Some times departments prefer to buy goods from their internal departments for this prices are charged equal to the normal selling prices or a department may transfer at it original cost price. Since each department is considered as a separate profit centre, it is necessary to have separate records for inter-departmental transfer of goods or even services. The department which transfers the goods considers its transfers as equal to sales and the department which receives the goods considers it as equal to its purchases and put it in the cost of goods sold. Generally a periodical analysis sheet is prepared to record these departmental transfers:

Transferring Departments Receiving Departments
Date X (Rs) Y (Rs) Z (Rs) X (Rs) Y (Rs) Z (Rs)
April 3 (from X to Y) 400 400
April 10 (from Y to X) 500 500 —-
April 20 (from Z to Y) 300 300
April 30 (from X to Z) 200 —- 200
Total 600 500 300 500 700 200
advance financial accounting  DEPARTMENTAL ACCOUNTS

At the end of the period the inter-departmental transfers are recorded by recording the following accounting entry: Receiving Department Dr. (at transfer price)

X 500 Y 700 Z 200

Transferring Department Cr. (at transfer price) X 600 Y 500 Z 300

Solved Problem: A firm has two departments X and Y. Department Y (manufacturing department) receives goods from department X as its raw material. Department X supplies the goods to Y at cost price. From the following information prepare a Departmental Income Statement for the year ended on 31 December 2007:

X Rupees Y Rupees
Opening Stock (1-1-2007) 250,000 75,000
Purchases (Outside supplier) 1,000,000 20,000
Sales (Outside customer ) 1,200,000 300,000
Closing stock (31-12-07) 150,000 50,000

Other Information:

  1. Depreciation is charged on building @ 20% p.a. Cost of building is Rs. 105,000 and occupancy ratio is 2/3 and 1/3 for X and Y respectively.
  2. X department transferred goods Rs. 250,000 to department Y.
  3. Manufacturing expenses Rs. 10,000.
  4. Selling expenses Rs. 15,000.
  5. General expenses Rs. 58,000.


Income Statement for the year ended December 31, 2007

Particulars X (Rs). Y (Rs). Total (Rs).
Sales 1,200,000 300,000 1,500,000
Transfer to Y 250,000 250,000
Total Revenue 1,450,000 300,000 1,750,000
Less Cost of goods sold
Opening stock 250,000 75,000 325,000
Add Purchases 1,000,000 20,000 1,020,000
Less closing stock 150,000 50,000 200,000
Transfer from X 250,000 250,000
Manufacturing expenses 10,000 10,000
Total cost 1,100,000 305,000 1,405,000
Gross profit 350,000 (5,000) 345,000
Less Selling expenses 12,000 3,000 15,000
Deprecation 14,000 7,000 21,000
Net profit 324,000 (15,000) 309,000
Less General expenses 58,000
Net profit of business 251,000


Selling expense Rs. 15,000

X (Rs) Y (Rs)
Sales 1,200,000 300,000
Sales ratio 12 3

X =15,000 X 12/15 = 12,000 Y =15,000 X 3/15 = 3,000

Depreciation expense

Building 105,000 X 20/100 = Rs. 21,000

X (Rs) Y (Rs)
Deprecation 2/3 1/3

X =21,000 X 2/3 = 14,000 Y =21,000 X 1/3 = 7,000


Large business entities open up branches in diversified geographic segments such as towns and cities and even in different countries. Segmenting their business geographically facilitate the business to market its products/services over a large territory and thus increase its profits. Here we must make this distinction that departments are business segments whereas, branches are geographic segments. A branch may be defined as a segment of an enterprise that is geographically separated from the rest of the entity, controlled by a head office, and generally carrying on the same or substantially same activities as of the entity. For example in our daily life we observe branches of banks, bakeries, shoes stores, schools, hotels and restaurants etc. It is worth mentioning here that a branch is not a separate legal entity, it is simply a segment of an entity. From accounting perspective, a branch is identified as a profit centre and if it is an independent branch then it becomes an investment centre. To have clear picture of the performance, profits of each branches are calculated separately and then are consolidated in the accounts of the head office. Depending upon the size of the branch the decision is taken regarding the accounting system to be implemented there. Had the branch size is small there would have been single entry system. Where the branch size is considerable large and it can afford a complete accounts department there we will follow the double entry accounting system, such are often independent branches.

Classification of Branches

For accounting purposes branches are classified as under:

  1. Foreign Branch (not part of our syllabus)
  2. Domestic Branch

a. Independent branch (investment centre)

b. Dependent branch (profit centre)

i. Whole-sale branch

ii. Retail branch


advance financial accounting  DEPARTMENTAL ACCOUNTS

Domestic branch Foreign branch

Dependent Independent

Dependent Branch

advance financial accounting  DEPARTMENTAL ACCOUNTS advance financial accounting  DEPARTMENTAL ACCOUNTS

Retail sale branch Whole sale branch

Debtors system

Income statement system / Final account system

Stock & Debtors system

Independent Branch

This is the type of branch which maintains its own set of books. The method of accounting is the double entry book keeping. Branch manager of such a branch is given certain powers for decision making regarding procurement, selling, advertising, staffing, pricing, and even for purchasing of fixed assets. These branches are taken as an investment centre.

Dependent Branch

This is the type of branch which does not maintain its own set of books. All records are maintained by the head office, which is concerned with the branch profits only. Branch manager of such a branch is not given decision making powers, the manager acts according to the instruction and policies directed by the head office.

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