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Integral System of Accounting
In the preceding pages, we have already explained that cost records can be maintained
either on non-integral system or integral system of accounting. The non-integral
system of accounting has already been explained in the preceding chapter. The
present chapter deals with integral system of accounting.
CIMA has defined Integrated system as “a system in which the financial and
cost accounts are inter-locked to ensure that all relevant expenditure is absorbed into
the cost accounts.” Under this accounting system transactions are classified both
according to their function and nature.
Integrated (or Integral) Accounts is the name given to a system whereby cost and
financial accounts are kept in the same set of books. Obviously, then there will be no
separate sets of books for Costing and Financial purposes. Integrated Account will
have to afford full information required for Costing as well as for Financial Account.
In other words, information and data should be recorded in such a ways as to enable
the firm to ascertain the Cost (together with the necessary analysis) of each product,
job, process, operation or any other identifiable activity. For example, purchases are
analysed by nature of material and its end-use.
MEANING OF INTEGRAL SYSTEM
Integral system of accounting is a system where both costing and financial transactions are
recorded only in one set of the books. The system is designed in a way to provide full
information required for both costing as well as financial purposes. In other words, the
system provides information for each of the following matters:
1. Ascertainment of cost of each job, product or process;
2. Preparation of Profit & Loss Account and the Balance Sheet;
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3. Data for managerial decision-making, e.g., marginal cost of the products, variances,
profit under alternative choices etc.
The principle of “double entry system of book-keeping” applicable to financial
accounting can also be made applicable to cost accounting. In financial accounting, all
accounting transactions relate to three categories of accounts—real, nominal, and
personal. However, in cost accounting which are generally concerned with nominal
accounts only. Sometimes, with real accounts also. These together can be put as
impersonal accounts. No record is maintained of personal accounts in the costing
books.
The principle of “double entry system of book-keeping” applicable to financial
accounting can also be made applicable to cost accounting. In financial accounting, all
accounting transactions relate to three categories of accounts—real, nominal, and
personal. However, in cost accounting which are generally concerned with nominal
accounts only. Sometimes, with real accounts also. These together can be put as
impersonal accounts. No record is maintained of personal accounts in the costing
books.
[2]
ADVANTAGES OF INTEGRAL SYSTEM
Integral system of accounting offers the following advantages:
(i) Duplication of work is avoided. In case of non-integral system of accounting
every transaction is analysed twice—once in financial accounts and again in cost
accounts. In financial accounts, analysis is done keeping in view the nature of the
expenditure while in cost accounts analysis is done keeping in view the objective of
the expenditure. In case of integral system of accounting, since only one set of books
is maintained both for costing and financial transactions, hence transactions will be
analysed only once. Thus, integral system of accounting saves a lot of clerical work.
(ii) Better coordination. There will be a better coordination between financial and
the costing staff since the system of accounting kept under integral system has to
serve both the costing and the financial requirements.
(iii) No need of reconciliation. In a non-integral system there is always a need of
reconciling the profit shown by the financial accounts with the profit as shown by the
cost accounts. In an integral system of accounting, the need for such reconciliation
does not at all arise since there is only one set of books both for the costing and the
financial transactions.
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DISADVANTAGE OF INTEGRAL SYSTEM
Integral system of accounting suffers from the following disadvantages:
(i) Delay in work. In case of integral system of accounting, one has to keep in mind
the requirements of both financial and costing aspects while recording the
transactions. This result in unnecessary delay in work both at the time of recording the
transactions as well as at the time of collecting information for the financial or costing
purposes, as the case may be.
(ii) Full integration not possible. As discussed later 100% integration is not possible.
This means that after a certain stage, transactions will have to be recorded separately
keeping in view the costing and the financial requirements. This means in any case
two sets of books will have to be maintained though for limited objectives.
(iii) Counter-check not possible. In case of non-integral system, separate books are
maintained for costing and the financial transactions. Hence, counter-check is possible
of the results shown by one set of books with that of the other. This advantage is not
available in case of integral system of accounting since only one set of books is
maintained.
