Departmental Stores serve not only as a big market but also as a faithful friend. Departmental stores offer valuable services to customers. Almost all the goods of daily use are provided to them under one roof.
One of the most important aims of accounting is the segregation and recording of activities, whether of buying or selling of production, administration or distribution.
In order to ascertain the profit or loss made by each department, it will be advisable to prepare separately trading and profit & loss account of each department at the end of the accounting year.
Importance of Departmental Stores Accounts
Preparation of such Departmental Stores Accounts is helpful to the business in the following respect:
- It enables the business to compare the performance of one department with that of another.
- It helps in appropriate rewarding or penalizing the departmental employees on the basis of the result shown by them.
- It helps the business in formulating proper policies relating to the expansion of the business. New profitable lines of production or trading that are giving a loss can be closed down.
The preparation of departmental trading and profits & loss account requires the maintenance of proper subsidiary books having appropriate columns for the different department.
For example: If a business had three departments P, Q and R, the subsidiary books such as purchases books, purchases return books, Sales book, Sales return book, etc. Should have separate columns for each of the departments.
Cashbook may also have columns for recording cash sales of each of the departments separately in case the volume of cash sales is quite large.
In order to ascertain the profit or loss made by each department, it is necessary that each department is charged with a proper share of the various business expenses.
Method of Allocating Departmental Expenses
1. Expenses incurred specifically for the department will be charged directly thereto eg: Repairs to Motors in the Transport Department.
2. Expenses for the benefit of all the departments and capable of precise allocation will be debited accordingly e,g: Lighting, according to separate meterage.
3. Expenses for the benefit of all department not capable of precise allocation will be treated as follows:
These will be charged on a sales basis, either (A) value (B) units or quantities sold, e.g. Discounts allowed, Bad debts, Selling commission, Although occasionally some of these expenses may come under one of the other headings as in the case of bad debts, Where separate sales ledgers are used for each department.
Many charges, like Rent and Rates, may be apportioned to give approximately true results on the basis of (A) area, (B) windows used, (C) cubic content, (D) average stock held or sold.
4. Where expenses are incurred for which no basis of apportionment is practicable it is usual to bring down the departmental balance of profits and apportion these expenses equally.
Now You Know Departmental Stores Accounts: Explanation, Importance