INTRODUCTION Accounting information is important for every business which will serve the needs of variety of interested parties. To satisfy the needs of all interested parties a sound accounting system is very necessary. It may be divided in to three parts: Financial accounting, Management accounting, and Cost accounting. Financial accounting is mostly concerned to record the business transactions in books of accounts so that final accounts can be prepared. Management accounting is an extension of management aspects of cost accounting. It provides the information to management so that planning, organizing, directing and controlling of business operations can be done in an orderly manner Cost accounting developed to help the internal management in decision making. The information provided by cost accounting acts as a managerial tool so that business can utilize the available resources at optimum level. The Costing terminology of C.I.M.A. London defines cost accounting as “The establishment of budgets, standard costs and actual costs of operations, processes, activities or products, and the analysis of variances, profitability or the social use of funds”. Cost Records have a very important role in the accounting of a manufacturing organization. Cost records provide the details about components of cost of a product or services i.e. material, labour and overhead. There are two system used in maintenance of cost records i.e. integrated records and non- integrated records.
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Under non-integrated accounting systems, Financial Accounting and Inventory/Cost Accounting books/ ledgers are separately maintained. In other words if the records are maintained separately, the system is called as non-integrated system of maintaining accounts. An Integrated Accounting System would be one where only a single set of books would contain all the information of Financial Accounting as well as Inventory/ Cost Accounting. Integrated system would be difficult to maintain if accounts are maintained manually but most available Computerized Accounting Systems are Integrated Systems. In integrated system, the problem of reconciliation of financial accounts and cost accounts does not arise. The objective is to understand: 1. The meaning of Integrated and non integrated system. 2. Difference between integrated and non integrated systems. 3. Reconciliation of cost and financial accounts.
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NON-INTEGRATED ACCOUNTING SYSTEM It is a system of accounting under which separate ledgers are maintained for cost and financial accounts by Accountants. Under such a system the cost accounts restricts itself to recording only those transactions which relate to the product or service being provided. Hence items of expenses which have a bearing with sales or, production or for that matter any other items which are under the factory management are the ones dealt with in such accounts. A special feature of the non-integrated system of accounts is its ability to deal with notional expenses like rent or interest on capital tied up in the stock. The accounting of notional rent facilitates comparisons amongst factories (some owned and some rented). Similarly, recognition of interest on capital tied up in stock could help make the stores and works managers aware of the money being blocked because of holding stock. Non Integrated Accounting Systems contain fewer accounts when compared with financial accounting because of the exclusion of purchases, expenses and also Balance Sheet items like fixed assets, debtors and creditors. Items of accounts which are excluded are represented by an account known as cost ledger control account.
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FEATURES OF NON-INTEGRATED ACCOUNTING SYSTEM 1. Separate Books: In a non-integrated Cost accounting system there are separate cost accounts, cost journals and cost ledger. 2. Principle of Double-Entry: However, it too follows the fundamental principles of double entry book keeping 9debit and credit) for this purpose. 3. Cost Manual: It is a document which sets out the responsibilities of the persons engage in, and the routine of, and the reforms and records required for, costing 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. Accounts/Code: Each entry is debited / credited to a cost account. Cost Account is defined as an account in the cost ledger. Each account may be given 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 in to Cost Journal. There may be one general journal to summarise all original entries or separate journal may be kept to record labour, material and overhead transactions. 7. Ledger: From the Cost Journal, entries are posted in the Cost Ledger. ‘It is defined as a cost ledger whose accounts record those transactions which are included in cost.In financial accounting, ledger may be divided in to General and subsidiary ledgers like debtors ledger, creditors etc. Similarly, Cost ledger may be divided in two main and subsidiary ledgers. There may be a main ledger known as cost ledger and other subsidiary ledgers like Store ledger, Work-in-progress ledger and finished stock ledger.
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PRINCIPAL LEDGER Subsidiary books maintained under non-integrated system of accounting. The following are some of the subsidiary books maintained under interlocking system of accounting. 1. Stores ledger: It is used to record both the quantity and amount of receipts, issues and balance of materials and supplies. It consists all store accounts. 2. Payroll and wage analysis book: It is used to record the wages. The basis for recording the transactions are (a) clock cards, (b) time tickets, and (c) piece work tickets. 3. Job ledger: It is used to record the material cost, wages, and overheads incurred in respect of a job. 4. Finished goods stock ledger: It is used to record the receipt of finished goods from production department, the sale and stock of finished goods both in terms of quantity and value. 5. Standing order ledger: It is used to record overheads incurred. 6. Debtors’ Ledger: It contains personal accounts of all trade debtors. 7. Creditors’ Ledger: It contains personal accounts of all trade creditors.
