,000

Unrealised Profit in Opening Stock = ₹ 15,000 × 10% = ₹ 1,500

Net Stock Reserve  = ₹ 2,880 – ₹ 1,500 = ₹ 1,380

Illustration 16

A & co. has two departments P & Q. department P sells goods to department Q at normal selling prices. From the following particulars, prepare departmental Trading & PL account for the year ended 31.03.20X1 and also ascertain the net profit to be transferred to Balance Sheet:

Particulars	Department P (₹)	Department Q (₹)
Opening stock	5,00,000	Nil
Purchases	28,00,000	3,00,000
Goods from P	Nil	8,00,000
Wages	3,50,000	2,00,000
Travelling expenses	20,000	1,60,000
Closing stock at cost to the department	8,00,000	2,09,000
Sales	30,00,000	2,00,000
Printing & Stationery	30,000	25,000

The following expenses incurred for both the departments were not apportioned between the departments:

Salaries ₹ 3,30,000, advertisement expenses ₹1,20,000,General expenses ₹ 5,00,000,Depreciation is to be charged @30% on the machinery worth ₹ 96,000.

The advertisement expenses of the departments are to be apportioned in the turnover ratio. Salaries and depreciation are to be apportioned in the ratio 2:1 and 1:3 respectively. General expenses are to be apportioned in the ratio 3:1.

Solution:

A & CO.
Departmental Trading and P/L Account for the year ended 31.03.20X1

Particulars	Dept. P (₹)	Dept. Q (₹)	Total (₹)	Particulars	Dept. P (₹)	Dept. Q (₹)	Total (₹)
To Opening Stock	5,00,000	Nil	5,00,000	By Sales	30,00,000	20,00,000	50,00,000
To Purchases	28,00,000	3,00,000	31,00,000	By Goods transferred to Q	8,00,000
To Goods from P		8,00,000		By Closing Stock	8,00,000	2,09,000	10,09,000
To Wages	3,50,000	2,00,000	5,50,000
To Gross Profit c/d	9,50,000	9,09,000	18,59,000
	46,00,000	22,09,000	60,09,000		46,00,000	22,09,000	60,09,000
To Travelling Expenses	20,000	1,60,000	1,80,000	By Gross Profit b/d	9,50,000	9,09,000	18,59,000
To Printing & Stationery	30,000	25,000	55,000
To Salaries (2:1)	2,20,000	1,10,000	3,30,000
To Advertisement Expenses (3:2)	72,000	48,000	1,20,000
To General Expenses (3:1)	3,75,000	1,25,000	5,00,000
To Depreciation (1:3)	7,200	21,600	28,800
To Net Profit c/d	2,25,800	4,19,400	6,45,200
	9,50,000	9,09,000	18,59,000		9,50,000	9,09,000	18,59,000
To Provision for unrealised profit on closing stock (note 2)			38,000	By Net Profit b/d			6,45,200
To Capital A/c (net profit transferred)			6,07,200

Working notes:

1. Gross profit ratio of department P = 9,50,000/(30,00,000 + 8,00,000)×100 = 25%

2. Proportionate P department’s stock in department Q

(Purchase from department P/total purchases of department Q)*total stock of department Q

= ₹(8,00,000/11,00,000) × ₹2,09,000 = ₹1,52,000

Unrealised profit = 25% of ₹1,52,000 = ₹ 38,000

 Illustration 17

A Ltd. manufacturing electronic components operates with two departments. Transfer made between the departments of both purchased goods and manufactured finished goods. Goods purchased are transferred at cost and manufactured goods are transferred only at selling price as is the case with open market.

Transactions for the year ended Mar. 31, 2022 are given below:

Particulars	Dept. X (₹)	Dept. Y (₹)
Opening Stock	20,000	15,000
Sales	1,90,000	1,35,000
Wages	12,500	7,500
Purchases	1,00,000	80,000
Closing stock:
Purchased goods	2,000	5,000
Manufactured goods	7,000	8,000

The following were the transfers from Dept. X to Dept. Y: Purchased goods ₹ 6,000 and finished goods ₹ 20,000; and from Dept. Y to Dept. X: Purchased goods ₹ 5,000 and finished goods ₹ 35,000. Stocks were valued at cost to the department concerned. It is estimated that the closing stock of manufactured goods of Dept. Y consists of 20% for goods received from Dept. X.

You are required to prepare Departmental Trading Account and A Ltd.’s Trading Account for the year ended Mar. 31, 2022. Also show the reconciliation of the profits ascertained from these accounts.

