UNIT 2
INTEGRATED SYSTEM AND NON INTEGRATED SYSTEM OF ACCOUNTS
After studying this chapter one should able understand
- The need for integrated and non-integrated account
- Distinguish between the two cost book keeping systems
- The required journal and ledger accounts to be prepared
- The advantages of these systems
Just as financial accounting system is maintained with certain objectives in view, cost accounting system is often distinctively maintained with a view to achieve its objectives. All transactions are collected from the same invoices vouchers or receipts which are also common for financial account. Costs are then classified according to functions, departments, or products. Though real accounts and nominal accounts are of direct relevance in ascertaining the cost of products, personal accounts and cash or bank account are not directly related to cost ascertainment. When cost accounting system is maintained it involves maintenance of certain bulks for recording day to day transactions. It is not necessary to maintain cost accents’ under double entry stated of book keeping. However, in order to ensure arithmetical accuracy of data often the principles of double entry system of bulk keeping is followed.
There are two systems of maintaining cost records viz., interlocking system and integral accounting system. Under interlocking system cost records are maintained in a separate set of books independent of financial accounts. The ICMA terminology defines interlocking system of accounting as “a system in which the cost accounts are distinct from the financial accounts, the two sets of accounts being kept continuously in agreement or readily recognizable”
The following are some of the advantages of interlocking accounting system:
a) When separate set of costing books are maintained it facilitates ready accomplishment of its objectives’) If avoids the complications or recording the entries if it is integrated with financial accounts.
b) It can be maintained according to convenience as it need not be statutorily maintained
The following are some of the limitations
a) When cost accounts are independently maintained, it amounts to duplication of expenses along with financial accounts.
b) The profit shown by cost books may vary with that shown by financial accounts. This requires reconciliation which involves time and effort
Subsidiary books maintained under interlocking system of accounting:
The following are some of the subsidiary books maintained under interlocking system of accounting:
- Stores ledger; this ledger is used to record both the quantity and amount of receipts, issues and balance of materials and supplies. The basis for recording the transactions are (a) Materials received note (b) Material transfer note, and (d) Material returned note.
- Payroll and wage analysis book; this ledger is used to record the wages. The basis for recording the transactions are (a)clock cards,(b)time tickets, and (c)piece work tickets
- Job ledger: this ledger is used to record the material cost, wages, and overheads incurred in respect of a job.
- Finished goods stock ledger: This ledger is used to record the receipt of finished goods from production department, the sale and stock of finished goods both in terms of quantity and value. The basis for recording the transactions is delivery note issued by the production departments, sales returns note and sales order requisitions.
- Standing order ledger: This ledger is used to record overheads incurred.
Accounts Maintained Under Cost Books
The following important accounts are maintained under cost books:
1) General ledger adjustment account: This ledger is also known as cost ledger control account or nominal ledger control account. In this accounts transactions with only one entry is recorded and contra appears in financial book.
On the credit side of this account are recorded Opening Balance of materials, work in progress and finished stock, (b)expenses of material, wages and overheads on the credit side, (c)on the debit side returns of materials to the supplier, (d) sales income: and (e)on the debit side balancing entries of P & L account closing stock.
2) Stores ledger control account: the total of stores ledger is entered in this account.
3) Wages control account: In this account the wages accrued and paid and allocation of wages in this account are recorded.
4) Work in progress control account: This account represents cost ledger in summary form.
5) Finished goods stock ledger control account: This account represents finished goods stock ledger transactions in total form.
6) Selling, distribution, and administration overhead control account: ”This account represents selling, distribution and administration overheads
7) Capital and repair account: This account represents capitalized and repair expenses
8) Cost of sales account: The total cost to make and sell the finished goods is recorded in this account.
9) Costing Profit and loss account: This account reveals the profit or loss as per cost accounts.
10) Material control account: This account serves as a transitional account which is closed subsequently to stores ledger control account. It helps in reconciling invoiced stock and accepted stock accounted in stores.
11) Overhead adjustment account: This account is used to record over or under absorption of overheads.
Entries to Record Transactions under Interlocking System
- Materials purchased for stock
Stores ledger control A/c Dr
To General ledger adjustment A/c
2. Material purchased for a special job
Work in progress control A/c Dr.
