RE: What are the importance of departments accounts in trading?
The preparation of such Trading and Profit and Loss Account separately for each department enables to compare the results of trading activities:
(a) It enables to compare the performance of one department with that of another and to measure the progress of the department itself by comparing year-wise performance.
(b) It enables to measure the profitability of each department. In the absence of departmental accounting, if there is a loss, the businessman thinks that the whole business is at loss. Thus he may stop the business and may start a new business, because he is unable to understand the performance of each department. But, by preparing departmental accounts separately, the contribution of profit made by each department can be known.
Thus a good profit- making department can be developed and the department which gives small margin of profit or no profit can be closed down. It is also possible to check the profit of a department, not to be eaten away by the department which makes no profit.
(c) It helps in formulating new policies and to adopt new and latest techniques in the departments, thereby further profitability of the department can be expected.
(d) Departmental Managers of the profit-making department can be encouraged by adopting a method of commission on the basis of departmental profit. This step will further boost the profit-making department