Solution: 

A Ltd. Departmental Trading Account for the year ended 31.3.2022

Dr.					Cr.
Particulars	X (₹)	Y (₹)	Particulars	X (₹)	Y (₹)
To, Opening Stock	20,000	15,000	By, Sales	1,90,000	1,35,000
To, Purchases	1,00,000	80,000	By, Transfer [Goods sent]:
To, Transfer [Goods received]:			Purchased goods	6,000	5,000
Purchased goods	5,000	6,000	Finished good	20,000	35,000
Finished goods	35,000	20,000	By, Closing Stock:
To, Wages	12,500	7,500	Purchased goods	2,000	5,000
To, Departmental Profit [Bal.  Fig.]	52,500	59,500	Manufactured goods	7,000	8,000
	2,25,000	1,88,000		2,25,000	1,88,000

Trading Account for the year ended 31.3. 20X1

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Opening Stock [20,000 + 15,000]	35,000	By Sales [1,90,000 + 1,35,000]	3,25,000
To, Purchases [1,00,000 + 80,000]	1,80,000	By Closing Stock:
To, Wages [12,500 + 7,500]	20,000	Purchased goods [2,000 + 5,000]	7,000
To, Gross Profit [Bal. Fig.]	1,11,110	Manufactured goods[WN: 1]	14,110
	3,46,110		3,46,110

Reconciliation of Profits:

The departmental profits ascertained from the Departmental Trading & P/L A/c and the company’s Gross Profit 
determined from the Company’s Trading A/c can be reconciled as under: 

Gross Profit of the company = Profit of Dept. X + Profit of Dept. Y – Unrealised profit in Unsold stock

= ₹ 52,500+ ₹ 59,500 – ₹ (490+400) = ₹ 1,11,110

Working Notes:

1. Value of closing stock of manufactured goods: 

‘Profit rate of the transferor’ on ‘transferred goods’
Value of ‘transferred goods’ included in closing stock	₹ 1,400 [7,000 × 20%]	₹ 1,600 [8,000 × 20%]
Less: Unrealised profits included in closing  stock [Transferred goods × Profit rate of transferor]	₹ 490 [1,400 × 35%]	₹ 400 [1,600 × 25%]
∴Total cost of closing stock of manufactured goods = [7,000 + 8,000] – [ 490 + 400] = ₹ 14,110

 Illustration 18

Samudra & Co, a Partnership Firm has three departments viz. K, L, M which are under the charge of the Partners B, C and D respectively. The following Consolidated P&L Account is given below :

Profit and Loss Account

Dr.			Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Opening Stocks (Note 1)	89,890	By Sales (Note 7)	4,00,000
To Purchases (Note 2)	2,65,700	By Closing Stocks (Note 8)	89,000
To Salaries and Wages (Note 3)	48,000	By Discounts Received (Note10)	800
To Rent Expenses (Note 4)	10,800
To Selling Expenses (Note 5)	14,400
To Discount Allowed (Note 5)	1,200
To Depreciation (Note 6)	750
To Net Profit for the year	67,060
	4,89,800		4,89,800

From the above Account and the following additional information, prepare the Departmental P&L Accounts for the year ended 31st March, 20X1.

1.  Break up of Opening Stock Department wise is: K - ₹ 37,890; L - ₹ 24,000 and M - ₹ 20,000.
2. Total Purchases were as under: K - ₹ 1,40,700; L - ₹ 80,600; M - ₹ 44,400.
3. Salaries and Wages include ₹ 12,000 wages of Department M. The balance Salaries should be apportioned to the three departments as 4:4:1.
4. Rent is to be apportioned in the ratio of floor space which is as 2:2:5.
5. Selling Expenses and Discount Allowed are to be apportioned in the ratio of Turnover.
6. Depreciation on assets should be equally charged to the three departments.
7. Sales made by the three departments were: K - ₹ 1,80,000; L - ₹ 1,30,000 and M - ₹ 90,000.
8. Break up of Closing Stock Department wise is: K - ₹ 45,100; L - ₹ 22,300 and M - ₹ 21,600. The Closing Stock of Department M includes ₹ 5,700 goods transferred from Department K. However, Opening Stock does not include any goods transferred from other departments.
9. Departments K and L sold goods worth ₹ 10,700 and ₹ 600 respectively to Department M.
10. Discounts received are traceable to Departments K, L and M as ₹ 400; ₹ 250 and ₹ 150 respectively.
11. Partners are to share the profits as under: (a) 75% of the Profits of Departments K, L and M to the respective Partner in Charge, (b) Balance Profits to be credited as 2:1:1.

