Departmental Accounting refers to maintaining accounts for one or more branches or departments of the company. It is about the preparation of final accounts taking into consideration divisional performance before the overall performance. It is essential to know the profit and loss account of each departmental store at the end of the accounting year. The departmental stores are the example of large scale retail selling just under a single roof. For example, a textile merchant may trade in cotton, woolen and jute fabrics. The overall performance for this type of business depends, however, on departmental efficiency.
Objectives of Departmental Accounting
The main objectives of departmental accounting are:
(1) To know the financial position of each and every department separately, it is helpful to make a comparison.
(2) To check out the interdepartmental performance. Unprofitable departments will be revealed.
(3) To evaluate the performance of the department with the previous period result. The gross profit of each department can be ascertained.
(4) To help the owner formulating the right policy for the future. The progress of each department can be monitored for appropriate actions to be taken.
(5) To assist the management in making the decision to drop or add a department. The result of operations can be used to determine the remuneration of managers of each department.
(6) To provide detail information about the entire organization. It can help the management in deciding which department should be developed more and which should be closed in order to maximize the profitability of the whole company.
(7) To assist management for cost control. It helps in determining the commission of the department manager when it is linked to profit achieved by their department.
For a company that is dealing with multiple products, it is much easier to control and monitor several departments based on the products they sell rather than controlling it as one single business.