It may, therefore, not be appropriate for a large concern to follow an integral system
of accounting.
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BASIC REQUIREMENTS
The basic requirements of the system are as follows:
Determination of the degree of integration
The business should first decide about the degree of integration. Some concerns find it
convenient to integrate only up to the stage of prime cost or factory cost. The other overheads
for costing purposes are recorded merely in a memorandum form. On the other hand, many
concerns integrate the two systems completely. In such a case, it is difficult to distinguish
between costing and financial transactions. The later course is preferable to the former.
Accumulation of accounting data in separate subsidiary ledgers
The accounting data in respect of different forms of expenditures duly analysed into various
classes should be accumulated in separate subsidiary ledgers. These subsidiary ledgers are:
(i) Sales ledger. It contains personal accounts of all customers.
(ii) Bought ledger. It contains personal accounts of all suppliers.
(iii) Stores ledger. It contains accounts relating to individual items of materials and
stores kept in stock.
(iv) Stock ledger. It contains accounts relating to individual items of finished goods
in stock.
(v) Job ledger or Work-in-progress ledger. It contains accounts of individual jobs
in hand
(vi) Overheads ledger. It contains accounts of overheads—separate for factory,
office and selling and distribution.
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Coding
Since integrated accounts have to provide information both for financial as well as costing
purposes, a meaningful system of coding should be used though there can be integration of
accounts without adopting it. The system of/coding should be such as to permit a meaningful
consolidation and analysis. Coding is a must where mechanized system of accounting is used.
The following code system can be adopted, for example:
(i) First digit from the left to denote broad category of expenses such as:
1. works expenses. 2. office and administration expenses. 3. selling and distribution
expenses.
(ii) Next two digits are allotted for the expenses concerned:
12. for indirect labour
13. for salaries
14. for rent and rates
15. Contribution to provident fund.
16. Directors’ remuneration.
It means that 114 shall represent that rent and rates for the Production Department to be
included in works expenses; 116 for directors’ remuneration to be charged to works; 213
shall represent the salaries paid to office employees; and 215 shall represent the provident
fund contribution of the persons engaged in administration. Thus, the total of all expenses
having digits 13 at end will give the total salaries paid, may be pertaining to works, office or
selling and distribution departments.
All expenses beginning with digit ‘ 1’ shall give total works expenses and so on.
Such information about the expenses is necessary because accounts are required for
certain external purposes also such as for shareholders, taxation officials, etc. For the former,
it will be necessary to give information as per the requirements of the Companies Act. For
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example, the total remuneration payable! directors have to be given separately. This can be
found out by adding all expenses having code number with two digits 16 at the end.
Control accounts
In General Ledger, the Control Account of each subsidiary ledger shall be maintained.
The Cost or General Ledger Control Account is eliminated and the various control accounts
whether they pertain I Cost Accounts, Personal Accounts or Capital Accounts are opened in
the General Ledger. The Integrate General Ledger shall contain the following control
accounts:
(a) Stores Ledger Control Accounts;
(b) Stock Ledger Control Accounts;
(c) Work-in-progress Ledger Control Account (pertaining to Job Ledger);
(d) Wages Control Account;
(e) Overhead Control Account (separate overhead accounts can be opened for fixed
and variably works, office and selling and distribution);
(f) Sundry Creditors Account or Bought Ledger Control Account or Total Creditors
Account;
(g) Share Capital and Reserve Account.
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Analysis of the transactions
At regular intervals, cost analysis is made of the transactions relating to material,
labour and overheads as recorded in stores, labour and overhead control accounts. At the end
of the accounting period, transfers! of total is made by crediting the various control accounts
and debiting the work-in-progress or finished! goods control or cost of sales account.
Items to be considered separately
(i) Matters of pure finance. Items of a financial nature such as cash discount, interest
on capital, etc. which are not included in costs but considered while preparing Profit
and Loss Account and Balance Sheet should be considered separately.
