Integral & Non integral Accounts | Cost and Management Accounting for CA Intermediate PDF Download

Cost Accounting Systems Overview

In the competitive business environment, maintaining accurate financial records is crucial for sustainable operations and profitability. A proper accounting system distinguishes between financial accounting, which focuses on monetary aspects, and cost accounting, which categorizes costs based on functions, departments, or products.

Key Concepts

• Financial accounting deals with the monetary aspects of business transactions.
• Cost accounting classifies costs according to functions, departments, or products.
• Real and nominal accounts are directly relevant to cost accounting.
• Personal and cash/bank accounts are not directly related to cost ascertainment.

Differences Between Systems

• Integrated System: Combines cost and financial accounts.
• Non-Integrated System: Maintains cost and financial records separately.

Non-Integral System Details

• Non-Integral System Definition (CIMA London): Cost accounts are distinct from financial accounts.
• Control Accounts: Used to keep cost and financial accounts in agreement.
• Expenses Recording: Cost accounts focus on expenses related to sales, production, and factory management.

CIMA London

The following are the key characteristics of non-integral accounting systems:

• BASIC FEATURES:
  • A notable aspect of the non-integrated accounting system is its capability to handle notional expenses such as rent or interest on capital invested in the stock.
• SPECIAL FEATURE:
  • Non-integrated accounting systems have a reduced number of accounts in comparison to financial accounting. This is due to the omission of purchases, expenses, and items found in the balance sheet like fixed assets, debtors, and creditors. These excluded items are managed through an account referred to as the cost ledger control account.

The significant ledgers that need to be maintained in the cost accounting department include:

• Cost Ledger: This serves as the primary ledger of the cost department, recording impersonal accounts and ensuring self-balancing by maintaining a Control Account for each subsidiary ledger.
• Stores Ledger: It encompasses an account for each type of stored item. Entries in this ledger are made from invoices, goods received notes, material requisitions, material received notes, etc. Each item's account displays receipts, issues, and balances in both physical and monetary terms.
• Work-in-Process Ledger: Also known as the job ledger, this ledger contains accounts of incomplete jobs and processes. All material costs, wages, and overheads for each job in progress are recorded in the respective job account. The balance in a job account represents the total work-in-process balance.

Work-in-Process Ledger

• Work-in-Process Ledger is also known as the job ledger.

Finished Goods Ledger

• The Finished Goods Ledger contains accounts for each finished product or completed job.
• When finished products are transferred to stores, a credit entry is made in the work-in-process ledger and a corresponding debit entry is made in this ledger.

Subsidiary Books in Non-Integrated Accounting Systems

• Stores Ledger: Records quantity and amount of receipts, issues, and balance of materials and supplies.
• Payroll and Wage Analysis Book: Records wages based on clock cards, time tickets, and piece work tickets.
• Job Ledger: Records material cost, wages, and overheads for a specific job.
• Finished Goods Stock Ledger: Records receipt, sale, and stock of finished goods in terms of quantity and value.
• Standing Order Ledger: Records overheads incurred.
• Debtors’ Ledger: Contains personal accounts of all trade debtors.

Debtors' Ledger

• Debtors' Ledger contains individual accounts of all the entities that owe money to the organization.

Creditors' Ledger

• Creditors' Ledger includes personal accounts of all trade creditors, showcasing the amounts the organization owes to its suppliers.

Accounts under Non-Integrated Accounting System

The following important accounts are maintained under non-integrated accounting systems:

• General Ledger Adjustment Account: Also referred to as cost ledger control account or nominal ledger control account. This account records transactions with only one entry, and contra entries appear in the financial book. All income and expenditure transactions originating in the financial accounts are recorded in this ledger for eventual transfer to Cost Accounts. The total of this account equals the total of all the balances of the impersonal accounts.

General Ledger Adjustment Account

On the credit side of this account, the following are recorded:

Credit Side

• Transactions with only one entry are recorded in the General Ledger Adjustment Account.
• Contra entries appear in the financial book for better financial management.
• All income and expenditure transactions are meticulously entered for transfer to Cost Accounts.
• The total of this account should match the total of all impersonal account balances, ensuring accurate financial representation.

