Definition: A departmental accounting system is an accounting information system that records the activities and financial information about the department. Managers can use the financial information from the departmental accounting system to tell how profitable and efficient each department is.
What Does Departmental Accounting System Mean?
Larger corporations can’t be properly accounted for with one single, centralized accounting system. That is why the corporation is divided into many different departments like the shipping and receiving department, sales department, and manufacturing department. Many companies also departmentalize based on products.
For instance, Microsoft has a Windows department, Xbox department, and Microsoft Office department.
Each one of these departments has its own accounting system to keep track of revenues and expenses. These accounting systems also provide useful efficiency ratios for management. Managers can use these ratios to evaluate the departments and consider merging departments or getting rid of some departments altogether.
Managers tend to look at whether the department is a cost center or profit center. Some departments that do not produce a profit are still worth keeping around because they share in the interdepartmental expenses like rent and utilities.