Solution:

Departmental P&L Accounts for the year ended 31st March 20X1

Dr.							Cr.
Particulars	K (₹)	L (₹)	M (₹)	Particulars	K (₹)	L (₹)	M (₹)
To Opening Stock	37,890	24,000	20,000	By Sales	1,80,000	1,30,000	90,000
To Purchases	1,40,700	80,600	44,400	By Transfer	10,700	600	-
To Inter-Dept Trf	-	-	11,300	By Closing Stock	45,100	22,300	21,600
To Wages	-	-	12,000
To Gross Profit c/d	57,210	48,300	23,900
	2,35,800	1,52,900	1,11,600		2,35,800	1,52,900	1,11,600
To Salaries (4:4:1)	16,000	16,000	4,000	By Gross Profit b/d	57,210	48,300	23,900
To Rent (2:2:5)	2,400	2,400	6,000	By Discounts Received	400	250	150
To Selling Exp	6,480	4,680	3,240
To Disc. (18:13:9)	540	390	270
To Depreciation	250	250	250
To Net Profit c/d	31,940	24,830	10,290
	57,610	48,550	24,050		57,610	48,550	24,050

2. Computation of Stock Reserve

From the above profits, Stock Reserve should be eliminated on the Closing Stock.

• GP Rate in Department K = (57,210 x 100)/1,90,700 = 30%.

• Stock Reserve = 30% on ₹ 5,700 = ₹ 1,710.

3. Profit and Loss Appropriation Account

Dr.				Cr.
Particulars		Amount ₹	Particulars	Amount ₹
To Stock Reserve		1,710	By Profit b/d (31,940 + 24,830 + 10,290)	67,060
To Profits transferred to Capital:
B : 75% of 31,940	23,955
C : 75% of 24,830	18,623
D : 75% of 10,290	7,718	50,296
To balance profits trfd in 2: 1: 1
B : 50% of 15,054	7,527
C : 25% of 15,054	3,763
D : 25% of 15,054 (bal.fig)	3,764
		15,054
		67,060		67,060

Illustration 19

The following details are available in respect of a business for a year.

Department	Opening Stock	Purchase	sales
X	120 units	1,000 units	1,020 units at ₹ 20.00 each
Y	80 units	2,000 units	1,920 units at ₹ 22.50 each
Z	152 units	2,400 units	2,496 units at ₹ 25.00 each

The total value of purchases is ₹ 1,00,000. It is observed that the rate of Gross Profit is the same in each department. Prepare Departmental Trading Account for the above year.

Solution:

1. Computation of Closing Stock Quantity (in units)

Particulars	X	Y	Z
Opening Stock	120	80	152
Add: Purchases	1,000	2,000	2,400
Less : Units Sold	(1,020)	(1,920)	(2,496)
Closing Stock	100	106	56

2. Computation of Gross Profit Ratio
We are informed that the GP Ratio is the same for all departments. Selling Price is given for each department’s products but the Sale Quantity is different from that of Purchase Quantity. To find the Uniform GP Rate, the sale value of Purchase Quantity should be compared with the Total Cost of Purchase, as under. Assuming all purchases are sold, the sale proceeds would be

Department X	1,000 units @ ₹ 20.00	20,000
Department Y	2,000 units @ ₹ 22.50	45,000
Department Z	2,400 units @ ₹ 25.00	60,000
Total Sale Value of Purchase Quantity	125,000
Less : Cost of Purchase	1,00,000
Gross Profit Amount	25,000
Gross Profit Ratio	25,000 ÷ 1,25,000	20% of Selling Price

3. Computation of Profit and Cost for each article

Department	Selling Price	Profit at 1/5 of SP	Cost = Sales – Profit
Department X	20.00	1/5 of ₹ 20.00 = 4.00	₹ 16.00
Department Y	22.50	1/5 of ₹ 22.50 = 4.50	₹ 18.00
Department Z	25.00	1/5 of ₹ 25.00 = 5.00	₹ 20.00

4. Departmental Trading Account for the year ended...

Dr.									Cr.
Particulars	X (₹)	Y (₹)	Z (₹)	Total (₹)	Particulars	X (₹)	Y (₹)	Z (₹)	Total (₹)
To Op. stock	1,920	1,440	3,040	6,400	By Sales	20,400	43,200	62,400	1,26,000
To Purchase	16,000	36,000	48,000	1,00,000	By Cl. stock	1,600	2,880	1,120	5,600
To Gross Profit	4,080	8,640	12,480	25,200
	22,000	46,080	63,520	1,31,600		22,000	46,080	63,520	1,31,600

Opening and Closing Stocks are valued at Cost as indicated in WN 3 above. Sale Amount in the Trading Account is computed for the Sale Quantity only. Gross Profit is calculated at 20% of Sale Value.