(ii) Appropriation of profits. Such as dividends paid, transfer to reserves, etc.,
should also be! considered separately.
(iii) Abnormal profits and losses. Similarly, a distinction between normal and
abnormal losses should| be observed for purposes of costing records.
(iv) Valuation of stock. Different bases of valuation of stock of finished goods, raw
materials and work-in-progress are adopted in case of cost and financial books. In
Financial Accounts, normally the basis] of valuation is—cost price or market price
whichever is lower, whereas in cost accounts, the valuation may be made at prime
cost or factory cost or total cost of production. This fact should be kept in view while)
preparing the Profit and Loss Account and Balance Sheet.
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THIRD ENTRY METHOD
The third entry method involves passing of a third entry in respect of different
elements of cost under integral system of accounting. In case of this method, a separate
account titled as ‘Cost Ledger Control Account’ is opened in the books. Any expenditure
relating to cost is charged to this account also besides charging the usual account or accounts.
The cost ledger control account is memorandum account and no double entry is made in this
account. At the end of a period, the cost ledger control account is analysed to identify
separately the expenditure incurred on materials, wages and other expenses. The total of this
account is transferred to the relevant accounts, viz., stores ledger control account, work-in-
progress control account, finished goods ledger control account, etc. This can be understood
with the following examples:
INTERLOCKING AND INTEGRATION OF COST AND FINANCIAL ACCOUNTS
In case of a non-integral system of accounting, as explained earlier, separate sets of books are
maintained both for cost and financial accounts. These two sets of books are interlinked or
interlocked with each other by two control accounts:
(i) General Ledger Adjustment Account: in the Costing books;
(ii) Cost Ledger Control Account: in the Financial books.
The balances of these two accounts are contra to each other and, therefore, the
balances should tally. In case it is desired to prepare integrated trial balances, these two
control accounts can be eliminated.
However, when integral system of accounting is used, there is only one set of books
in which all transactions are to be recorded. The necessity of maintaining of a cost ledger
does not arise since all control accounts are maintained in the General Ledger.
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Integral system of accounting is sometimes preferred over non-integral system of accounting
because of the advantages of economy, better coordination, reduction of clerical work. etc.
However, integral system of accounting results in costly delays and unnecessary
complications. Hence, non-integral system of accounting is preferred over integral system of
accounting in case of a large concern.
NON-INTEGRATED SYSTEM
FEATURES
(1) Separate Books: In a non-integrated Cost accounting system there are separate
cost accounts cost journals and cost ledgers.
(2) Principle of Double-Entry: However, it too follows the fundamental principles of
double entry book-keeping (debit and credit) for this purpose.
(3) Cost Manual: As the number and types of transactions involved in accounting are
numerous, a number of individuals are employed in their recording and analysis. A
Cost Manual is prepared for guidance of the staff. CIMA has defined a ‘cost manual’
as ‘a document which sets out the responsibilities of the persons engaged in, and the
routine of, and the forms and records required for, costing and cost accounting.’
(4) Voucher: As in the case of financial accounting system, transactions are recorded
in the Cost Journal Voucher, which provides the details necessary to support an entry
in the cost accounts.
(5) Account/Code: Each entry is debited/credited to a cost account. CIMA has
defined a ‘cost account’ as ‘an account in the cost ledger’. Each account may be given
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a cost code. A ‘cost code’ is ‘a series of alphabetical and/or alpha-numerical symbol
representing a descriptive title in a cost classification.’
(6) Journal: These vouchers are first entered into Cost Journals. There may be one
general journal to summarized all original entries or separate journals may be kept to
record labour, material, and overhead transactions.
(7) Ledger: From the Cost Journals, entries are posted in the Cost Ledger. CIMA has
defined a ‘cost ledger”1 as ‘a ledger whose accounts record those transactions which
are included in costs.’ In financial accounting, ledger may be divided into General and
subsidiary ledgers like debtors ledger, creditors ledger etc. Similarly, Cost ledger may
be divided into main and subsidiary ledgers. There may be a main ledger known as
Cost Ledger and other subsidiary ledgers like Stores ledger, Work-in-progress ledger
and Finished stock ledger.
