Integrated & Non-Integrated System of Accounts

8/17/2019 Integrated & Non-Integrated System of Accounts

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INTRODUCTION

Accounting information is important for every business which will serve

the needs of variety of interested parties. To satisfy the needs of all

interested parties a sound accounting system is very necessary. It may be

divided in to three parts: Financial accounting, Management accounting,

and Cost accounting.

Financial accounting is mostly concerned to record the business

transactions in boos of accounts so that final accounts can be prepared.

Management accounting is an e!tension of management aspects of cost

accounting. It provides the information to management so that planning,

organi"ing, directing and controlling of business operations can be done

in an orderly manner

Cost accounting developed to help the internal management in decision

maing. The information provided by cost accounting acts as a

managerial tool so that business can utili"e the available resources at

optimum level.

The Costing terminology of C.I.M.A. #ondon defines cost accounting as

$The establishment of budgets, standard costs and actual costs ofoperations, processes, activities or products, and the analysis of

variances, profitability or the social use of funds%.

Cost &ecords have a very important role in the accounting of a

manufacturing organi"ation. Cost records provide the details about

components of cost of a product or services i.e. material, labour and

overhead.

There are two system used in maintenance of cost records i.e. integratedrecords and non- integrated records.

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Under non-integrated accounting systems, Financial Accounting and

Inventory'Cost Accounting boos' ledgers are separately maintained. In

other words if the records are maintained separately, the system is calledas non-integrated system of maintaining accounts.

An Integrated Accounting System would be one where only a single set

of boos would contain all the information of Financial Accounting as

well as Inventory' Cost Accounting.

Integrated system would be difficult to maintain if accounts are

maintained manually but most available Computeri"ed Accounting

(ystems are Integrated (ystems. In integrated system, the problem ofreconciliation of financial accounts and cost accounts does not arise.

The ob)ective is to understand:

*. The meaning of Integrated and non integrated system.

+. ifference between integrated and non integrated systems.

-. &econciliation of cost and financial accounts.

.

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NON-INTEGRATED ACCOUNTING SYSTE

It is a system of accounting under which separate ledgers are maintained

for cost and financial accounts by Accountants. nder such a system the

cost accounts restricts itself to recording only those transactions which

relate to the product or service being provided. /ence items of e!penses

which have a bearing with sales or, production or for that matter any

other items which are under the factory management are the ones dealt

with in such accounts.

A special feature of the non0integrated system of accounts is its ability to

deal with notional e!penses lie rent or interest on capital tied up in the

stoc. The accounting of notional rent facilitates comparisons amongstfactories 1some owned and some rented2. (imilarly, recognition of

interest on capital tied up in stoc could help mae the stores and wors

managers aware of the money being bloced because of holding stoc.

3on Integrated Accounting (ystems contain fewer accounts when

compared with financial accounting because of the e!clusion of

purchases, e!penses and also 4alance (heet items lie fi!ed assets,

debtors and creditors. Items of accounts which are e!cluded are

represented by an account nown as cost ledger control account.

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!EATURES O! NON-INTEGRATED

ACCOUNTING SYSTE

". Se#arate $oo%s& In a non0integrated Cost accounting system there

are separate cost accounts, cost )ournals and cost ledger.'. (rinci#)e of Dou*)e-Entry: /owever, it too follows the

fundamental principles of double entry boo eeping 5debit and

credit2 for this purpose.

+. Cost anua)& It is a document which sets out the responsibilities

of the persons engage in, and the routine of, and the reforms and

records re6uired for, costing accounting.,. oucer& As in the case of financial accounting system,

transactions are recorded in the cost )ournal voucher, which provides the details necessary to support an entry in the cost

accounts.

/. Accounts0Code& 7ach entry is debited ' credited to a cost account.

Cost Account is defined as an account in the cost ledger. 7ach

account may be given a cost code. A cost code is a series of

alphabetical and ' or alpha0numerical symbol representing a

descriptive title in a cost classification.

1. 2ourna)& These vouchers are first entered in to Cost 8ournal. Theremay be one general )ournal to summarise all original entries or

separate )ournal may be ept to record labour, material and

overhead transactions.

