Chapter 13. Integrated Accounting System – Cost Accounting

13

Integrated Accounting System

LEARNING OBJECTIVES

After studying this chapter you should be able to:

  1. Understand and explain the meaning, advantages and disadvantages of integrated (integral) accounting system.

  2. Know the pre-requisites of successful integration of accounts.

  3. Explain the meaning of third entry method.

  4. Pass appropriate accounting entries in non-integrated accounting system (financial books and cost books) and integrated accounting system.

  5. Distinguish between interlocking and integration of cost and financial accounts.

  6. Know how to value stocks in integrated accounts.

  7. Explain the meaning of key terms related to integrated accounting system.

In general, manufacturing concerns adopt accounting system to ascertain the cost of products, jobs or processes as well as to prepare profit and loss account and the balance sheet to ascertain the financial position. Accordingly, the accounting system differs. They maintain two sets of records for such transactions: one financial accounts and the other cost accounts. This leads to the duplication of work. Further, the need for reconciliation of cost account and financial account arises. This, in turn, necessitates the need for the integration of cost and financial accounts. This chapter aims at explaining the meaning and procedure for such integrated accounting system.

13.1 MEANING OF INTEGRATED ACCOUNTING SYSTEM

Integrated accounting system involves the combination of cost accounting and financial accounting records. In this system, only one set of books of accounts are maintained. This set of books fulfils the principles of cost accounting and financial accounting. In this system, nominal accounts follow the principles of cost accounting. Real accounts and personal accounts are kept in accordance with financial accounting principles.

Integrated accounting system may be defined as “the inter-locking of financial and cost accounting systems to ensure that all relevant expenditure is absorbed into the cost accounts. Under this system, transactions are classified according to both their function and nature”. Under this system, double-entry system of book keeping is followed for recording transactions.

13.2 ADVANTAGES OF INTEGRAL SYSTEM OF ACCOUNTING
  1. Duplication of work avoided: Keeping unnecessary accounting records is avoided, by which duplication of accounting work is eliminated to a great extent.
  2. Saves time and money: Instead of cost ledger, control account, general ledger adjustment account, purchases account and stores ledger account, only one set of books are maintained and thus save time and money.
  3. Reconciliation problem: As there will be only one figure for profit or loss, the problem of reconciliation of profits, as shown by cost and financial books, will not arise.
  4. Accuracy: Correct and reliable data can be obtained under this system and as such the results will be more accurate.
  5. Control on cost: In this system, all expenses are included in cost accounts. It leads to an automatic check on costs and ensures better control over it.
  6. Faster reporting: All accounting information is available at one place. Financial costing and management information can be obtained and reported without any delay.
  7. Mechanization: This system is useful under mechanized system of accounting.
13.3 DISADVANTAGES
  1. This system has to fulfil the requirements of both the cost and the financial accounts. Because of this, it is a complicated procedure.
  2. In any case, perfect integration cannot be possible.
  3. This system may not be suitable for large-scale manufacturing factories.
13.4 PREREQUISITES FOR SUCCESSFUL INTEGRATED SYSTEM OF ACCOUNTING
  1. Role of management: The role of management is important in the implementation of integrated accounting system. The management has to plan the level of integration and issue guidelines for effective implementation of this system.
  2. Classification of accounts: Account heads should be duly identified and classified. The accounting data have to be maintained in separate subsidiary ledgers as follows (i) sales ledger (ii) purchases ledger (iii) stores ledger is job ledger (iv) stock ledger (v) overheads ledger and the like.
  3. Coding of accounts: To facilitate the task of relevant and speedy information, proper coding of accounts must be done.
  4. Accounts personnel: Proper training should be provided to accounts department personnel to acquaint with this accounting system.
  5. Maintenance of control accounts: The integrated general ledger should contain the following control accounts, which must be maintained properly:
    1. Stores ledger control account
    2. Stock ledger control account
    3. Job ledger control account
    4. Wages control account
    5. Overheads control account
    6. Debtors account
    7. Creditors account
    8. Share capital and reserve account
  6. Preparation of accounts manual: Cost analysis has to be carried out at regular interval. An account manual has to be prepared. This manual contains a description of the accounting system, its method of operation, accounts master, accounting entries, flow charts and necessary formats for each department.
13.5 ACCOUNTING TREATMENT