CONTROL ACCOUNTS
The Cost Ledger contains two types of accounts to complete the double entry: (a)
Cost Ledger Control Account and (b) Three Cost Control Accounts (Stores, W-I-P
and Finished goods),
(a) Cost Ledger Control Account : CIMA has defined a ‘Cost Ledger Control
Account’ as ‘an account which is maintained in the principal ledger (and sometimes
in the cost ledger) which records the totals of the transactions recorded in detail in the
cost ledger and provides a check on the accuracy of the latter.’ Cost ledger control
account helps to record all items of income and expenditure.
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The function of this account which is also referred to as General Ledger Adjustment
Account or Nominal Ledger Control Account, is quite important in a cost accounting
system. This account is opened in Cost Ledger to complete double entry. All items of
income and expenditure taken from financial accounts and all transfers from cost
accounts to financial accounts are recorded in this account. Thus, all the transactions
in the cost ledger must be recorded through the ‘cost ledger control account’ in order
to complete the double entry in the cost ledger. The balance in this account will
always be equal to the total of all the balances of the impersonal accounts. In the non-
integrated cost ledger accounting system, the cost control accounts mentioned above
are kept separate from the financial ledgers which record all financial transactions. No
personal accounts are kept in the cost books but as the latter are maintained on the
principles of double entry, all transactions which arise in the financial accounts are
debited or credited to the Cost Ledger Control Account maintained for the purpose.
The Cost Ledger Control Account makes the cost ledger self-balancing. In fact, this
account is equivalent to the Personal, or Cash or Bank Accounts, as the case may be,
in the financial books. Financial transactions such as those on account of material
purchases, miscellaneous expenses, and wages and salaries of workers and staff are
credited to the Cost Ledger Control Account by contra debit to the various control
accounts. Similarly, all sales are debited to the Cost Ledger Control Account. Transfer
from financial books to cost books, such as of departmental capital work is made
through this account. Purely cost accounting transactions involving no finances, e.g.
transfer of manufacturing overhead cost to Work-in-Progress Control Account and
transfer of finished goods from Work-in-Progress Control Account to Finished Goods
Control Account do not pass through the Cost Ledger Control Account because
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double entries in respect of these transactions are already complete without the Cost
Ledger Control Account.
(b) Cost Control Accounts : The Three Cost Control Accounts - Stores ledger
control account, Work-in-progress control account and Finished goods control
account - help to exercise control over the concerned subsidiary ledgers. Transactions
kept in details in one or more accounts of the subsidiary ledger are posted in totals, at
the end of a period, to the control accounts. Thus, the balance in a control account
represents the totals contained in a number of accounts of similar nature in a
subsidiary ledger. For example, the balance in the Work-in-Progress Control Account
represents, in aggregate, the balances of the respective Job Accounts. (An account is
maintained for each job.) The main control accounts and their functions are
summarised below:
(1) Stores Ledger Control Account
(1) Records Material Cost: This account records materials transactions.
(2) Debits & Credits: Receipts (Debits) are posted from goods received notes (or
receipt vouchers) and issues (credits) from materials requisitions or materials issue
analysis sheet. The account also records issues of materials to outside parties, returns
through return notes, and stores (inventory) adjustments through material transfer
notes.
(3) Balance: The balance of this account represents the total balance of stock which
should agree with the aggregate of the balances of individual folios in the stores
ledger. (Materials purchased for a specific job are generally debited to the Work-in-
Progress Control Account and not to the Stores Ledger Control Account).
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(2) Wages Control Account
(1) Records Labour Cost: This account records labour transactions.
(2) Debits & Credits: Entries are made from wages analysis sheet. The account is
debited with the gross wages and is cleared (credited) by the transfer of direct labour
to Work-in-Progress and indirect labour to Factory, Administration and Selling and
Distribution Overhead Control Accounts or Research and Development Account or
Capital Account as the case may be.
