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; [2]
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 accountsreal, 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 accountsreal, 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.
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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 twiceonce 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 overheadsseparate 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 [7]
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 iscost 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. [10]
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 [11]
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. [12]
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 [13]
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). [14]
(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. [16]
(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. [19]
(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 managements 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. [22]
(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. [23]
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. [24]
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 [25]
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 [26]
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. [27]
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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
"The Language of Business: How Accounting Tells Your Story" "A Comprehensive Guide to Understanding, Interpreting, and Leveraging Financial Statements for Personal and Professional Success"