Journal entries: The journal entries that have to be passed under both integral and non-integral accounting systems are shown in the tabular form as follows:

Accounting entries in non-integrated accounting system (financial books and cost books) and integrated accounting system

 

Illustration 13.1

M/S Good Luck Enterprises operates an integrated system of accounting. You are required to pass journal entries for the following transactions that took place for the year ended 31 December 2009:

  Rs.

(i) Raw materials purchased (50% on credit)

2,50,000

(ii) Materials issued to production

1,50,000

(iii) Factory overhead incurred

40,000

(iv) Sales (50% credit)

4,00,000

(v) Receipts from debtors

1,25,000

(vi) Payment to creditors

1,25,000

[B.Com, University of Madras. Modified]

Solution

 

Journal (Integral System)

Illustration 13.2

Sun Enterprises operates an integral system of accounting. You are required to pass journal entries for the following transactions that took place for the year ended 31 March (narration is not required).

  Rs.

(i) Raw materials purchased (50% on credit)

9,00,000

(ii) Materials issued to production

6,00,000

(iii) Wages paid to workers

3,00,000

(iv) Factory overheads incurred

2,00,000

(v) Factory overheads charged to production

2,50,000

(vi) Selling and distribution overheads incurred

1,00,000

(vii) Finished goods at cost

7,50,000

(viii) Sales (50% credit)

12,00,000

[B.Com (Hons) Delhi. Modified]

Solution

 

Journal

Important note

See the difference in journal entry for the following:

  1. Factory overheads incurred
  2. Factory overheads charged to production.

Illustration 13.3

Journalize the following transactions under the integral accounting system:

  Rs.

Direct wages paid in cash

  90,000

Indirect wages paid in cash

  45,000

Purchases made in cash

  22,500

Purchases (credit)

4,35,000

Stores issued against production order

4,20,000

Works expenses incurred and paid in cash

  82,500

Works expenses allocated to jobs

1,20,000

Administration expenses paid in cash

  60,000

Administration expenses allocated to jobs

  72,000

Finished goods transferred to warehouse

6,75,000

Solution

 

Journal (Integral System)
13.6 THE THIRD ENTRY METHOD

The third entry method is one more approach to record transactions when cost and financial accounts are integrated. This is similar to double-entry system, but it differs from it with respect to elements of cost. In this method, a new account called “cost ledger control account” is opened. Any expenditure with respect to costs (elements of cost) is incurred, this account has to be debited in addition to usual accounts. It is to be observed that no double entry is passed for this cost ledger control account. The total cost of this account is analysed by preparing third entry analysis sheet. Then these are transferred to work-in-progress account, finished goods account, profit and loss A/c, etc. from cost ledger control account.

For instance, for any items of cost, that respective item will be debited, and again cost ledger control A/c will again by debited as follows:

Transaction: wages paid Rs. 6,000

Journal entry under this method would be:

Note that further debit amount is not added and shown in the amount credited. Only Rs. 6000 is credited and not Rs. 12,000.

Another example:

Transaction: materials purchased: Rs. 10,000

Journal entry under this method would be:

 

 

But this method is not in vogue.

13.7 INTERLOCKING VS. INTEGRATION OF COST AND FINANCIAL ACCOUNTS

Integral accounting, as already described, is a system of accounting where both cost and financial accounts are maintained in only one set of books. By eliminating cost ledger, all the control accounts are maintained in general ledger.

But when independent books are maintained separately, for cost and financial accounts, they are interlocked by control accounts maintained in the two sets of books.

Cost ledger control account is maintained in financial books, and general ledger adjustment is maintained in cost gooks.