(3) Factory Overhead Control Account
(1) Records Overheads Costs: This account deals with manufacturing overhead
expenses.
(2) Debits & Credits: To this account is debited the amount of indirect material,
indirect labour, and indirect expenses incurred. The figures are obtained from
materials issue analysis sheet, wages analysis sheet, and expense analysis sheet. The
account is credited with the amount of overhead recovered, as obtained from the
applied overhead analysis sheet. Where separate Overhead Applied Account is
opened, credit is given to this account.
(4) Work-in-Progress Control Account
(1) Debits: This account is debited with the opening balance of work-in-progress, and
material, labour and factory overhead costs (recovered).
(2) Credit: This account is credited with the cost of finished goods.
(3) Balance: The balance of this account represents unfinished closing stock in
process carried over.
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(5) Finished Goods Control Account
(1) Debits: This account is debited with the opening balance of finished goods; the
cost of finished goods for the period transferred from the Work-in-Progress Control
Account and the amount of administration overhead recovered, if administration
overhead is not treated as period cost.
(2) Credits: It is credited with the cost of sales (by transfer to Cost of Sales Account).
(3) Balance: The balance of the account after writing back the unrecovered
administration overheads, represents unsold stock carried over.
(6) Administration Overhead Account
(1) Debits: Administration overhead cost is debited to this account.
(2) Credits: The amount of overhead recovered in the finished goods sold is credited.
Another method is to close the Administration Overhead Account by transfer to
Costing Profit and Loss Account. In this case, no amount of administration cost is
charged to the Finished Goods Account. When administration overhead is prorated to
manufacturing and selling and distribution overheads, the Administration Overheads
Account is credited with the amount so transferred.
(7) Cost of Sales Account
(1) Debit: This account is debited with the cost of goods sold and selling and
distribution overhead recovered.
(2) Credit: It is closed (credited) by transfer to Costing Profit and Loss Account.
(8) Selling and Distribution Overhead Account
(1) Debit: Selling and distribution costs are debited to the Selling and Distribution
Overhead Account.
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(2) Credit: At the end of the period, the account is closed by transfer to Cost of Sales
Account.
(9) Overhead Adjustment (Suspense) Account
(1) Debits & Credits: The amount of under-absorbed or over-absorbed factory,
administration, selling and distribution overheads may be debited or credited to this
account. Sometimes this account is not maintained and the amount of under-
absorption or over-absorption is transferred directly to Costing Profit and Loss
Account.
(2) Balance: The balance at the end of a period, may be either (i) carried over to the
next accounting period, (ii) or transferred to Costing Profit and Loss Account (iii) or
prorated (charged prorata) to Cost of Sales Account, Work-in-Progress Account and
Finished Stock Account.
(10) Costing Profit and Loss Account
(1) Debits and Credits: This account records the transfer of the amounts of under-
absorbed and over-absorbed overhead, the sale value of goods sold, and the balance
from the Cost of Sales Account. Abnormal losses or gains to be kept out of costs are
also debited or credited to this account.
(2) Balance: The closing balance of this account represents the costing profit or loss
which should be reconciled with the financial profit or loss.
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INTEGRATED SYSTEM
MEANING
CIMA has defined Integrated system as “a system in which the financial and cost
accounts are inter-locked to ensure that all relevant expenditure is absorbed into the
cost accounts.” Under this accounting system transactions are classified both
according to their function and nature.
Integrated (or Integral) Accounts is the name given to a system whereby cost and
financial accounts are kept in the same set of books. Obviously, then there will be no
separate sets of books for Costing and Financial purposes. Integrated Account will
have to afford full information required for Costing as well as for Financial Account.
In other words, information and data should be recorded in such a ways as to enable
the firm to ascertain the Cost (together with the necessary analysis) of each product,
job, process, operation or any other identifiable activity. For example, purchases are
analysed by nature of material and its end-use. Purchases account is eliminated and
direct postings are made to Stores Control Account, Work-in-Progress Account or
Overhead Account. Payroll is straightway analysed into direct labour and overheads.
