Department Accounting – Understanding the Fundamentals

Branching Out

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Such further areas might both be within the type of an company or a department.

Department or Company?

Relying on its targets, the enterprise might undertake the type of both a department or an company. Each are a part of a central group and whereas they conduct operations away from their house workplace, they aren’t a separate authorized entity from the latter.

The important thing distinction between the 2 lies of their diploma of autonomy or independence. As an illustration, a gross sales company sometimes doesn’t inventory stock, however solely shows merchandise, takes orders and arranges for supply of the merchandise. In different phrases, the company merely acts on behalf of the house workplace (H.O.), with the latter dealing with the opposite elements of operations equivalent to buy of merchandise, promoting, and granting of credit score.

The department, nevertheless, has a higher diploma of autonomy and thus operates extra independently of the house workplace than the company, primarily within the following elements:

  • Provision of a wider vary of companies to prospects or clientele
  • Train of higher administration decision-making
  • Dealing with of extra elements of enterprise operations, equivalent to stocking of stock, filling of shoppers’ orders, credit score and assortment
  • Upkeep of a separate accounting system

Separate Department Accounting System

Reflecting this higher diploma of autonomy, the department sometimes maintains its personal separate accounting system, whereas the company doesn’t. In actual fact, it’s the house workplace which information all company transactions within the former’s accounting system.

Such upkeep of separate accounting information by the department and the house workplace facilitates simpler management over operations and allows high administration to raised assess department efficiency and make strategic enterprise choices for the corporate.

Accounting for Department Operations

The accounting transactions recorded by the department are typically of the next sorts:

    • Exterior transactions or transactions with events exterior to the corporate as a authorized entity (e.g. prospects, suppliers, collectors, utility firms)
    • Inner transactions
      • throughout the department
      • with different branches of the corporate
      • with house workplace

 

The recording by the department of its exterior transactions and people which by nature have an effect on solely the department (i.e. inside transactions throughout the department) is finished utilizing the common accounts and journal entries. Nonetheless, in recording the department’s transactions with the H.O., sure intra-company accounts must be created and used. Likewise, inter-branch transactions or transactions of the department with one other department are normally coursed or cleared by means of the H.O. utilizing intra-company accounts.

On the finish of the accounting interval, the department prepares its personal monetary statements primarily based on the balances of its accounts, however just for inside reporting functions. These department monetary statements nonetheless must be mixed with these of the H.O. for exterior reporting functions, in such a means that the ensuing stories mirror the monetary situation and outcomes of operations of the corporate as a single entity.

 

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