Financial Accounting · Branch (including Foreign Branch) and Departmental Accounts

Inter-Departmental Transfers and Unrealised Profit in Departmental Accounts

Updated 10 October 2026 · Fact-checked

When one department transfers goods to another at a price above cost, the transferring department books a profit that is not yet earned if the goods remain unsold. Find the closing stock that came from the other department, take the profit loading in it, and deduct this stock reserve from total profit.

Understand Inter-Departmental Transfers and Unrealised Profit

A business with departments often moves goods from one department to another. Department A may make a product and Department B may sell it. The transfer can be at cost price or at a price above cost, such as cost plus 25%.

If the transfer is at cost, there is no profit in the transfer. Nothing special is needed beyond crediting the sending department and debiting the receiving department.

If the transfer is above cost, the sending department shows a profit on goods it has not sold outside the business. That helps you judge each department's performance. But the business as a whole cannot earn a profit by moving goods from one pocket to another.

So a problem arises when some transferred goods are still in the receiving department's closing stock. That stock is valued at transfer price, which includes the sending department's profit. This profit is unrealised. It becomes real only when the goods are sold to outsiders.

To fix this, you create a stock reserve (also called a provision for unrealised profit). You compute it on the transferred goods in closing stock and deduct it from the combined profit in the final accounts. It is shown against stock in the balance sheet, or stock is shown at cost. If there is opening stock, the reserve from last year is reversed, so only the net change affects this year's profit.

Key rules to remember

Profit loading when transfer is at cost plus a percentage on cost: Unrealised profit = Closing transferred stock × (Markup % ÷ (100 + Markup %)); For cost plus 25%, the fraction is 25/125 = 1/5.
Profit loading when transfer price is cost plus a percentage on transfer price: Unrealised profit = Closing transferred stock × (Profit % on transfer price ÷ 100); For a transfer at a profit of 20% on transfer price, the fraction is 1/5.
Stock reserve required: Stock reserve = Unrealised profit in closing stock at transfer price; Apply it only to the portion of closing stock that came from another department at above cost.
Effect on profit for the year: Charge to profit = Closing reserve − Opening reserve; If opening reserve is larger, the difference increases profit.
Closing stock at cost: Cost of transferred stock = Transfer price − Unrealised profit; Used when stock is shown at cost in the balance sheet.

How to solve Inter-Departmental Transfers and Unrealised Profit questions

Use this method for any question on goods transferred between departments above cost.

1Read how the transfer price is fixed: cost plus a percentage on cost, or a percentage on transfer price. Note this carefully.
2Prepare each departmental trading account, showing transfers to or from other departments at transfer price.
3Find the closing stock of each department and split it into own purchases and goods received from other departments.
4Compute the unrealised profit on the transferred part using the correct fraction.
5Do the same for opening stock if given, to find the opening reserve.
6Compute the net adjustment as closing reserve minus opening reserve.
7Deduct the net reserve from the total departmental profit (or add if opening reserve is higher) in the combined profit and loss account.
8Show closing stock in the balance sheet at cost, or show the reserve as a deduction from stock.

Quickest way: Fraction method for stock reserve

When to use it: Use it when the question gives the markup and the closing stock split and you only need the total profit after reserve.

Convert the markup into a fraction of transfer price: 25% on cost becomes 1/5, 20% on cost becomes 1/6, 50% on cost becomes 1/3.
Multiply the transferred closing stock by that fraction.
Subtract the opening reserve calculated the same way.
Adjust total departmental profit by this net figure in one line.

