Integrated and non-integrated accounts
Non-integrated accounts (Non-integral system) Meaning
Under this system, two
separate set of accounts books are maintained, one for cost accounts, and the
other for financial accounts. In other words, cost accounts are maintained
separately from financial accounts. Non-integrated system of accounting is also
known as cost ledger accounting or interlocking accounting system.
CIMA, London has defined it
as ‘a system in which the cost accounts are distinct from financial accounts,
the two sets of accounts being kept continuously in agreement’ by the use of
control accounts or made readily reconcilable by other means.’ Like financial
accounting, it is also based on double entry system. In financial books, there
are three types of accounts:
(a)
Personal e.g., debtors and
creditors.
(b)
Real e.g., cash, stocks, fixed
assets, etc.
(c)
Nominal e.g., wages, lighting,
heating, discounts, rent and rates, etc.
In cost accounts, there are
no personal accounts because cost accounts do not show relationship with
outsiders. In real accounts, only stocks are shown in cost accounts. The main
emphasis is on nominal accounts where cost is analysed in detail. Thus cost
accounting department is concerned mainly with the ascertainment of income and
expenditure of the business. It is particularly interested in nominal accounts,
to some extent in real accounts but in no way in personal accounts. In other
words, cost accounts, are concerned with impersonal accounts, i.e., real and
nominal accounts.
Ledger to be Maintained
The following four
important ledgers are maintained by the costing department under non-integrated
system.
1.
Cost Ledger: This is the principal
ledger in cost books which controls all other ledgers in the costing
department. It contains all impersonal accounts and is similar to general
ledger of financial accounts. It contains, inter alia, a number of control
accounts like stores ledger control accounts, wages control account, factory
overheads control account, etc. and a cost ledger control account to make the
cost ledger self-balancing.
2.
Stores Ledger: This ledger maintains a
separate account for each item of store (raw material, components, consumable
stores, etc.). It is used for recording receipts, issues and balance of stores,
both in quantity and amount. A reference to stores ledger was also made in the
chapter on pricing the materials issues.
3.
Work-in-progress ledger or job ledger: It contains a separate account
for each job in progress. Each such account is debited with the material costs,
wages and overheads chargeable to the jobs and credited with the cost of work
completed. This balance in this account represents the cost of unfinished work.
4.
Finished goods ledger: It contains an
account for each item of finished product. As stated above, the cost ledger is
the principal ledger. Other ledgers, i.e., stores ledger, work-in-progress
ledger and finished goods ledger are referred to as subsidiary ledgers of the
cost accounting department. The cost ledger is made self-balancing by opening a
control account for each of these subsidiary ledgers.
Meaning of Control Accounts
Control accounts are the
total accounts in the cost ledger. In these accounts, entries are made once in
each accounting period on the basis of the periodical totals of transactions in
related subsidiary legers and books. For example, stores ledger control account
represents stores ledger in a summary form. Purchase of individual items of
stores shown in individual accounts in the stores ledger are totaled and shown
in stores ledger control account as total purchases. Similarly, other individual
debits and credits in individual accounts in stores ledger are abstracted,
totaled and taken to stores ledger control account. Thus the opening balance of
this control account should always equal the total of opening balances on each
individual account in the stores ledger. In this way, a control account is also
kept for each of the other subsidiary ledger, i.e., job ledger or
work-in-progress ledger and finished goods ledger. In addition, a control
account is opened for cost ledger with the main object of completing the double
entry and making the cost ledger self-balancing.
Advantages: The main advantages of
control accounts are:
1.
Control accounts present the
management with a summary of detailed information contained in various
subsidiary ledgers.
2.
It makes possible the division
of accounting work among ledger keepers, thereby resulting in specialization in
work.
3.
It permits prompt preparation
of profit and loss account the balance sheet, at the end of each period, by
providing stock figures without delay.
4.
It provides internal check
leading to greater accuracy of records.
5.
It provides a basis for
reconciliation of cost and financial accounts.
Principal
Accounts to be Maintained
The principal accounts in
the cost ledger and their functions are summarized below:
1.
Stores Ledger Control Account: This
account deals with material transactions. It is a summary of the value of
stores received, issued and balance in store. Receipts are posted from goods
received notes or invoices to the debit side of this account. Similarly, issues
of materials are posted from material requisition or materials issues analysis
sheet to the credit side of this account. The balance of this account
represents the total balance of stock which should agree with the aggregate of
the balances of individual accounts in the Stores Ledger.
2.
Wages Control Account: This account
records wage transaction in aggregate. Postings are made from wages analysis
sheet. This account is debited with gross wages (paid and accrued) and is
closed by transfer of direct wages to work-in-progress and indirect wages to
factory, administration and selling and distribution overheads control accounts
3.
