Managing Inter-Departmental Transfers in Financial Accounting
Inter-departmental transfers involve recording and charging costs from one department to another, with different pricing bases like cost-based and market-based transfers. Unrealized profits in transfers are adjusted using stock reserves. Entries are made at the selling price to include costs and profits. Eliminating unrealized profits involves creating stock reserves through journal entries. Proper management of inter-departmental transfers is crucial for accurate financial reporting.
- Financial accounting
- Inter-departmental transfers
- Cost-based pricing
- Market-based pricing
- Stock reserves
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WELCOME Class: B.Com Part-1 Subject: Financial Accounting TOPIC: INTER-DEPARTMENTAL TRANSFERS Prepared By Dr. SHAHID IQBAL Guest Faculty, Marwari College, Darbhanga, Mobile No. and Whatsup No. : 7004160257 Email ID: shahidlnmu@gmail.com 1
INTER-DEPARTMENTAL TRANSFERS: Whenever goods or services are provided by one department to another, their cost should be separately recorded and charged to the department benefiting thereby and credited to that providing the goods or services. The totals of such benefits (inter- departmental transfers) should be disclosed in the departmental Profit and Loss Account, to distinguish them from other items of expenditure. Basis of Inter-Departmental Transfers Goods and services may be charged by one department to another usually on either of the following three bases: a. Cost based transfer price Where the transfer price is based on standard, actual, or total cost, or marginal cost is called cost based transfer price. 2
b. Market based transfer price Where the goods are transferred at selling price from one department to another is known as market based price. Therefore, unrealized profit on the goods sold is debited from the selling department in the form of a stock reserve for both the opening and the closing stock. b. Dual pricing system Under this system, the goods are transferred on the selling price by the transfer or department and booked at the cost price by the transferee department. Elimination of Unrealised Profit When profit is added in the inter-departmental transfers the loading included in the unsold inventory at the end of the year is to be excluded before final accounts are prepared so as to eliminate any anticipatory (internal) profit included therein. 3
Stock Reserve Unrealised profit included in unsold stock at the end of accounting period is eliminated by creating an appropriate stock reserve by debiting the combined Profit and Loss Account. The amount of stock reserve will be calculated as: Transfer price of unsold stock Profit included in transfer price / Transfer price When goods or services are supplied from one department to another at cost price, the corresponding entries to record the transfer will be made at cost price. This does not involve any adjustment at any stage. However, when goods or services are supplied to another department at selling price, the transfer has to be recorded at a selling price called transfer price. This obviously includes cost as well as profit. In such a situation, if the 4
department to whom goods or services are transferred at selling price has an unsold on unused stock at the end of the accounting period, this involves an element of unrealised profit. This needs an adjustment which will be ma& by creating a stock reserve with the help of the following journal entry : Journal Entry At the end of the accounting year, the following journal entry will be passed for elimination of unrealised profit (creation of stock reserve): Profit and Loss Account To Stock Reserve (Being a provision made for unrealised profit included in closing stock) Dr. 5
In the beginning of the next accounting year, the aforesaid journal entry will be reversed as under: Stock Reserve Dr. To Profit and Loss Account (Being provision for unrealised profit reversed.) Disclosure in Balance Sheet The unsold closing stock acquired from another department will appear on the assets side of the balance sheet as under: (An extract of the assets side of the balance sheet) Current assets Stock Less: Stock reserve xxx xxx xxx xxx 6
