Integrated and Non-Integrated Accounts | Cost Accounting - B Com PDF Download

Non-integrated accounts (Non-integral system) Meaning

• Under this system, two separate sets of account books are maintained: one for cost accounts and the other for financial accounts. Cost accounts are kept separate from financial accounts. This system is also known as cost ledger accounting or interlocking accounting system.
• CIMA, London defines it as 'a system where the cost accounts are distinct from financial accounts, with both sets of accounts being kept continuously in agreement through the use of control accounts or other means.'
• Similar to financial accounting, cost accounts under this system are based on the double-entry system. In financial books, accounts fall into three categories:
  • Personal accounts (e.g., debtors and creditors)
  • Real accounts (e.g., cash, stocks, fixed assets, etc.)
  • Nominal accounts (e.g., wages, lighting, heating, discounts, rent, and rates, etc.)
• In cost accounts, there are no personal accounts as they do not involve relationships with external parties. Only stocks are shown in real accounts in cost accounts. The primary focus is on nominal accounts, where costs are analyzed in detail. The main concern of the cost accounting department is to ascertain the income and expenditure of the business, focusing mainly on nominal accounts and to some extent on real accounts, but not on personal accounts.

Ledger to be Maintained

• Cost Ledger: This is the primary ledger in cost books, controlling all other ledgers in the costing department. It contains all impersonal accounts and is akin to the general ledger in financial accounts. It includes control accounts like stores ledger control accounts, wages control account, factory overheads control account, etc., along with a cost ledger control account to keep the cost ledger self-balancing.
• Stores Ledger: This ledger maintains individual accounts for each type of store (raw material, components, consumable stores, etc.), recording receipts, issues, and store balances in both quantity and amount.
• Work-in-Progress Ledger or Job Ledger: It comprises separate accounts for each job in progress, noting material costs, wages, and overheads chargeable to the jobs, and the cost of work completed. The remaining balance represents the cost of unfinished work.
• Finished Goods Ledger: This ledger contains accounts for each finished product item. The cost ledger is the primary ledger, with the stores ledger, work-in-progress ledger, and finished goods ledger considered subsidiary ledgers of the cost accounting department. Control accounts for each of these subsidiary ledgers help maintain the self-balancing nature of the cost ledger.

Control Accounts 

• Control accounts are comprehensive accounts within the cost ledger that record entries periodically based on the total transactions from related subsidiary ledgers and books.
• For instance, the stores ledger control account summarizes the stores ledger by combining total purchases and other debits/credits from individual store accounts.
• Each control account, such as job ledger or finished goods ledger, aims to complete double-entry accounting and ensure the cost ledger is self-balancing.

Advantages of Control Accounts

• Control accounts offer management a summarized view of detailed information from various subsidiary ledgers.
• They enable the division of accounting tasks among ledger keepers, promoting specialization.
• Facilitate the swift preparation of financial statements by providing stock figures promptly at the end of each period.
• Enhance internal checks, leading to greater accuracy in records and acting as a basis for reconciling cost and financial accounts.

Principal Accounts in Cost Ledger

• Stores Ledger Control Account: Summarizes material transactions, including receipts and issues, ensuring the total stock balance aligns with individual store balances.
• Wages Control Account: Records aggregate wage transactions, with postings from the wages analysis sheet and transfers of direct and indirect wages.
• Factory Overheads Control Account: Manages factory overheads in aggregate, dealing with costs and transfers to work-in-progress based on absorbed overheads.
• Work-in-progress Ledger Control Account: Tracks work-in-progress balances, debiting materials, labor, and factory overheads, and crediting the cost of finished goods.
• Finished Goods Ledger Control Account: Monitors finished stock balances, recording costs transferred from work-in-progress and absorbed administration overheads.
• Administration Overheads Account: Documents administration overhead costs and absorbed overheads by finished goods, managing under or over-absorbed overheads.
• Cost of Sales Account: Tracks the cost of goods sold, including overheads absorbed, and transfers to the Costing Profit and Loss account.
• Selling and Distribution Overheads Account: Manages selling and distribution overhead costs, recording absorbed costs and transferring balances accordingly.
• Overheads Adjustment Account: Handles under or over-absorbed overheads for various departments, aiding in adjustments for accurate financial reporting.
• Costing Profit and Loss Account: Records costing profits or losses, including sales values, abnormal gains/losses, and absorbed overheads, ultimately transferred to the cost ledger control account.
• 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.
  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)

• Integrated or Integral accounting involves maintaining cost and financial accounts within the same set of books. Transactions from both accounts are recorded together based on the double-entry system, eliminating the need for separate sets of books for costing and financial purposes. This system provides all necessary information for both cost and financial accounting from a single set of books.

Advantages of Integrated Accounts

• Economical system: It saves costs by eliminating duplicate recording in separate books.
• No need for reconciliation: With only one set of accounts, there is no need for reconciliation between cost and financial figures.
• Centralization of accounting work: Centralizing accounting functions offers better control and cost savings.
• Information available without delay: Cost information is readily available from the original entry books.
• Pooling of knowledge: Combining cost and financial knowledge leads to more effective outcomes.
• Better coordination: Enhances coordination between cost and financial accounting staff.
• Suitable in mechanized accounting: Well-suited for mechanized and data processing techniques.
• Wide outlook: Broadens the perspective of accounting staff by consolidating information in one set of books.

Disadvantages of Non-integrated Accounts

• Unsuitable for large concerns: Not ideal for very large organizations needing detailed continuous cost and financial information.
• Complicated system: Integrating cost and financial information can be complex, requiring expert accountants.
• Need for reconciliation: Full integration may necessitate reconciliation between cost and financial accounts.

Features of Integral Accounting

• In integral accounting, there is no necessity for a Cost Ledger Control Account as double entry can be completed without it.
• Subsidiary ledgers like stores ledger, work-in-progress ledger, and finished goods ledger are maintained, alongside sales and purchase ledgers.
• Control accounts are opened in the general ledger for each subsidiary ledger.
• Degree of integration must be predetermined, with some firms integrating fully and others only up to prime cost or factory cost.
• A suitable coding system is typically developed to serve both cost and financial accounts.

Need for Integration of Cost and Financial Accounting

• Holistic Financial Picture: Combining cost and financial data offers a complete view of an organization's financial health.
• Informed Decision-Making: Helps managers make informed decisions considering expenses and revenues.
• Performance Evaluation: Enables assessment of operational efficiency and profitability through cost comparisons.
• Resource Optimization: Identifies areas for cost control and resource optimization by linking cost information to financial results.

Procedure for Integration of Cost and Financial Accounting

• Common Chart of Accounts: Use a shared chart of accounts for consistent categorization.
• Standardized Costing Methods: Adopt uniform costing methods for consistent treatment of costs.
• Data Sharing: Establish seamless data sharing processes between Cost and Financial Accounting departments.
• Integrated Software: Implement integrated systems like ERP for real-time data sharing and reduced errors.
• Periodic Reconciliation: Regularly reconcile records between Cost and Financial Accounting for accuracy.
• Cross-Functional Collaboration: Promote teamwork and communication for unified financial goals and cost management.