3. 4edger& From the Cost 8ournal, entries are posted in the Cost

#edger. 9It is defined as a cost ledger whose accounts record those

transactions which are included in cost.In financial accounting,

ledger may be divided in to eneral and subsidiary ledgers lie

debtors ledger, creditors etc. (imilarly, Cost ledger may be divided

in two main and subsidiary ledgers. There may be a main ledger

nown as cost ledger and other subsidiary ledgers lie (tore ledger,

;or0in0progress ledger and finished stoc ledger.

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(RINCI(A4 4EDGER

Su*sidiary *oo%s maintained under non-integrated system of

accounting.

The following are some of the subsidiary boos maintained under

interlocing system of accounting.

*. Stores )edger&

It is used to record both the 6uantity and amount of receipts, issues

and balance of materials and supplies. It consists all store accounts.

+. (ayro)) and 5age ana)ysis *oo%&

It is used to record the wages. The basis for recording the

transactions are 1a2 cloc cards, 1b2 time ticets, and 1c2 piece wor

ticets.

-. 2o* )edger&

It is used to record the material cost, wages, and overheads

incurred in respect of a )ob.

. De*tors6 4edger&

It contains personal accounts of all trade debtors.

?. Creditors6 4edger&

It contains personal accounts of all trade creditors.

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CONTRO4 ACCOUNTS

The following important accounts are maintained under non0integrated

accounting system:

A. Genera) )edger ad7ustment account&

It is also nown as cost )edger contro) account or nomina) )edger

contro) account. In this accounts transactions with only one entry

is recorded and contra appears in financial boo. All transactions of

income and e!penditure which originate in the financial Accounts

must be entered in the ledger for eventual transfer to Cost Accounts

and total of this account will be e6ual to total of all the balance of

the impersonal accounts.

@n the credit side of this account are recorded

1a2 @pening 4alance of materials, wor in progress and finished

stoc,

1b2 7!penses of material, wages and overheads on the credit

side,

1c2 @n the debit side returns of materials to the supplier,

1d2(ales income and

1e2 @n the debit side balancing entries of B# account and

closing stoc.

4. Cost contro) Accounts& The three cost control accounts (tores

ledger control account, ;or0in0progress control account and

Finished oods control account0helps to e!ercise control over the

concerned subsidiary ledgers. Transactions ept in detail in one or

more accounts of the subsidiary ledger are stored in totals, at the

end of a period, to the control accounts. Thus the balance in a

control account represents the total contained in number of

accounts of similar nature in a subsidiary ledger. For e!ample, the

balance in the wor0in0progress control account represents, in

aggregate, the balances of the respective 8ob Accounts.

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*. Stores )edger contro) account& It is debited with purchase of

materials for the stores and credited with issues of material.

De*it 8Credits& &eceipts are posted in goods received notes and

issues from materials re6uisitions or materials issue analysis sheet.

The account also records issues of new materials to outside parties,

returns through return notes, and stores ad)ustments through

material transfer notes.

$a)ance& The balance of this account represents the total balance

of stoc which should agree with the aggregate of the balances of

the individual folios in the stores ledger.

+. 9ages contro) account& In this account the wages accrued and

paid and allocation of wages in this account are recorded.

De*its 8Credits: 7ntries are made from wages analysis sheet.

This account is debited with the gross wages and is cleared by the

transfer of direct labour to wor0in0progress 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.

-. 9or% in #rogress contro) account& It includes of all direct

materials, direct wages, direct e!penses, special purchases and

e!penses.

De*its& This account is debited with the opening balance of wor0

in0progress and material, labour and factory overhead costs.

Credit: This account is credited with the cost of finished goods.

$a)ance& The balance of this account represents unfinished closing

stoc in process carried over.

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E. O:eread Ad7ustment Account&

De*its and Credits: The amount of under0absorbed or over0

absorbed factory, administration, selling, and distributionoverheads may be debited or credited to this account. (ometimes

this account is not maintained and the amount of under0absorption

or over0absorption is transferred directly to the Costing rofit and

#oss Account.