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CONTROL ACCOUNTS The following important accounts are maintained under non-integrated accounting system: A. General ledger adjustment account: It is also known as cost ledger control account or nominal ledger control account. In this accounts transactions with only one entry is recorded and contra appears in financial book. All transactions of income and expenditure which originate in the financial Accounts must be entered in the ledger for eventual transfer to Cost Accounts and total of this account will be equal to total of all the balance of the impersonal accounts. On the credit side of this account are recorded (a) Opening Balance of materials, work in progress and finished stock, (b) Expenses of material, wages and overheads on the credit side, (c) On the debit side returns of materials to the supplier, (d) Sales income and (e) On the debit side balancing entries of P&L account and closing stock. B. Cost control Accounts: The three cost control accounts –Stores ledger control account, Work-in-progress control account and Finished Goods control account-helps to exercise control over the concerned subsidiary ledgers. Transactions kept in detail in one or more accounts of the subsidiary ledger are stored in totals, at the end of a period, to the control accounts. Thus the balance in a control account represents the total contained in 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.
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1. Stores ledger control account: It is debited with purchase of materials for the stores and credited with issues of material. Debit &Credits: Receipts are posted in goods received notes and issues from materials requisitions or materials issue analysis sheet. The account also records issues of new materials to outside parties, returns through return notes, and stores adjustments through material transfer notes. Balance: The balance of this account represents the total balance of stock which should agree with the aggregate of the balances of the individual folios in the stores ledger. 2. Wages control account: In this account the wages accrued and paid and allocation of wages in this account are recorded. Debits &Credits: Entries are made from wages analysis sheet. This account is debited with the gross wages and is cleared 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. Work in progress control account: It includes of all direct materials, direct wages, direct expenses, special purchases and expenses. Debits: This account is debited with the opening balance of workin-progress and material, labour and factory overhead costs. Credit: This account is credited with the cost of finished goods. Balance: The balance of this account represents unfinished closing stock in process carried over.
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4. Finished Goods Control Account: 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. Credit: It is credited with the cost of sales. Balance: The balance of the account after writing back the uncovered administration overheads represents unsold stock carried over. 5. Administration overhead account: Debit: Administration overhead cost is debited to this account. 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. When administration overhead is prorated to manufacturing and selling and distribution overheads the account is credited with the amount so transferred. 6. Cost of sales account: Debit: The account is debited with the cost of goods sold and selling and distribution overhead recovered. Credits: It is credited by transfer to Costing Profit and Loss account. 7. Selling and Distribution Overhead Account: Debit: Selling and distribution costs are debited to the account. Credit: At the end of the period the account is closed by transfer to cost of sales account.
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8. Overhead Adjustment Account: Debits and Credits: The amount of under-absorbed or overabsorbed 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 the Costing Profit and Loss Account. Balance: The balance at the end of the period may be either1.carried over to the next accounting period2.or transferred to the Costing Profit and Loss Account3.or prorated to Cost of Sales Account, Work-in-progress account and Finished Stock account. 9. Costing Profit and Loss account: Debits and Credits: This account records the transfer of the amounts of under-absorbed or 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 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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ADVANTEGES OF NON- INTEGRATED ACCOUNTING SYSTEM
The following are the main advantages of integral accounting: 1. This system tends to coordinate the functions of different selections of the accounts department since all efforts are integrated and directed towards achievement of one aim that is providing a high level of efficiency. 2. The accounting procedures can be simplified and the system can be centralized with the object of achieving a greater control over the organization. 3. The system creates conditions which are eminently suitable for the introduction of mechanized accounting. 4. There is no possibility of overlooking any expense under the system. 5. As cost accounts are posted straight from the books of original entry, there is no delay in obtaining the data. 6. There is automatic check on the correctness of the cost data. It ensures that all legitimate expenditure is included in Cost accounts and reliable and proved data is provided to the management for its decisions’. 7. Integrated accounting widens the outlook of the accountant. 8. It can be maintained according to convenience as it need not be statutorily maintained.
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LIMITATIONS OF NON-INTEGRATED ACCOUNTING
The following are some of the limitations of this accounting system: 1. The Financial transactions other than cost incurred are not recorded in the system. 2. Transactions involving payment other than that of cost are not included in the system E.g.: loss on fixed assets. 3. There is always a diff between the profits reported as per the cost accounting system and the Financial Accounting System.
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INTEGRATED (INTEGRAL) ACCOUNTING SYSTEM
CIMA has defined integrated system as “a system in which the financial and cost accounts are interlocked to ensure that all relevant expenditure is absorbed in to the cost accounts”. Integrated Accounting is a system in which the accounts are integrated and only a single set of accounts are maintained for Cost & Financial records. It avoids maintenance of Accounts under cost accounting & financial accounting. This enables a firm to eliminate separate Profit & Loss Accounts under financial accounting and cost accounting systems & only one Profit & Loss Accounts are prepared. It provides entire information for the ascertainment of cost of each unit as well as preparation of a balance sheet as per the legal requirement of the organization. It also provides necessary information as required by the costing and finance department. There is no General Ledger Control A/c is prepared in this system.