Illustration 20

M/s Auto Garage consists of three departments: Spares, Services and Repairs. Each department being managed by a departmental manager whose commission was respectively 5%, 10% and 10% of the respective departmental profit. In the absence or inadequacy of profit, a minimum commission of ₹ 3,000 is to be paid to managers. Inter-departmental transfers of goods and services are made on the basis of loaded price given as under:

From Spares to Services 5% above cost

From Spares to Repairs 10% above cost

From Repairs to Services 10% above cost

In respect of the year ended 31st March, 20X1 the books has already been closed and positions drawn. Subsequently it was discovered that closing stock of departments had included inter-departmental transferred goods at loaded price instead of the correct cost price. From the following information prepare a revised statement recomputing the departmental profit or loss.

Net Profit/Loss as per accounts	Spares (₹)	Service (₹)	Repairs  (₹)
	19,000  (loss)	25,200 (profit)	36,000  (profit)
Inter-departmental transfers included at loaded price in the departmental stocks		32,500	2,100
		(₹ 10,500 from Spares and ₹ 22,000  from Repairs)	(from  spares)

Solution:

Statement showing computation of correct departmental profit:

Particulars	Spares (₹)	Service (₹)	Repairs (₹)
Net Profit/ (Loss) as per accounts	(19,000)	25,200	36,000
Add: Managerial Remuneration:
[Spares: Higher of (19,000) × 5/95) and 3,000]	3,000
[Service: Higher of (22,500 × 10/90) and 3,000]		3,000
[Repairs:Higher of (36,000 × 10/90) and 3,000]			4,000
∴ Profits before Managerial Remuneration	(16,000)	28,200	40,000
Less: Unrealised Profits of transferor department [WN:1]	691		2,000
	(16,691)	28,200	38,000
Less: Managerial Remuneration:
[Spares: Higher of (16,691) × 5%) and 3,000]	3,000
[Service: Higher of (28,200 × 10%) and 3,000]		3,000
[Repairs:Higher of (38,000 × 10%) and 3,000]			3,800
∴ Correct departmental profit	(19,691)	25,200	34,200

Working Notes:

Transferor		Transferee
		Services (₹)	Repairs (₹)	Total (₹)
	Spares	500 [10,500 × 5/105]	191 [₹ 2,100 × 10/110]	691
	Repairs	2,000 [22,000 × 10/110]		2,000

Exercise

CMA book unsolved questions solution

1. Mr. Y is the proprietor of a retail business which has two main departments which sell respectively Computers and Printers. On 31.12.20X1, the balances in the books of the business were as follows:

Particulars	Dr. (₹)	Cr.(₹)
Capital		71,000
Sales — Computers		59,000
Printers		29,500
Purchases — Computers	20,000
Printers	10,000
Stock on 1.1.20X1 — Computers	2,320
Printers	2,136
Salaries — Computers	20,560
Printers	15,440
Advertising	615
Discount allowed — Computers	400
Printers	200
Drawings	3,000
Buildings (Cost)	43,000
Equipment at W.D.V. — Computers	18,000
Printers	7,000
Debtors and Creditors	10,200	5,319
Bank	5,600
Rent and Rates	1,580
Canteen Charges	875
Heating and Lighting	880
Insurance of Stock	940
General Administrative Expenses	2,073
Total	1,64,819	1,64,819

Additional information —
(i) At 31.12.20X1, the following amounts were outstanding:

Salaries— Computers ₹250; Printers ₹170; Heating and Lighting ₹20.

(ii) The general administrative expenses and the rent and rates included prepayments of ₹33 and ₹80 respectively.

(iii) Stocks at 31.12.20X1 were: Computers₹2,800; Printers ₹2,450.

(iv) Depreciation is to be provided on equipment at 10% on W.D.V.

(v) The managers of the Computers and Printers departments are to be paid a commission of 5% of the net profit (prior to the commission payment) of the respective departments.