In cost books, entries relating to fixed assets, cash or outsiders are posted in general ledger adjustment account. Integration is more economical than interlocking. Integral system is suitable for small organization, whereas interlocking system is inevitable in larger firms. Nowadays, the importance of cost accounting is being well recognized and functions like a central nervous system in manufacturing concerns.

FOR PROFESSIONAL COURSES

Illustration 13.4

In the absence of the chief accountant, you have been asked to prepare a month’s cost accounts for a company which operates a batch costing system fully integrated with the financial accounts. The following relevant information is provided to you:

    Rs.

Balance at the beginning of the month:

 

 

  Stores ledger control account

 

50,000

  Work-in-progress control account

 

40,000

  Finished goods control account

 

70,000

Pre-paid production overhead b/f from previous month:

 

6,000

Transactions during the month:

 

 

  Materials purchased

 

1,50,000

  Materials issued–

 

 

To production:

60,000

 

To factory maintenance:

8,000

68,000

Materials transferred from batches

 

10,000

Total wages paid –

 

 

  Direct workers

50,000

 

  Indirect workers

10,000

60,000

  Direct wages charged to batches

 

40,000

Recorded non-productive time of direct workers

 

10,000

Selling and distribution overheads incurred

 

12,000

Other production overheads incurred

 

24,000

Sales

 

2,00,000

Cost of finished goods sold

 

1,60,000

Cost of goods completed and transferred into finished goods during the month

 

1,30,000

Physical value of work-in-progress at the end of the month

 

80,000

The production overhead absorption rate is 150% of direct wages charged to work-in-progress.

Required:

Prepare the following accounts for the month:

  1. Stores ledger control account
  2. Work-in-progress account
  3. Finished goods control account
  4. Production overhead control account
  5. Profit and loss account

[C.A (Inter). Modified]

Solution

 

Stores Ledger Control A/c
Work-in-Progress Ledger Control A/c
Finished Stock Control A/c
Cost of Sales A/c
Production Overhead Control A/c
Profit and Loss A/c

Illustration 13.5

M/S S.R. Ltd maintains integrated accounts of cost and financial accounts. From the following details, write up control accounts in the general ledger of the factory and prepare a trial balance:

  Rs.

Share capital

1,50,000

Reserve

1,00,000

Sundry creditors

2,50,000

Plant and machinery

2,87,500

Sundry debtors

1,00,000

Closing stock

75,000

Cash and bank balance

37,500

Transactions during the year were as follows:

 

  Stores purchased

5,00,000

  Stores issued to production

5,25,000

  Stores in hand

47,500

  Direct wages incurred

3,25,000

  Direct wages charged to production

3,00,000

  Manufacturing expenses incurred

1,50,000

Manufacturing expenses charged to production

1,37,500

Selling and distributing expenses

50,000

Finished stock production (at cost)

9,00,000

Sales at selling price

11,00,000

Closing stock

47,500

Payment to creditors

5,50,000

Receipts from Debtors

10,50,000

[(I.C.W.A. (Inter). Modified)]

Solution

Sundry Debtors A/c
Finished Goods Ledger Control A/c
Bank and Cash Balance A/c
Stores Ledger Control A/c
Work-in-Progress Ledger Control A/c
Wages Control A/c
Production Overhead Control A/c
Selling and Distribution Overhead Control A/c
Cost of Sales A/c
Sales A/c
Profit and Loss A/c
Overhead Adjustment A/c
Trial Balance of M/S S.R. Ltd as on
Particulars Dr Rs. Cr Rs.

Share capital

 

1,50,000

Reserve

 

2,57,500

Sundry credits

 

2,00,000

Plant and machinery

2,87,500

 

Sundry debtors

1,50,000

 

Finished goods ledger control A/c

47,500

 

Bank and cash Balance

12,500

 

Stores ledger control A/c

47,500

 

Work-in-progress ledger control A/c

62,500

 

 

6,07,500

6,07,500

Summary

Integrated Accounting System: This system involves the combination of cost accounting and financial accounting records. Only one set of books is maintained under this system.