Summary of Accounting Control Accounts

Accounting control accounts are essential for businesses to track and manage various financial aspects. Let's delve into the key components of these accounts:

Materials Control Account

• Opening Balance of materials, work in progress, and finished stock
• Expenses of material, wages, direct expenses, and all types of overheads
• Profit transferred from Costing Profit and Loss Account

On the debit side of this account, you will find:

• Returns of materials to suppliers
• Sales income
• Balancing entries of Profit and Loss account (Loss) and closing stock values

Other Control Accounts

(2) Stores Ledger Control Account

(3) Wages Control Account

(4) Work in Progress Control Account

(5) Finished Goods Stock Ledger Control Account

(6) Selling, Distribution, and Administration Overhead Control Account

Let's understand these accounts further:

This account tracks the purchase and issue of materials in the stores.

It records accrued wages, payments made, and wage allocations.

Includes direct materials, wages, expenses, and special purchases for work in progress.

Represents transactions related to finished goods stock in total.

Tracks overhead expenses related to selling, distribution, and administration.

Accounting for Materials Transactions

• Materials Purchased

When materials are acquired for use in the business.

Example: Buying raw materials such as wood and metal for manufacturing furniture.

Material Purchased for a Special Job

• Material purchased for a special job

Refers to materials acquired specifically for a particular project or task.

Example: Procuring unique fabrics for a customized clothing order.

For Issue of Direct Materials to Production Department

• For issue of direct materials to production department

Occurs when raw materials are transferred for direct use in manufacturing.

Example: Sending steel and plastic to the production floor for making car parts.

For Issue of Indirect Materials to Production Departments

• For issue of indirect materials to production departments

Involves providing materials that are not directly used in production but support the manufacturing process.

Example: Supplying gloves and cleaning supplies to the production unit.

For Returning Materials to Supplier

• For returning materials to supplier

When materials are sent back to the supplier due to various reasons like defects or overstock.

Example: Returning faulty electronic components to the vendor for a refund.

For Materials Returned from Production Department

• For materials returned from production department

Refers to materials sent back to the inventory from the production area.

Example: Returning excess raw materials back to the warehouse after completing a production run.

Materials Transfer Process

• When materials are transferred from one job to another (Job-1 to Job-2), certain accounting entries are made in the work in progress ledger.
Example:

No entry is recorded in the control account. However, in the work in progress ledger, the following entry is made:

- Debit Transferee Job-2 account

- Credit Transferor Job-1 account

Total Salary and Wages Paid

• Accounting for the total salary and wages paid involves specific entries.
Example:

- Debit Wages Control account

- Credit General Ledger Adjustment account

Allocation of Direct and Indirect Labor

• Allocating direct and indirect labor costs requires specific accounting treatment.
Example:

- Debit Work in Progress Control account (Direct Labor)

- Debit Overhead Control account (Indirect Labor)

- Credit Wages Control account

Recording Direct Expenses

• Recording direct expenses involves certain accounting entries.
Example:

- Debit Work in Progress Control account

- Credit General Ledger Adjustment account

Recording Overhead Incurred and Accrued

• Accounting for overhead costs incurred and accrued requires specific entries.
Example:

- Debit Overhead Control account

- Credit General Ledger Adjustment account

Administrative Overhead and Recovery

• Administrative Overhead costs are recuperated

Entries:

• Debit: Finished Goods Ledger Control A/c
• Credit: Administrative Control A/c

Selling and Distribution Overhead Management

• Handling Selling and Distribution Overheads

Adjusting Overheads:

• Entries for over or under absorption overheads adjustments
• Transfer to overhead suspense account for closing the overhead control account

Recording Finished Stock Production

• Entries for recording finished stock produced
• Debit: Finished Goods Stock Ledger Control a/c
• Credit: Work in Progress Control a/c

Cost of Sales Calculations

• When finished goods are sold at cost
• Debit: Cost of Sales a/c
• Credit: Finished Goods Stock Ledger Control a/c

Accounting for Sales at Total Sales Value

• When finished goods are sold at total sales value
• Debit: General Ledger Adjustment a/c
• Credit: Costing Profit and Loss a/c

Recording of Sales Returns

• Recording of sales returns
Recording of sales returns

Debit Costing Profit and Loss account.