Factory Overheads Control Account: This
account deals with factory overheads in aggregate. It debited with indirect
material cost, indirect wages and indirect expenses and is credited with
overheads absorbed, which are transferred to work-in-progress. The balance in
this account represents under or over-absorbed overheads and is transferred to
Overheads Adjustment Account or Costing Profit and Loss Account.
4.
Work-in-progress Ledger Control Account: This account starts with opening balance of work-in-progress and is
debited with materials, labour and factory overheads charged. It is credited
with cost of finished goods. Closing balance shows the value of unfinished
jobs.
5.
Finished Goods Ledger Control Account:
This account starts with opening balance of finished stock. It is debited with
cost of finished goods transferred from work-in-progress control account and
the amount of administration overheads absorbed. This account is credited with
cost of sales by transferring to cost of sales account. The closing balance of
this account represents the cost of goods remaining unsold at the end of the
period.
6.
Administration Overheads Account: This
account is debited with administration overhead cost incurred and is credited
with overheads absorbed by finished goods. The balance in this account
represents under or over-absorbed overheads which is transferred to Overheads
Adjustment Account or to Closing Profit and Loss Account.
7.
Cost of Sales Account: This account is
debited with the cost of goods sold by transfer from finished goods ledger
control account and also selling and distribution overheads absorbed. It is
closed by transfer to Costing Profit and Loss account.
8.
Selling and Distribution Overheads Account: this account is debited with selling and distribution overheads
incurred and is credited with overheads absorbed by cost of sales. It is closed
by transferring the balance to costing Profit and Loss Account or Overheads
Adjustment Account for under or over-absorbed overheads.
9.
Overheads Adjustment Account: This
account is debited with under-absorbed overheads for factory, administration
and selling and distribution overheads and is credited with over-absorbed
overheads. The balance in this account represents the net amount of over or
under-absorption which is transferred to Costing Profit and Loss Account.
10.Costing Profit and Loss
Account: This account is debited with the cost of
sales, abnormal losses and under-absorbed overheads. It is credited with sale
value of goods sold, abnormal gains and over-absorbed overheads. The balance in
this account represents costing profit or loss which is transferred to cost
ledger control account.
11.Cost Ledger Control
Account: this account is also known as General
Ledger Adjustment Account or Financial Ledger Control Account. The purpose of
this account is to complete the double entry and make the cost ledger
self-balancing. As no personal accounts are kept in the cost books, in order to
complete the double entry, all accounts relating to financial accounts but not
required for cost accounting are debited or credited to the cost ledger control
account. For example, wages paid in case amount to Rs. 250 and as no cash or
bank account is maintained in the cost ledger, then in order to complete the
double entry, the following entry will be made, so as to credit cost ledger
control account in place of cash or bank.
|
Wages Account Dr. To Cost Ledger Control A/c |
Rs. 250 |
Rs. 250 |
Cost ledger control account
is sometimes disrespectfully referred to as ‘dustbin account’ because it is for
disposing of the odds and ends of double entry which do not find any other
place.
Thus, the cost ledger
control account is equivalent to debtors, creditors and cash or bank accounts
in the financial ledger. Sales are debited to this account and net profit or
loss is also transferred to this account. All transfer entries of internal
nature which affect only cost accounts and have no implications in financial
accounts do not appear in cost ledger control account. For example, transfer
from stores ledger to work-in-progress, from work-in-progress to finished
goods, etc., are not shown in cost ledger control account. The balance of cost
ledger control account represents the total of all balances of impersonal
accounts.
Integrated accounts (Integral system).
Meaning
Integrated or Integral
accounting is a system in which cost and financial accounts are kept in the
same set of books. In such a system, transactions of both cost and financial
accounts are recorded in one combined set of books based on double entry
system. This system eliminates the need for separate sets of account books for
costing and financial accounting purposes. Accounts are designed in such a way
that full information required for costing as well as financial accounting
purposes is obtained from one set of books.
Advantages of Integrated Accounts
Integrated system of
accounting offers the following advantages:
(1)
Economical system: Integral
system is quite economical as it eliminates the duplication of recording the
transactions in two separate sets of books. This results in saving of clerical
cost.
(2)
No need for reconciliation: As
only one set of accounts is maintained, there will be only one profit or loss
figure and as such there will be no need for reconciliation between costing and
financial profit or loss.
(3)
Centralization of accounting
work: Centralization of accounting function in one department helps in
achieving greater control and saves administration costs.
(4)
Information available without
delay: There is no delay in the availability of cost information because cost
accounts are directly written-up from the books of original entry.
(5)
Pooling of knowledge: The
knowledge of cost and financial accounting may be combined together to achieve
better results.
(6)
Better coordination: The system
helps in achieving better coordination in the activities of cost accounting and
financial accounting staff.
(7)
Suitable in mechanized
accounting: Integral system is quite suitable in mechanized accounting and
other data processing techniques.
(8)
Wide outlook: The system tends
to broaden the outlook of the accounting staff who are in a better position to
appreciate one set of account books revealing so much.