Under this system, double entry system of book-keeping is followed for recording transactions.

Accounting entries in Non-Integrated System ( Financial Books and Cost Books) and Integrated System for various transactions are shown in summarised form in the tabular form. (Ref: Main Text).

Advantages of Integral System of Accounting: (i) Duplication of work avoided, (ii) no reconciliation problem, (iii) accuracy, control over cost, (iv) faster reporting, (v) facilitates mechanised system of accounting.

Disadvantages: (i) complicated system, (ii) practical difficulties in integration and (iii) non-suitability for large scale enterprises.

Pre-requisites for Successful Integrated System of Accounting: (i) Role of management (ii) classification of accounts (iii) coding of accounts (iv) Trained accounting personnel (iv) proper maintenance of control accounts and (v) preparation of accounts manual.

Third entry method—In this method, a new account called “Cost Ledger Control Account” is opened to record transactions with respect to elements of cost.

Interlocking vs Integration of cost and financial accounts. (Ref: Main Text).

Key Terms

Interlocking of Cost and Financial Accounts: Under non-integral system, two control accounts ((i) general ledger adjustment in costing books and (ii) cost control accounts in the financial books) are interlinked. This is referred to as “interlocking of cost and financial accounts”.

Third Entry Method: An accounting method that involves the passing of third entry in integral system of accounting.

QUESTION BANK

Objective-Type Questions

 

I: State whether the following statements are true or false

  1. Under integrated accounting system, only one set of books are maintained.
  2. Under integral system, nominal accounts follow the principles of cost accounting.
  3. The real accounts and personal accounts find no place under integrated accounting system.
  4. Single entry system is used for recording transactions in integral system.
  5. Under integral system, transactions are classified according to both their function and nature.
  6. Integral system eliminates the problem of reconciliation.
  7. There will be more than one figure of profit in integral system.
  8. Integral system uses third entry method.
  9. No accounts for debtors and creditors are opened in integrated accounts.
  10. Under integrated accounts, cost accounts play an important role and financial accounts are ignored.

Answers:

 

1. True

2. True

3. False

4. False

5. True

6. True

7. False

8. True

9. False

10. False

 

 

 

II: Fill in the blanks with apt word(s)

  1. _____ system overcomes the problems associated with two sets of records viz. financial and cost books.
  2. Integrated accounting system involves the _____ of cost accounting and financial accounting records.
  3. Under integral system _____ accounts follow the principles of cost accounting rules.
  4. Under integral system both _____ and _____ accounts are maintained in accordance with financial accounting rules.
  5. _____ system of book-keeping is used for recording transactions in integral system.
  6. Integral system eliminates the problem of _____.
  7. For recording cash paid to creditors under integral accounting, _____ is debited and _____ is credited.
  8. For recording sales under integrated accounting, _____ are debited and _____ are credited.
  9. There will be _____ in the main ledger for transfer of materials from one job to another.
  10. Of late, _____ entry method is not used in integral system.

Answers:

  1. Integral
  2. Merger
  3. Nominal
  4. Real; Personal
  5. Double entry
  6. Reconciliation
  7. Trade creditors, cash
  8. Debtors or cash; sales
  9. No entry
  10. Third

III: Multiple choice questions: choose the correct answer

  1. Integrated accounting system involves
    1. maintenance of separate set of books
    2. maintenance of cost accounting records only
    3. merger of cost accounting and financial accounting records in one set of books
    4. maintenance of financial accounting records only
  2. Which system of book-keeping is followed in integral system:
    1. double entry
    2. third entry
    3. single entry
    4. all of these
  3. Which one is a pre-requisite for successful integration of accounts:
    1. establishment of responsibility centre
    2. classification and codification of accounts
    3. suppliers support
    4. proper motivation
  4. Integrated accounting system is beneficial because
    1. perpetual inventory system can be dispensed with
    2. no valuation of work in progress is necessary
    3. estimation of budgets easy
    4. it eliminates problems of reconciliation

Answers:

 

1. (c)