Common mistakes in Inter-Departmental Transfers and Unrealised Profit

Applying the markup percentage directly to the stock value, such as 25% of the transfer-price stock.
Students forget that the stock is already at cost plus profit, so the base is not cost.
Fix: Use markup ÷ (100 + markup) for a markup on cost. Check: cost ₹100 becomes ₹125, and profit is 25 out of 125.
Creating a reserve on the whole closing stock instead of only the transferred part.
The stock figure given in the question includes both own and transferred goods, and students use it all.
Fix: Split the closing stock. Only goods received from another department at above cost carry unrealised profit.
Ignoring the opening reserve.
Students treat the reserve as a one-year item and forget it carries over.
Fix: Compute the opening reserve and charge only the difference between closing and opening reserve.
Deducting the reserve from an individual department's profit instead of the total.
Students want each department to look correct after adjustment.
Fix: Departmental profits stay as shown with transfer profits included. Deduct the reserve in the combined profit and loss account, unless the question says otherwise.
Mixing up whether the percentage is on cost or on transfer price.
Phrases like 'at a profit of 20%' are read quickly.
Fix: Underline the base words. 'On cost' needs the (100 + markup) denominator. 'On transfer price' uses the percentage as is.

Worked examples

Example 1

A firm has Departments X and Y. Department X transfers goods to Department Y at cost plus 25%. Transfers during the year were ₹1,50,000 (at transfer price). Department Y's closing stock includes ₹30,000 of goods received from X. There was no opening stock. Department X shows a profit of ₹60,000 and Department Y shows a profit of ₹40,000, both before any reserve. Find the stock reserve and the total profit after it.

Show the solution

Transfer is at cost plus 25% on cost, so the profit fraction is 25 ÷ 125 = 1/5.
Transferred goods in closing stock at transfer price = ₹30,000.
Unrealised profit = ₹30,000 × 1/5 = ₹6,000.
Stock reserve = ₹6,000. There is no opening reserve, so the net charge is ₹6,000.
Total profit before reserve = ₹60,000 + ₹40,000 = ₹1,00,000.
Total profit after reserve = ₹1,00,000 − ₹6,000 = ₹94,000.

Answer: Stock reserve is ₹6,000 and total profit after the reserve is ₹94,000.

Example 2

Department P transfers goods to Department Q at cost plus 20%. Q's opening stock included ₹24,000 and closing stock included ₹36,000 of goods received from P, both at transfer price. Combined departmental profit before the reserve adjustment is ₹2,10,000. Find the profit after the reserve adjustment.

Show the solution

Markup is 20% on cost, so the fraction is 20 ÷ 120 = 1/6.
Opening reserve = ₹24,000 × 1/6 = ₹4,000.
Closing reserve = ₹36,000 × 1/6 = ₹6,000.
Net increase in reserve = ₹6,000 − ₹4,000 = ₹2,000.
This increase is charged to the combined profit and loss account.
Profit after adjustment = ₹2,10,000 − ₹2,000 = ₹2,08,000.

Answer: Profit after the reserve adjustment is ₹2,08,000.

Exam tips

Write the fraction (such as 1/5) at the top of your answer so the examiner can see your base is correct.
Show the opening reserve, closing reserve and net change as separate lines. Step marks are given for each.
Check whether the question wants stock at cost in the balance sheet or the reserve shown as a deduction, and present it that way.
In an MCQ, work out the fraction first. Options are often built from the common wrong base, so a quick check removes the trap.
Show a short working note for the closing stock split into own and transferred goods before computing the reserve.

Practice questions from Branch (including Foreign Branch) and Departmental Accounts

Inter-Departmental Transfers and Unrealised Profit in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Inter-Departmental Transfers and Unrealised Profit: frequently asked questions

What is unrealised profit in departmental accounts?

It is the profit included in the transfer price of goods that one department sent to another, where the goods are still unsold at the year end. The business has not earned it from outsiders, so it is removed through a stock reserve.

How do I calculate the stock reserve if goods are transferred at cost plus 25%?

Multiply the transferred closing stock by 25/125, which is 1/5. This gives the profit in the stock at transfer price. Only the part of closing stock that came from another department is used.

What if there is opening stock of transferred goods?

Compute the opening reserve in the same way. The profit and loss account is charged with the closing reserve minus the opening reserve. If the opening reserve is higher, the difference is added to profit.

Do I need a reserve when goods are transferred at cost?

No. If the transfer is at cost, the transferred stock contains no profit, so there is nothing to reserve.