Integral system helps to ascertain marginal cost, variances, abnormal losses and gains
- in fact, all information that management requires from a system of Costing for doing
its work properly. The integrated accounts give full information in such a manner so
that the profit and loss account and the balance sheet can be prepared according to the
requirements of law with the help of Integral System, management can have full
control over the liabilities and assets of its business.
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FEATURES OF INTEGRATED SYSTEM
The essential features of an integrated system are as follows :
(1) Financial Transactions : The integrated system records, besides internal costing
transactions, other financial items not normally required for cost accounting.
Accounts for capital expenditure, sundry creditors and debtors, share capital, cash and
bank transactions, and pre-payments and accruals are opened.
(2) Store Transactions : Store transactions are recorded in the Stores Control
Account. The cost of stores purchased is debited to the Stores Control Account and
credit is given to Cash or Sundry Creditors Accounts depending upon whether the
purchase is made for cash or credit.
(3) Wages & Expenses : The wages paid are debited to the Wages Control Account;
corresponding credit is taken in the Cash or Bank Account. Similarly, overhead
expenses incurred are debited to the Overhead Control Account by credit to the Cash
or Bank Account or the Sundry Creditors Account.
(4) ‘Third Entries’: Suitable cost analysis is made of the transactions relating to
material, labour and overhead, which are posted in the Stores, Wages, and Overhead
Control Accounts and at the end of the accounting period, transfer of the total is made
to the Work-in-Progress Account by crediting the various control accounts. The day-
to-day cost analysis made for this purpose is known as ‘making third entries’. As
would be apparent, the third entries do not mean entries in the same sense as the entry
of transactions in ledgers but these are simply a sort of cost analysis.
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(5) Accruals & Pre-payments : All accruals are debited and advance payments
credited to the respective control accounts by contra entries in the accrual and pre-
payment accounts.
(6) Capital Expenditure: Capital expenditure is separated in the process of cost
analysis and credited to the control accounts by debit to the Capital Assets Account.
(7) Cost Control Account: Sometimes a separate ‘Cost Control Account’ is opened
to record the cost transactions. The Wages Control and Overhead Control Accounts
are dispensed with and all transactions relating to wages and overhead are entered in
the Cost Control Account. Materials issued to production are debited to the Cost
Control Account by credit to the Stores Control Account. If a Provision for
Depreciation Account is maintained, depreciation is credited to this account by debit
to the Cost Control Account. At the end of the accounting period, ‘third entries’ are
made and the totals are posted to the Work-in-Progress Account by credit to the Cost
Control Account.
(8) Work-in-Progress Account(s): The Work-in-Progress Account may be split up
into three separate accounts, viz. Materials-in-Process, Labour-in-Process. and
Factory Overhead-in-Process Accounts.
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ESSENTIAL PRE-REQUISITES
The essential pre-requisites of integrated accounting system include the following :
(1)Extent of Integration : The management’s decision about the extent of integration
of the two sets of books must be made before-hand. Some concerns find it useful to
integrate up to the stage of primary cost or factory cost while other prefer full
integration of the entire accounting records.
(2) Coding System: A suitable coding system must be made available so as to serve
the accounting purposes of financial and cost accounts.
(3) Agreed Routine : An agreed routine, with regard to the treatment of provision for
accruals, prepaid expenses and other adjustments necessary for preparation of interim
accounts must be specified.
(4) Co-ordination : Perfect coordination should exist between the staff responsible
for the financial and cost aspects of the account^ and an efficient processing of
accounting documents should be ensured.
(5) Subsidiary Ledgers : Under this system there is no need for a separate cost
ledger. Of course, there will be a number of subsidiary ledgers; in addition to the
useful Customers’ Ledger and the Bought Ledger, there will be : (a) Stores Ledger;
(b) Stock Ledger and (c) Job Ledger.
