Journal Entry for Inter-departmental Transfers
Departmental Accounts are accounts relating to the several departments or sections of a business drawn up with a view to ascertaining their individual performances. Transfer of goods or services by one department to another department is called inter-departmental transfers. Since the departments are just under the single roof and involved in exchanging their goods or employment staff or performance of services among the different departments, which is known as inter-departmental transfer. For instance, Departmental Store is an example of large scale trading by a retail trader. If unrealized profit is contained in the opening stock, such reserve should be credited to the general profit and loss account. The journal entry for inter-departmental transfer would be as follows:
To Supplying Department…
Goods may be transferred either at cost price or at a selling price. If the goods are transferred at cost price, there will not be any serious consideration. It is because the supplying department will record in its books as a sale at cost price and the receiving department records as a purchase at a cost price. But it needs due consideration if the supplying department supplies goods or services to the receiving department at purchase cost plus a certain percentage of margin. It is essential to know the profit and loss account of each departmental store at the end of the accounting year. The receiving department after receiving goods at cost price plus margin from supplying department, if unable to sell them totally at the end of an accounting period, then in this condition a provision for unrealized profit or stock reserve has to be affected for the unsold stock with the help of the following entry:
General profit and loss A/C………..Dr.
To stock reserve A/C…
Similarly, if the receiving department holds the goods which are transferred at selling price in its opening stock, the following entry is made:
Stock reserve A/C………………..Dr.
To general profit and loss A/C
It is a common practice that the calculated rate of gross profit is applied to closing stock and a given rate of gross profit is applied in the opening stock to calculate unrealized profit. The rate of gross profit can be ascertained as follows:
- % of gross profit = (Gross profit/Sales + Departmental transfers) X 100
- Transferred portion of goods = (Departmental transfers/Purchase+departmental transfers)
- Unrealized profit= Gross profit rate X Total amount of stock X Transferred portion of goods.