(vi) In apportioning the various expenses between the two departments due regard is to be given to the following information:

	Number of Workers	Average Stock Levels (₹)	Floor Area (sq.mt)
Hardware	18	5,000	8,000
Electrical	12	4,400	4,000

(vii) The general administrative expenses are primarily incurred in relation to the processing of purchases and sales invoices.

Prepare a Departmental Trading and Profit and Loss Account and the Balance Sheet.

Solution:

In the Books of Mr. Y

Departmental Trading and Profit and Loss Account 

For the year ended 31st December 20X1

Dr.					Cr.
Particulars	Computer (₹)	Printers (₹)	Particulars	Computer (₹)	Printers (₹)
To Opening Stock	2,320	2,136	By Sales	59,000	29,500
To Purchase	20,000	10,000	By Closing Stock	2,800	2,450
To Gross Profit	39,480	19,314
	61,800	31,950		61,800	31,950
To Salaries (Plus Outstanding)	20,810	15,610	By Gross Profit	39,480	19,814
To Advertising (Note1)	410	205
To Discount Allowed	400	200
To Rent and Rates (Note 1)	1,000	500
To Canteen Charges (Note 1)	525	350
To Healing and Lighting (Note 1)	600	300
To Insurance of Stock (Note 1)	500	440
To General Administrative Expenses (Note 1)	1,360	680
To Depreciation on Equipment	1,800	700
To Managers’ Commission	604	41
To Net Profit (transferred to Capital)	11,471	788
	39,480	19,814		39,480	19,814

Balance Sheet as on 31.12.20X1

Liabilities		Amount (₹)	Assets		Amount (₹)
Capital (Opening)	71,000		Building (Cost)		43,000
Add. Profit from Computer	11,471		Equipment at w.d.v (18000+7000)	25,000
Add. Profit from Printer	788		Less. Depreciation (1800+700)	2,500	22,500
	83,259		Stock (2800+2450)		5,250
Less. Drawings	3,000	80,259	Debtors		10,200
Creditors		5,319	Bank		5,600
Outstanding salaries (250+170)		420	Prepaid Gen. Adm. Expenses		33
Outstanding Heating and lighting		20	Prepaid Rent and Rates		80
Outstanding Commission (604+41)		645
		86,663			86,663

Note:

(1) Rent and rates (1580 - 80 prepaid) = ₹1500 is apportioned in floor area ratio; Lighting and heating (880+20 outstanding) = 900 is apportioned in floor area ratio; General administrative expenses (2073-33 prepaid) = ₹2040 is apportioned in the ratio of total of sales and purchases; Advertising is distributed in sales ratio and insurance is distributed in average stock level. 

2. Department A sells goods to Department B at a profit of 25% on cost and to Department C at 10% profit on cost. Department B sells goods to A and C at a profit of 15% and 20% on sales, respectively. Department C charges 20% and 25% profit on cost to Department A and B, respectively.

Department Managers are entitled to 10% commission on net profit subject to unrealised profit on departmental sales being eliminated. Departmental profits after charging Managers’ commission, but before adjustment of unrealised profit are as under:

	₹
Department A	36,000
Department B	27,000
Department C	18,000

Stock lying at different departments at the end of the year are as under:

	Dept A	Dept B	Dept C
	₹	₹	₹
Transfer from Department A	-	15,000	11,000
Transfer from Department B	14,000	-	12,000
Transfer from Department C	6,000	5,000	-

Find out the correct departmental Profits after charging Managers’ commission.

Solution:

Calculation of correct Profits

	Dept X     ₹	Dept Y     ₹	Dept C     ₹
Profit after charging managers' commission	36,000	27,000	18,000
Add back : Managers' commission (1/9)	4,000	3,000	2,000
	40,000	30,000	20,000
Less: Unrealized profit on stock (Working Note)	(4,000)	(4,500)	(2,000)
Profit before managers' Commission	36,000	25,500	18,000
Less : Commission for Department manager @ 10%	(3,600)	(2,550)	(1,800)
Departmental Profits after manager's commission	32,400	22,950	16,200

Working Note :

Stock lying with

	Dept X	Dept Y	Dept C	Total
	(₹)	(₹)	(₹)	(₹)
Unrealized Profit of:
Dept X		1/5×15,000	1/11×11,000
		= 3,000	= 1,000	4,000
Dept Y	0.15×14,000		0.20×12,000
	= 2,100		= 2,400	4,500
Dept C	1/6×6,000	1/5×5,000
	= 1,000	= 1,000		2,000