To put it simply, departmental accounting is nothing but a way of accounting in which the financial data of a business/company or organization is divided into several divisions or departments. This particular accounting method is pretty common too, but it is not meant for every organization/company or business out there. Why? Well, you’ll get to know more about that by taking a good look at the advantages and disadvantages of departmental accounting, and that is precisely what we’re onto today. So let’s get started with just that, shall we?
Advantages of Departmental Accounting
1. Better Decision-making
Departmental accounting is great since it assists in making smart decisions. When every department is doing its set of books aka accounting, the manager in charge could know how each part of the business is doing. This is very crucial in planning and enables to make more money for the business or organization and run the business more effectively.
2. Smarter Use of Resources
This type of accounting will definitely show the managers’ performance in all departments, hence enabling the availability of resources in the right places. This means that all that the department is in need of will be achieved in full so that, really, the department can grow as per the requirements and, in the same manner, keep the budget tight to cut down waste.
3. More Accountability
Keeping up with every single department’s money separately means everybody’s job is more accountable. Of course, this tells the managers who are doing great and who must do better. In such a way, everyone in control knows that he or she has to meet the set goals because their work is under close observation.
4. Easier to Grow or Cut Back
With departmental accounting, it is easy to make decisions on whether to enlarge/expand or shut down a department, depending on the financial records. The records will show which areas in the business are doing well and which ones are not. This helps the company decide on where to put its money for the best returns.
5. Drawing in Investors
You see, investors usually prefer those businesses that are evidently defining how they are doing and how their money is well handled. Departmental accounting will indicate how that particular part is performing, thus making it easy for the investor to make a decision to put money in that particular business. The company that is able to prove its departments as profitable and efficient will, therefore, be in the best position to obtain investments, which are key for growth.
6. Boosting Competition
This method of accounting can or will also make it more competitive because it will be a separate account for each department. It will entice each of them to try and do better than the other one, thus improving the amount and quality of work done. This kind of healthy competition can lead to new ideas and better overall results for the company.
Disadvantages of Departmental Accounting
1. Complexity and Management Difficulty
While this has its benefits, departmental accounting makes the financial side of running a business much trickier. This can indeed turn out to be a nightmare: keeping not one but several accounts for different departments, and peering deep into the workings of the department. This extra layer of complexity means more work for the accounting team and can make audits a real challenge.
2. Higher Costs
See, you will have to shell out a longer range of funds in setting up a system of departmental accounting. The costs do add up: from training your team to purchasing the right software and taking that extra trouble to keep each department’s accounts straight. For a smaller business, the price tag might be too high compared to the benefits, and that counts in the long run.
3. Risk of Poor Coordination
The fact that the departments have their financial reins to themselves could actually be quite a drawback to working as a team, as every single one does its own thing and it would really be hard to pull in the same direction towards the main goals of the company. At its worst, such a lack of coordination leads to doing the same work twice, well most of the time at least, and may even lead to internal conflicts, making the operations within the firm a real mess or chaotic, to be honest.
4. Data Security Concerns
In the departmental accounting scenario, the details of finances for a higher number of people will increase, thereby increasing the possibility of a data leak or misuse of information. And for those who are already on a tight budget and can’t spend too much on accounting operations, like the smaller businesses, it would be a huge deal for them to consider the need for extra leveled-up security just to add more to the bill and the complexity.
6. Resistance to Change
See, the team is likely to hit a wall while trying to introduce the rolling out of departmental accounting in a place that is not used to it. And that is pretty understandable since this happens every time you introduce something new in the work environment. So, this is not particularly a big disadvantage of departmental accounting, but just an issue to overcome.
Final Thoughts
Alright, now you pretty much understand why some companies or businesses go down the path of using departmental accounting, and why others avoid it. Right? And we really hope that this post has made things a lot easier for you to understand related to this whole departmental accounting thing.