Credit General Ledger Adjustment account.

Recording Total Cost to Make and Sell

• Recording total cost to make and sell
Recording total cost to make and sell

Debit Cost of Sales account.

Credit Costing Profit and Loss account.

Under Absorption of Overheads

• Recording under absorption of overheads which is not yet adjusted
Recording under absorption of overheads which is not yet adjusted

Debit Costing Profit and Loss account.

Credit Overhead Suspense account.

Over Absorption of Overheads

• Recording over absorption of overheads which is not yet adjusted
Recording over absorption of overheads which is not yet adjusted

Debit Overhead Suspense account.

Credit Costing Profit and Loss account.

Recording of Profit

• Recording profit
Recording profit

Debit Costing Profit and Loss account.

Credit General Ledger Adjustment account.

Non-Integrated Accounting System-flowchart

The non-integrated accounting system does not include financial transactions other than costs incurred. It excludes transactions involving payments unrelated to costs, such as losses on fixed assets. Discrepancies often exist between profits reported in cost accounting systems and financial accounting systems.

Integrated Accounting System

In an integrated accounting system, a single set of accounts merges cost and financial records. This integration eliminates the need for separate accounts in cost and financial accounting, streamlining the preparation of a single Profit & Loss Account. It provides comprehensive information for cost analysis, balance sheet preparation, and meets legal requirements. Additionally, it caters to the needs of both the costing and finance departments.

• General Ledger Control Account

The system does not require a General Ledger Control account, as control accounts like Cash/Bank, Debtors, and Creditors are managed in the financial ledger.

Benefits of Integrated Accounting System

• Efficiency
• Accuracy
• Compliance

Benefits of Integrated Accounting System

• No need for reconciliation as it maintains single set of accounting records.
• Easy method to maintain accounts and avoid unnecessary complications.
• No possibility of different profit figures being reported in integrated accounting system.
• Economical as it avoids duplication of recording transactions in two separate sets of books.
• No delay in obtaining information because it is provided directly from the books of original entry.
• Suitable for mechanized accounting.

Key Considerations in Integrated Accounting

• The management’s decision about the extent of integration of the two sets of books.
• A suitable coding system must be made available to serve the accounting purposes of financial and cost accounts.
• Accounting policy regarding provisions for accruals, prepaid expenses, and other adjustments necessary for the preparation of interim accounts.
• Perfect coordination between the staff responsible for the financial and cost aspects of the accounts to ensure efficient processing of accounting documents.

Essential Features of an Integrated Accounting System

• Records financial transactions not typically required for cost accounting.
• Stores transactions are recorded in the stores control account.
• Wages control account tracks wages paid.
• Overhead expenses are debited to the overhead control account.
• Transactions related to material, labor costs, and overheads are posted in respective control accounts.
• Advance payments are credited, and accruals are debited to the respective control account.
• Capital asset account is debited during the cost analysis of capital expenditure.

Overview of Integrated Accounting System

• Integrated accounts combine elements of non-integrated and financial accounting systems.
• In integrated accounting, both personal and real accounts are prepared with a basis in cost accounting.
• When recording entries in an integrated system, steps involve visualizing the entry in the financial system and adapting it for cost accounting.

Integrated Accounts

Integrated accounts are a blend of non-integrated and financial systems:

• When recording entries in an integrated system:
• 1. Visualize the accounting entry in the financial system.
• 2. Replace the cost head with the corresponding head in the costing system.
• 3. In a non-integrated system, additionally replace any personal or real account with the General Ledger Adjustment account.

Examples:

For instance, when transitioning entries from a financial system to a costing system, consider the following:

• 1. If a transaction involves direct material costs in the financial system, these would be reallocated appropriately in the costing system.
• 2. Personal accounts like individual employee expenses might need to be adjusted to fit the costing system's structure.
• 3. The General Ledger Adjustment account serves as a bridge between systems, ensuring accurate integration.