2. (a)

3. (b)

4. (d)

Short Answer Questions

  1. What is meant by integrated system of accounting?
  2. How does one set of books fulfil the requirements of accounting?
  3. How transactions may be classified under integral system?
  4. What is the utility of integrated accounting system?
  5. What are the pre-requisites for successful integration of accounts?
  6. What is third entry? Is it useful nowadays?
  7. How reconciliation of cost and financial accounts can be avoided?
  8. What is meant by interlocking?
  9. Distinguish between integrated and non-integrated system of accounting.
  10. Give journal entries for the following transactions under integrated accounting.
    1. Materials purchased by cash
    2. Payment to creditors
    3. Credit sales
    4. Payment of wages

Essay Questions

  1. What is integrated accounting system? What are the principles involved in it?
  2. Discuss the advantages of integrated accounts.
  3. Enumerate the essential pre-requisites of an integrated accounting system?
  4. Give the accounting treatment if the system of integrated accounts is maintained and distinguish it with the treatment under non-integral system.
  5. Under integral system, explain the detailed records required for the following control accounts: (i) stores (ii) work-in-progress (iii) finished goods.
  6. What is meant by inter-locking and integrated system of maintaining cost and financial accounts? Which one would you advise and why?

Exercises

 

Note: As most of the universities do not prescribe this topic for undergraduate course, exercises are for professional courses, B.Com (Hons) and M.Com level only.

1. Vas Enterprises operates an integral system of accounting. You are required to pass journal entries in the books of Vas Enterprises for the following transactions that took place for the year ended 31 March 2010. (Narrations need not be given.)

 

 

Rs.

Raw materials purchased (50% on credit)

10,00,000

Materials issued to production

6,00,000

Wages paid (50% Direct)

3,00,000

Wages charged to production

1,60,000

Factory overheads incurred

90,000

Factory overheads charged to production

1,40,000

Selling and distribution overheads incurred

60,000

Finished goods at cost

9,00,000

Sales (50% credit)

12,00,000

Closing stock

nil

Receipts from debtors

3,00,000

Payments to creditors

3,00,000

 

[B.Com (Hons); C.A. Modified]

2. From the following information, you are required to pass journal entries and prepare necessary accounts under the system of integrated system of accounting:

 

 

Rs.    

Materials purchased on credit

1,50,000

Wages paid

1,80,000

Wages productive

1,50,000

Wages unproductive

30,000

Materials issued to production

1,20,000

Works expenses incurred

50,000

Works expenses charged to production

75,000

Work-in-progress completed transferred to finished goods

3,00,000

Office and administration expenses paid

45,000

Office and administration expenses charges to production

40,000

Selling overheads paid

50,000

Selling overheads charged to sales

50,000

Sales (credit)

4,00,000

3. In the absence of a chief accountant, you have been asked to prepare a month’s cost accounts for a company which operates a batch costing system fully integrated with the financial accounts. The following relevant information is provided to you:

 

 

 

Rs.

Balance at the beginning of the month:

 

 

  Stores ledger control a/c

 

25,000

  Work-in-progress control a/c

 

20,000

  Finished goods control a/c

 

35,000

Pre-paid production overhead brought forward from previous month

 

3,000

Transactions during the month:

 

 

  Materials purchased

 

75,000

  Materials issued

 

 

  To production

Rs. 30,000

 

  To factory maintenance

Rs.4,000

34,000

Materials transferred between batches

 

5,000

Total wages paid–

 

 

Direct workers

Rs. 25,000

 

Indirect workers

Rs.5,000

30,000

Direct wages charged to batches

 

20,000

Recorded non-productive time of direct

 

5,000

workers

 

 

Selling and distribution overheads incurred

 

6,000

Other production overheads incurred

 

12,000

Sales

 

1,00,000

Cost of finished goods sold

 

80,000

Cost of goods completed and transferred into finished goods during the month

 

65,000

Physical value of work-in-progress at the end of the month

 

40,000

The production overhead absorption rate is 150% of direct wages charged to work-in-progress