To general ledger adjustment a/c
3. For issue of direct materials to production department
Work in progress control A/c Dr
To stores ledger control account
4. For issue of indirect materials to production departments
Overhead control A /c Dr.
To stores ledger control a/c
5. For returning materials to supplier
General ledger adjustment A/c Dr
To stores ledger control A/c
6. For materials returned from production department
Stores ledger control A/c Dr
To Work in progress control a/c
7. For materials transferred from job to job
No entry is passed in control account.
In work in progress ledger the following Entry is passed
Transferee job A/c Dr
To transferor job a/c
8. For total salary and wages paid
Wages control A/c Dr.
To general ledger adjustment a/c
9. For allocation of direct and indirect labor
Work in progress control A/c Dr.
Overhead control A/c Dr.
To wages A/c
10. For recording direct expenses
Work in progress control A/c Dr
To general ledger adjustment A/c
11 For recording overhead incurred and accrued
Overhead control a/c
To general ledger adjustment A/c
12 When overheads are received
Work in progress control A/c Dr.
Cost of sales A/c Dr.
To overhead control a/c
13 For adjusting under or over absorption overheads The overhead control account is closed by transferring to overhead suspense account.
14 For recording finished stock produced
Finished goods stock ledger control a/c Dr.
To Work in progress control a/c
15 When finished goods are sold at cost
Cost of sales a/c Dr.
To finished goods (sold at cost)
16 When finished goods are sold at total sales value
General ledger adjustment a/c Dr
To Costing Profit and loss a/c
17 For recording sales returns
Costing Profit and loss a/c Dr.
To general ledger adjustment a/c
18 For recordings repair work
Repair order a/c Dr.
To work in progress control a/c
19 For allocation of repair work
Overhead control a/c Dr.
To Repair order a/c
20 For recording special orders completed and sold at total sales value
Cost of sales a/c Dr.
To Work in progress control a/c
21 For recording special orders completed and sold immediately at factory cost
General ledger adjustment A/c Dr.
To costing profit and loss A/c
22 For recording total cost to make and sell
Cost of sales A/c Dr.
To costing profit and loss A/c
23 For recording under absorption of overheads which is not yet adjusted
Costing profit and loss A/c Dr.
To Overhead suspense a/c
24 For recording over absorption of overheads which is not yet adjusted
Overhead suspense a/c Dr.
To Costing Profit and loss a/c
25 For recording profit
Costing profit and loss a/c Dr.
To General ledger adjustment a/c
The reconciliation of cost and financial accounts is frequently a task calling for considerable expenditure of time and effort, much of which can be avoided if books are suitable designed and the concept of separate Profit and loss accounts for financial and costing purposes discarded in favor of a unified account which will serve both financial and costing purposes. Such a system of accounting is referred to as integral or integrated. Thus, integral accounting is a system of recording financial and costing transactions in one self-contained ledger, called the integrated. Ledger.
The following are the main advantages of integral accounting:
- There is no need to reconcile the profit ascertained by the cost accounts with that of financial accounts since only one profit and loss account is prepared from the information recorded in the cost accounts.
2. There is no duplication of recording and effort as in non-integral system and as such this system is simple and economical.
3. This system tends to coordinate the functions of different selections of the accounts department since all efforts are integrated and directed towards achievement of one aim that is providing a high level of efficiency.
4. The accounting procedures can be simplified and the system can be centralized with the object of achieving a greater control over the organization.
5. The system creates conditions which are eminently suitable for the introduction of mechanized accounting.
6. There is no possibility of overlooking any expense under the system.
7. As cost accounts are posted straight from the books of original entry, there is no delay in obtaining the data.
8. There is automatic check on the correctness of the cost data. It ensures that all legitimate expenditure is included in Cost accounts and reliable and proved data is provided to the management for its decisions’.
9. Integrated accounting widens the outlook of the accountant and his staff ad they can take broader view of things.
10. From psychological point of view, it shows the complimentary status of cost and financial accountant which need to be considered as separate water light compartments.
Principles of (or Pre requisites for) an Integral accounting System
The following principles shall be taken into consideration while designing such a system:
- The degree of integration must be determined. Some undertakings find it satisfactory merely to integrate up to the stage of prime cost or factory cost while other concerns integrate the whole of the records in which cost and financial accounts cannot bed is distinguished.