Disadvantages of Non-integrated accounts
Integrated system suffers
from the following drawbacks:
(1)
Unsuitable for large concerns:
Integrated system is not very suitable for very large concerns which require
detailed cost and financial information on a continuous basis.
(2)
Complicated system: A system
which is expected to provide costing as well as financial information is quite
cumbersome and complicated and requires the services of expert accountants.
(3)
Need for reconciliation: Under
there is full integration of cost and financial accounts, there may be a need
for reconciliation between the two.
Features of Integral accounting
Integral accounting has the
following distinctive features:
1.
In integral accounting, there
is no need to open a Cost Ledger Control Account as it is possible to complete
double entry without this account.
2.
Subsidiary ledgers, i.e., stores
ledger, work-in-progress ledger and finished goods ledger are maintained as in
done in non-integrated accounting. In addition, a sales ledger (containing
personal accounts of all customers) and a purchase ledger (containing personal
accounts of all suppliers) are also maintained. Overheads ledger is maintained
to contain separate accounts for factory, administration and selling and
distribution overheads.
3.
For each subsidiary ledger, a
control account is opened in the general ledger. Main control accounts are as
follows:
(a)
Stores ledger control account.
(b)
Work-in-progress ledger control
account.
(c)
Finished goods ledger control
account.
(d)
Wages control account.
(e)
Factory overheads control
account.
(f)
Administrative overheads
control account.
(g)
Selling and distribution
overheads control account.
(h)
Sales ledger control account.
(i)
Purchase ledger control
account.
4.
Balance in various overheads
control accounts represents over or under absorption which is transferred to
Profit and Loss Account.
5.
Balance in Profit and Loss
Accounts represents profit or loss which is transferred to Profit and Loss
Appropriation Account.
6.
Degree of integration must be
determined in advance. Many firms integrated the cost and financial accounts
completely while other firms integrate the two only upto a stage of prime cost
or factory cost.
7.
A suitable coding system is
generally developed to serve the purposes of both cost accounts as well as
financial accounts.
Need for Integration of Cost and Financial Accounting:
1. Holistic
Financial Picture: Integration combines cost data (Cost Accounting) with
financial transactions (Financial Accounting) for a complete view of an
organization's financial health.
2. Informed
Decision-Making: Integrating cost and financial data aids managers in making
well-informed decisions by considering both expenses and revenues.
3. Performance
Evaluation: Integration allows for the assessment of operational efficiency and
profitability by comparing actual costs with budgeted costs.
4. Resource
Optimization: By linking cost information to financial results, organizations
can identify areas for cost control and resource optimization.
Procedure for Integration of Cost and Financial Accounting:
1. Common
Chart of Accounts: Use a shared chart of accounts to align cost and financial
categories for consistency.
2. Standardized
Costing Methods: Adopt consistent costing methods (e.g., activity-based
costing) for uniform treatment of costs.
3. Data
Sharing: Establish processes for seamless data sharing between Cost Accounting
and Financial Accounting departments.
4. Integrated
Software: Implement integrated ERP systems to facilitate real-time data sharing
and reduce errors.
5. Periodic
Reconciliation: Regularly reconcile records between Cost Accounting and Financial
Accounting to ensure accuracy.
6. Cross-Functional
Collaboration: Promote teamwork and communication between departments for a
unified approach to financial goals and cost management.
Also Read: Important Questions for Upcoming Exams
Unit 5:
Part A: Non-integrated and Integrated Accounts System
Part B (Reconciliation Statement – Theory or Practical)
(These Questions are subject to modification, if necesary. Download DTS Application for complete notes)
Q. Practical Problems: Preparation of reconciliation statement together with profit and loss account and cost sheet. Follow examples of BASU AND DAS COST ACCOUNTING BOOK. 2012, 2015, 2017, 2019, 2022
Q. Draft a format of Reconciliation statement.
Difference
between non-integrated and integrated accounting cost control accounting
The differences between the
integrated and non-integrated accounting are as follows:
|
Bases
of differences |
Non-integrated
accounting |
Integrated
accounting |
|
Accounts |
Under it, separate accounts are
maintained for cost and financial transactions. |
Under it, separate accounts are
not maintained for cost and financial transactions. |
|
Cost account |
The recording of various costs
are maintained difference cost |
Difference subsidiary ledgers
are maintaining the records of the
transactions. |
|
Dependency |
It is independent system of
accounting. |
Under this, the cost and
financial accounts are dependent to each other. |
|
Reconciliation |
Under it, it is necessary to prepare
a reconciliation statement to reconcile the profit between the cost and
financial accounting. |
Under it, it is not necessary to
prepare a reconciliation statement to reconcile the profit between the cost
and financial accounting. |
|
Internal check |
Under it, the cross checking is
not possible since they are independent to each other. |
Under it, the cross checking is
possible since they are dependent to each other. |
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