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ADVANTAGES OF INTEGRATED SYSTEM
Integral or integrated accounting (maintenance of accounts in integral form) records
all financial and cost accounting transactions in one combined ledger. The advantages
of integral accounting are as follows :
(1) No Separate Financial A/cs: The need for separate sets of financial and cost
accounts ledgers does not exist. This saves clerical expenditure.
(2) No Reconciliation : There is no need for reconciliation between the financial and
cost accounts.
(3) Cross-check Ensures Accuracy : There is an automatic check on the correctness
of the cost data and this ensures that all legitimate expenditure is included in cost
accounts. Reliable and proved cost data create confidence in the management.
(4) Avoids Duplication : Fewer accounts and records are required, and duplication in
accounting and analysis is avoided.
(5) No Delay : As cost accounts are posted straight from the books of original entry
there is no delay in obtaining cost data.
(6) Complementary : Integral system offers an additional advantage from the
psychological point of view. It shows the complementary status of cost and financial
accounting which need not be considered as two separate watertight compartments.
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(7) Economy : Centralized as well as computerized accounting, which is possible in
the integrated system, results in economy.
(8) Pooling of Knowledge: The knowledge of financial and cost accounting may be
pooled together.
(9) Wider Outlook: Integrated accounting widens the outlook of the accountant and
his staff who are placed in a better position to appreciate the entire accounting system.
(10) Avoids Cost Ledger Control A/c : In integral accounting, there is no need to
open a Cost Ledger Control Account because it is possible to post each transaction on
double entry basis without the necessity for opening a balancing account.
Non-integral System of Accounting
SYSTEMS OF ACCOUNTING
The systems of accounting for recording cost and financial transactions can be put into two
categories:
(i) Non-integral System of Accounting;
(ii) Integral System of Accounting.
(i) Non-integral system of accounting. In this system two sets of books are maintained: one
for costing transactions and the other for financial transactions.
(ii) Integral system of accounting. In this system only one set of books is maintained both
for costing and financial transactions.
[22]
In this chapter we are basically concerned with non-integral system of accounting. Integral
system of accounting has been discussed in the next chapter.
LEDGERS REQUIRED
It will be appropriate here to acquaint ourselves with the important ledgers maintained both
by the financial as well as costing departments when a non-integral system of accounting is in
use.
Financial ledgers
The three important financial ledgers are —
1. General ledger. It contains:
(/) all real, nominal and personal accounts except those of trade debtors and trade
creditors.
(«) a total account, termed as “Cost Ledger Control Account”. It records all items of
expenditure and income which relate to cost accounts. This account is a memorandum
account only.
2. Debtors’ ledger. It contains personal accounts of all trade debtors.
3. Creditors’ ledger. It contains personal accounts of all trade creditors.
Costing ledgers
1. Stores ledger. This ledger contains all stores accounts. A separate account is
opened for each item of store. This has already been explained in Chapter 3 (Material
Cost Control) of the book.
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2. Work-in-progress or Job ledger. This ledger records production during a period
and the costs incurred. A separate account is opened for each job, product, etc. in
process.
3. Finished goods or Stock ledger. This ledger records details of finished goods. A
separate account is opened for each finished or completed product or job.
4. Cost Ledger. It is the principal ledger of cost department. It contains—
(i) Cost control accounts. These accounts are maintained for the purpose of
exercising control over the three subsidiary ledgers discussed above and also to
complete double entry in cost accounts. They summarise masses of detailed
information contained in the subsidiary ledgers and thus provide immense help to
management in policy formulation. They also facilitate reconciliation of cost and
financial accounts.
The important cost control accounts are as follows :
a) Stores ledger control account. The purpose of stores ledger is to maintain item-wise
record of raw materials and other stores. In cost ledger, a Stores Ledger Control
Account is opened pertaining to this subsidiary ledger. The total materials received in
stores (which can be found by looking at Purchases Journal) is shown on the debit
side of Stores Ledger Control Account and the total materials issued out of stores
(which can be found by looking at Materials Abstract) is credited in the account. The
balance of this account shall tally with the total of the balances of the individual stores
accounts in the Stores Ledger. Sometimes, separate ledgers are maintained for raw
materials and other stores. In that case, there will be two separate control accounts,
namely, Materials Ledger Control Account and Stores Ledger Control Account.