$a)ance& The balance at the end of the period may be

either*.carried over to the ne!t accounting period+.or transferred to

the Costing rofit and #oss Account-.or prorated to Cost of (ales

Account, ;or0in0progress account and Finished (toc account.

;. Costing (rofit and 4oss account&

De*its and Credits: This account records the transfer of the

amounts of under0absorbed or over0absorbed overhead, the sale

value of goods sold, and the balance from the cost of sales account.

Abnormal losses or gains to be ept out of costs are also debited or

credited to this account

$a)ance& 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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ADANTEGES O! NON- INTEGRATED

ACCOUNTING SYSTE

The following are the main advantages of integral accounting:

". 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.

'. The accounting procedures can be simplified and the system can be

centrali"ed with the ob)ect of achieving a greater control over the

organi"ation.

+. The system creates conditions which are eminently suitable for the

introduction of mechani"ed accounting.

,. There is no possibility of overlooing any e!pense under the system.

/. As cost accounts are posted straight from the boos of original entry,

there is no delay in obtaining the data.

1. There is automatic chec on the correctness of the cost data. It ensures

that all legitimate e!penditure is included in Cost accounts and reliable

and proved data is provided to the management for its decisions.

3. Integrated accounting widens the outloo of the accountant.


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4IITATIONS O! NON-INTEGRATED

ACCOUNTING

The following are some of the limitations of this accounting system:

". The Financial transactions other than cost incurred are not recorded in

the system.

'. Transactions involving payment other than that of cost are not included

in the system 7.g.: loss on fi!ed assets.

+. There is always a diff between the profits reported as per the costaccounting system and the Financial Accounting (ystem.

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INTEGRATED =INTEGRA4> ACCOUNTING SYSTE

CIMA has defined integrated system as ?a system in which the financialand cost accounts are interloced to ensure that all relevant e!penditure is

absorbed in to the cost accounts@.

Integrated Accounting is a system in which the accounts are integrated

and only a single set of accounts are maintained for Cost B Financial

records. It avoids maintenance of Accounts under cost accounting B

financial accounting. This enables a firm to eliminate separate rofit B

#oss Accounts under financial accounting and cost accounting systems B

only one rofit B #oss Accounts are prepared. It provides entire

information for the ascertainment of cost of each unit as well as

preparation of a balance sheet as per the legal re6uirement of the

organi"ation. It also provides necessary information as re6uired by the

costing and finance department. There is no eneral #edger Control A'c

is prepared in this system.

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!EATURES O! INTEGRATED SYSTE

The following are the essential features of an integra) an accountingsystem:

*. It records financia) transitions not normally re6uired 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 creditorsdepending whether the purchase is made for cash or on credit.

-. 9ages 8 E#enses: 9ages contro) account is debited with the

wages paidD contra credit is taen in cash or ban account.

(imilarly o:eread e#enses incurred are debited to the overhead

control accounts by credit to the cash or ban account or sundry

creditors accounts.

. Ca#ita) asset account is debited and respective control accounts

are credited in the process of cost analysis of ca#ita) e#enditure.

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It is also important to note that integrated accounts are lie a hybrid

between non0integrated and the financial system of accounting as

in case of the non0integrated system, 3o personal or real accounts

are prepared and all entries are passed through the general ledger

ad)ustment account. In the financial accounting system, there is no

base of the cost accounting. In the integrated system of accounting,

personal and real accounts are prepared but there e!ists a base of

the cost accounting system.

?. 9or% Bin B #rogress& It may be split in to three separate accounts

vi". Material0in0rocess, #abour0in0rocess, and @verhead0in0

rocess Accounts.

E.

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ADANTAGES O! INTEGRATED ACCOUNTING

SYSTE

The benefits of Integrated Accounting (ystem are as follows:

*. No se#arate financia) accounts& The need for separate sets of

financial and cost accounts ledgers does not e!ist. This saves

clerical e!penditure.

+. No need for reconci)iation as it maintains single set of accounting

records

-. A:oids du#)ication& Fewer accounts and records are re6uired and

duplication in accounting and analysis is avoided


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(RE-REUISITES !OR AN INTEGRA4

ACCOUNTING SYSTE

The following principles shall be taen into consideration while

designing such a system:

". Etent of integration: The degree of integration must be determined.