2. The degree of integration will determine the classification of expenditure. The expenditure classified here according to function as office expenses, selling expenses etc., and not according to nature. However, control accounts are maintained for each element of cost. A suitable coding system should be available to serve the accounting purposes of financial and cost accounts.
3. Full details of items posted to the control accounts are supplied to the cost office at convenient intervals. This information is then dealt with by the cost office in accordance with the system of costing in force
4. The amount of detail recorded in the ledger is usually kept to a minimum. Full information regard in each department or process being contained in tabulators prepared by the cost office. These tabulations are sometimes referred to as third entries to emphasize that they are not part of double entry system.
5. For preparation of interim accounts there must be an agreed routine for treatment after accruals, prepaid expenses and other necessary adjustments.
6. There should be perfect coordination between the staff responsible for the financial and cost aspects to ensure an efficient processing of accounting documents.
The following are the essential features of an integral an accounting system:
- This system records financial transitions not normally required for cost accounting be sided recording internal costing transaction prepayments and accruals are opened.
- Stores transactions are recorded in the stores control account. This account is debited with the cost of stores purchased corresponding credit being given to cash or sundry creditors depending whether the purchase is made for cash or on credit.
- Wages control account is debited with the wages paid, contra credit is taken in cash or bank account
- Overhead expenses are debited to the overhead control account, corresponding credit being given to cash or band account or the sundry creditors.
- Transactions relating to material, labour cost overheads are posted in the stores wages and overhead control account after making suitable cost analysis and tat the end of the period transfer of the totals is made to the work in progress accounts by crediting various control accounts. The day to day cost analysis made for this purpose is known as making third etc. These entries do not mean entries in the same sense an entry of transaction in the ledger but such entries are simply a sort of cash analysis.
- All advance payments are credited and accruals debited to the respective control account by contra entries in the prepayments and accrual accounts.
- Capital asset account is debited and respective control accounts are credited in the process of cost analysis of capital expenditure
Journal entries under integral system
The entries to be passed for various transactions under integral system are summarized below:
Transactions Journal entries under integral system
- Material purchased on credit
(a) For Stock
Stores Control A/c Dr.
To Sundry Creditors A/c.
(b) For Jobs
Work-in-progress A/c. Dr.
To Sundry Creditors A/c.
2. Material issued
(a) Direct Material
Work-in-progress A/c. Dr.
To Stores Control A/c.
(b) Indirect Material
Relevant overhead A/c Dr.
To Stores Control A/c.
3. Material returned from shop
Stores Control A/c. Dr.
To work-in-progress A/c.
4. Material returned to supplier
Creditors A/c. Dr.
To Stores Control A/c.
5. Material transferred from one Job to another job
Transferee job A/c. Dr.
To Transferor job A/c.
6. Salary and wages paid-direct and indirect
Wages control A/c. Dr.
To Cash
7. Direct expenses
Work-in-progress A/c. Dr.
To Cash
8. Overhead incurred
Relevant overhead A/c Dr.
To cash
9. Overhead recovered
Work-in-progress A/c Dr.
(For production overhead recovered) Finished Stock A/c Dr.
(for Admin. Overhead recovered) Cost of Sales A/c. Dr.
(For selling and Distribution overhead Recovered)
To relevant overhead A/c
10. Overhead on work-in-progress
Work-in-progress A/c Dr.
To production overhead A/c
11. Finished goods produced
Finished good A/c. Dr.
To work-in-progress A/c
12. Goods sold(At cost)
Cost of Sales A/c Dr.
To finished goods A/c.
13. For Sales
Debtors A/c Dr.
To Sales A/c
14. Sales returned
Sales A/c Dr.
To Debtors A/c
15. Capital Work in Progress
Sundry Assets A/c Dr.
To work-in-progress A/c
16. Repair work
Relevant overhead A/c Dr.
To work-in-progress A/c
17. Under-absorbed overhead
P &L A/c. Dr.
To relevant overhead A/c
18. Over-absorbed overhead
Relevant overhead A/c Dr.
To P & L A/c.