(b) Work-in-progress ledger control account. For every job, product or process, cost
of materials, labour and factory expenses are incurred. All such costs are debited in
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different accounts relating to different jobs. These accounts are kept in a job or work-
in-progress ledger. A Work-in-progress Ledger Control Account is opened in the Cost
Ledger. The cost of production of completed jobs will be credited to this account and
the total expenses incurred on all the jobs debited so as to show the total work-in-
progress at any time. The balance of this account must be equal the total of individual
balances of Job or Process accounts in the Job Ledger. The Work-in-progress Ledger
Control Account is referred to as Work-in-progress Account also.
(c) Finished goods ledger control account. In Finished Goods Ledger, a separate
account is opened for recording the quantity and price of each and every finished
product manufactured. In Cost Ledger, a Finished Goods Ledger Control Account is
maintained. It is also known as Stock Ledger Control Account. It represents the total
value of finished goods stock at a particular time.
(d) General ledger adjustment account. In Cost Ledger, a General Ledger Adjustment
Account is opened to record all items of income and expenditure. This account is also
referred as Cost Ledger Control Account (in costing books). Personal Accounts are
shown in financial accounts and not in cost accounts. The General Ledger Adjustment
Account completes the double entry in the cost ledger and hence all such accounts
which pertain to fixed assets or cash or outsiders are posted to this account. All
expenditures are shown on the credit side of this account; and the result of such
expenditure in the form of sales is shown on the debit side of this account. The
balance represents the value of stores, stock-in-hand and the amount of work-in-
progress.
Cost ledger control account (in financial books). Since the Costing Department is
not a distinct entity from the Financial Department and all the purchases and sales are
recorded through financial books, a Cost Ledger Control Account must be opened in
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the financial books. This is only a memorandum account. In this account all the items
of revenue and expenditure affecting Cost Accounts are recorded. This account is just
the reverse or contra of the General Ledger Adjustment Account in the Cost Ledger
and, therefore, the balance of this account should tally with the balance of its
counterpart in the Cost Ledger.
(ii) Other accounts. They include all other impersonal accounts (real as well as
nominal) which affect costs e.g., wages control account, factory overhead account,
administration overhead account, selling and distribution overhead account, cost of
sales account etc. Sometimes, following additional accounts are also opened.
(a) Overheads suspense account. Sometimes, while valuing semi-finished jobs, works
overheads are not included. Similarly while valuing closing stock of finished goods
office overheads are not charged. In such cases, normally, at the end of an accounting
period, the estimated amount of such overheads is debited to Works or Office
Overheads Suspense Account and credited to Works or Office Overheads Account, as
the case may be. In the beginning of the next accounting period, the entries are
reversed to close the suspense accounts.
(b) Capital orders. For each item of capital work to be performed in the factory itself,
e.g., producing tools and equipments, certain expenditures shall be incurred in the
form of materials, wages and other expenses. Such expenditures should be recorded in
Capital Order Account and later on capitalized..
No separate account is maintained for Direct Expenses since they are directly charged
to work-in-progress account.
When the finished goods are sold, they are transferred to Cost of Sales Account.
Finally, a Costing Profit & Loss Account can be prepared with the help to the above
Accounts.
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CONCLUSION
CIMA has defined Integrated system as “a system in which the financial and
cost accounts are inter-locked to ensure that all relevant expenditure is absorbed into
the cost accounts.” Under this accounting system transactions are classified both
according to their function and nature.
The business should first decide about the degree of integration. Some
concerns find it convenient to integrate only up to the stage of prime cost or factory
cost. The other overheads for costing purposes are recorded merely in a memorandum
form.
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BIBLIOGRAPHY
1. Google
2. Advanced Cost Accounting
Dr. Varsha M. Ainapure
3. Fundamentals of Cost Accounting
Dr. S. N. Maheshwari
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