(ome undertaings find it satisfactory merely to integrate up to the

stage of primary cost or factory cost while other concerns integrate

the whole of the records in which cost and financial accounts cannot

be distinguished.

'. A suitable coding system should be available to serve the accounting purposes of financial and cost accounts

+. The degree of integration will determine the classification of

e!penditure. The e!penditure classified here according to function as

office e!penses, selling e!penses etc., and not according to nature.

/owever, control accounts are maintained for each element of cost.

,. 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.

/. The amount of detail recorded in the ledger is usually ept to a

minimum. Full information regards in each department or process

being contained in tabulators prepared by the cost office. These

tabulations are sometimes referred to as third entries to emphasi"e

that they are not part of double entry system.

1. For preparation of interim accounts there must be an agreed routine

for treatment after accruals, prepaid e!penses and other necessary

ad)ustments.

3. There should be #erfect coordination between the staff responsible

for the financial and cost aspects to ensure an efficient processing of

accounting documents.NRE

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RECONCI4IATION O! COST AND !INANCIA4

ACCOUNTS

NEED !OR RECONCI4IATION

The two systems of accounting vi". financial and cost accounts co0e!ist

in the same organisation and they deal with same basic transactions say,

purchases, consumption of materials, wages and other e!penses. 4ut the

difference of purpose calls for a difference in approach in collection,

analysis and presentation of data to meet the ob)ective of individual

system. Financial accounts are concerned with the ascertainment of profit

or loss for the whole operation of the organisation for a relatively long

period usually a year, without being too much concerned with costcomputation, whereas cost accounts are provided for ascertaining the

profit or loss made by manufacturing or product divisions'products for

cost comparison and preparation and use of variety of cost statements.

The difference in purpose and approach more often than not results in a

different profit from what is disclosed by the financial accounts and this

establishes the need for a reconciliation of profit between cost account

and financial accounts.

Thus, reconciliation between the results of the two sets of boos is

necessary due to the following reasons:

*. It finds out the reasons for the difference in the profit or loss in cost

and financial accounts.

+. It ensures the mathematical accuracy and reliability of cost

accounts in order to have cost ascertainment, cost control and to

have a chec on the financial accounts.

-. It contributes to the standardi"ation of policies regarding stocvaluation, depreciation and overheads.


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CONC4USION

o There are basically three cost accounting systems. Financial

Accounting (ystem. 3on0Integrated Accounting (ystem.

Integrated Accounting (ystem.

o 3on0integral accounting system where separate accounts boos are

maintained to record financial and cost transactions.

o 3on0integral accounting system is also nown as 9Cost Control

Accounts.

o Two set of accounts boos are ept in non0integral system one for

recording cost transaction another for financial transaction.

o ouble entry system is adopted for recording the transactions in

both accounts boos.

o Integral system is a system of accounting under which only one set

of boos of account is maintained to record the both transactions

1cost B financial2. It is also nown as integrated accounts system.

There is no need for cost ledger and cost ledger control account.

o Integrated accounts are lie a hybrid between non0integrated and

the financial system of accounting.

o In case of the non0integrated system, no personal or real accounts

are prepared and all entries are passed through the eneral #edger

Ad)ustment account.

o In the financial accounting system, there is no base of the cost

accounting.

o In the integrated system of accounting, personal and real accounts

are prepared but there e!ists a base of the cost accounting system.

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o In non0integral accounting system shows the two different profits

due to two separate boos of account.

o &econciliation statement reconciles the profit as per Cost Accounts

with the profit as per Financial Accounts by showing all causes of

differences between the two.

o &econciliation places management in better position to ac6uaint

itself with the reasons for the variation in profits paying the wayfor more effective internal control

o

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RE!ERENCE

G.&a)esearan, &.#alitha, Cost Accounting, earson 7ducation in (outh

Asian.

Cost and Management AccountingD Halyani ublishers.

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Documents

Integrated & Non-Integrated System of Accounts