Prepare the following accounts for the month:

  1. Stores ledger control A/c
  2. Work-in-progress control A/c
  3. Finished goods control A/c
  4. Production overhead control A/c
  5. Profit and loss A/c

[C.A. (Inter)]

[Ans:

  1. Stores ledger control A/c – Rs. 1,00,000 (Total)
  2. Work-in-progress control A/c – Rs. 1,05,000 (Total)
  3. Finished goods control A/c – Rs. 1,00,000 (Total)
  4. Production overhead control A/c – Rs. 30,000 (Total)
  5. Net profit – Rs. 20,000]

4. Journalize the following transactions under the integral accounting system:

 

 

Rs.

Direct wages paid in cash

60,000

Indirect wages paid in cash

30,000

Purchases made in cash

15,000

Purchases (credit)

2,90,000

Stores issued against production order

2,75,000

Works expenses incurred and paid in cash

55,000

Works expenses allocated to jobs

80,000

Administration expenses paid in cash

40,000

Administration expenses allocated to jobs

48,000

Finished goods transferred to warehouse

4,50,000

 

[I.C.W.A. (Inter)]

5. From the following information, pass the journal entries in an integrated accounting system:

  1. Issued materials Rs. 3,00,000 of which Rs. 2,80,000 (standard Rs. 2,40,000) direct materials
  2. Net wages paid Rs. 70,000 deductions being Rs. 12,000 (standard Rs. 75,000)
  3. Gross salaries payable for the period are Rs. 26,000 (standard Rs. 25,000). Deduction Rs. 2,000.
  4. Sales (credit) Rs. 8,00,000
  5. Discount allowed Rs. 5,000
  6. Salaries and wages allocation: Rs. 60,000 direct (standard Rs. 62,000) and out of the balance 50% production, 30% administration and 20% selling and distribution overheads.

[I.C.W.A. (Inter)]

[Ans: Hint: Apply standard costing principles—variances should be debited with respective items]

6. Record the following transactions in the ledger under integrated system and prepare the trial balance:

The following are the extracts of balances in its integrated ledger on 31 March 2009:

  Dr Rs. Cr Rs.

Stores control A/c

7,200

 

Finished goods A/c

5,200

 

Work-in-progress A/c

6,800

 

Creditors A/c

 

3,200

Cash at bank

4,000

 

Debtors A/c

4,800

 

Fixed assets A/c

22,000

 

Profit and loss A/c

 

12,800

Depreciation provision account

 

2,000

Share capital account

 

32,000

 

50,000

50,000

Transactions for the year ending 31 March 2010 were:

 

 

Rs.

Wages direct

34,800

Indirect

2,000

Stores purchased on credit

40,000

Stores issued to production

44,000

Stores issued to repair order

800

Goods finished during the period at cost

86,000

Goods sold at cost

88,000

Goods sold at sales value (credit)

1,20,000

Production overhead recovered

19,200

Production overhead (paid for by cheque)

16,000

Administration overhead (paid for by cheque)

4,800

Selling and distribution overhead (paid for by cheque)

5,600

Depreciation (works)

520

Payment from customers

1,16,000

Purchases to suppliers

40,400

Purchases of fixed assets in cash

800

Fines paid

200

Income tax

8,000

Charitable donations

400

Rates per-paid included in production overhead incurred

120

Interest on bank loan

40

You are required to write up accounts in integral ledger and take out a trial balance. (The administration overhead is written off to profit and loss A/c.)

[Ans:

  1. Stores control A/c: Rs. 47,200 (total)
  2. Production overhead A/c: Rs. 19,320 (total)
  3. Work-in-progress A/c: Rs. 1,04,800 (total)
  4. Finished goods A/c: Rs. 91,200 (total)
  5. Cost of sales A/c: Rs. 1,20,000
  6. Costing profit and loss A/c: Rs. 21,600
  7. Profit and loss A/c: Rs. 25,760
  8. Trial balance total: Rs. 63,080]