Departmentalized Accounting System: Definition & Example

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Departmental Purchases & Cash Payments in Accounting

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:03 What's a Departmental…
  • 0:46 The System's Usefulness
  • 3:02 An Example
  • 4:03 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Timeline
Autoplay
Autoplay
Speed Speed Audio mode
Lesson Transcript
Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

A departmental accounting system allows management to assess the profitability of individual product lines and take appropriate action to ensure that profits are maximized and costs are controlled.

What's a Departmental Accounting System?

Buy the Book store sells fiction, non-fiction, and children's books. The owner, Ms. U. Reed, knows the store is making money overall, but she isn't sure how much profit each of the three segments is making. She would like to know if a departmental accounting system can provide her with the information she needs.

A departmentalized accounting system, also called a departmental accounting system, is an information system that records the financial activities of individual departments in situations where a company has two or more departments. After all, it would be difficult to assess the performance of an individual department if the financial information of several different departments were lumped together.

The System's Usefulness

Larger companies find this type of system particularly useful because assessing the profitability of each department allows management to identify and make decisions about unprofitable departments on a timely basis. For example, recall that Buy the Book has fiction, non-fiction, and children's book departments. Under a departmental accounting system, each of these departments will have its own accounting system to keep track of all financial activity, including revenue and expenses. Revenue is the amount of money a business receives from selling its products or providing a service. Expenses are costs incurred by the company in order to earn the revenue. Examples of expenses include salaries, rent, and advertising.

Departmental accounting also allows a business to calculate gross profits for each individual department. Gross profit is the company's revenues less its cost of goods sold, or the amount it pays to buy or make the products it sells. Gross profit represents the mark-up on the products that the company sells.

In addition to allowing Ms. Reed to assess the profitability of each of her three departments, a departmental accounting system can also help her compare each department's current profitability to prior years' results, as well as budgeted or forecasted figures. It also helps management make significant decisions regarding the business. For example, Ms. Reed may be thinking about expanding the fiction section, or she may determine that the children's section is not making enough money and should be closed. Since departmental accounting also provides information about expenses, Ms. Reed could identify departments where expenses appear to be out of line and take steps to control them.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support