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FEATURES OF INTEGRATED SYSTEM The following are the essential features of an integral an accounting system: 1. It records financial transitions not normally required for cost accounting be sided recording internal costing transaction prepayments and accruals are opened. 2. Stores transactions are recorded in the stores control account. This account is debited with the cost of stores purchased corresponding credit being given to cash or sundry creditors depending whether the purchase is made for cash or on credit. 3. Wages & Expenses: Wages control account is debited with the wages paid; contra credit is taken in cash or bank account. Similarly overhead expenses incurred are debited to the overhead control accounts by credit to the cash or bank account or sundry creditor’s accounts. 4. Third Entries: Transactions relating to material, labour cost overheads are posted in the stores wages and overhead control account after making suitable cost analysis and that the end of the period transfer of the totals is made to the work in progress accounts by crediting various control accounts. The day to day cost analysis made for this purpose is known as making third etc. These entries do not mean entries in the same sense an entry of transaction in the ledger but such entries are simply a sort of cost analysis. 5. Accruals & Prepayment: All advance payments are credited and accruals debited to the respective control account by contra entries in the prepayments and accrual accounts. 6. Capital asset account is debited and respective control accounts are credited in the process of cost analysis of capital expenditure. 13
It is also important to note that integrated accounts are like a hybrid between non-integrated and the financial system of accounting as in case of the non-integrated system, No personal or real accounts are prepared and all entries are passed through the general ledger adjustment account. In the financial accounting system, there is no base of the cost accounting. In the integrated system of accounting, personal and real accounts are prepared but there exists a base of the cost accounting system. 7. Work –in – progress: It may be split in to three separate accounts viz. Material-in-Process, Labour-in-Process, and Overhead-inProcess Accounts.
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ADVANTAGES OF INTEGRATED ACCOUNTING SYSTEM The benefits of Integrated Accounting System are as follows: 1. No separate financial accounts: The need for separate sets of financial and cost accounts ledgers does not exist. This saves clerical expenditure. 2. No need for reconciliation as it maintains single set of accounting records 3. Avoids duplication: Fewer accounts and records are required and duplication in accounting and analysis is avoided 4. No Delay: As cost accounts are posted straight from the books of original entry there is any delay in obtaining cost data. 5. Economy: Centralised as well as computerized accounting, which is possible in the integrated system, results in economy. 6. Pooling of knowledge: The knowledge of financial and cost accounting may be pooled together. 7. Wider outlook: Integrated accounting widens the outlook of the accountants and staff who are placed in a better position to appreciate the entire accounting system. 8. Complementary: Integrate 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 compartment.
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PRE-REQUISITES FOR AN INTEGRAL ACCOUNTING SYSTEM The following principles shall be taken into consideration while designing such a system: 1. Extent of integration: The degree of integration must be determined. Some undertakings find it satisfactory merely to integrate up to the stage of primary cost or factory cost while other concerns integrate the whole of the records in which cost and financial accounts cannot be distinguished. 2. A suitable coding system should be available to serve the accounting purposes of financial and cost accounts 3. The degree of integration will determine the classification of expenditure. The expenditure classified here according to function as office expenses, selling expenses etc., and not according to nature. However, control accounts are maintained for each element of cost. 4. Full details of items posted to the control accounts are supplied to the cost office at convenient intervals. This information is then dealt with by the cost office in accordance with the system of costing in force. 5. The amount of detail recorded in the ledger is usually kept to a minimum. Full information regards in each department or process being contained in tabulators prepared by the cost office. These tabulations are sometimes referred to as third entries to emphasize that they are not part of double entry system. 6. For preparation of interim accounts there must be an agreed routine for treatment after accruals, prepaid expenses and other necessary adjustments. 7. There should be perfect coordination between the staff responsible for the financial and cost aspects to ensure an efficient processing of accounting documents.NRE
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RECONCILIATION OF COST AND FINANCIAL ACCOUNTS NEED FOR RECONCILIATION The two systems of accounting viz. financial and cost accounts co-exist in the same organisation and they deal with same basic transactions say, purchases, consumption of materials, wages and other expenses. But the difference of purpose calls for a difference in approach in collection, analysis and presentation of data to meet the objective of individual system. Financial accounts are concerned with the ascertainment of profit or loss for the whole operation of the organisation for a relatively long period usually a year, without being too much concerned with cost computation, whereas cost accounts are provided for ascertaining the profit or loss made by manufacturing or product divisions/products for cost comparison and preparation and use of variety of cost statements. The difference in purpose and approach more often than not results in a different profit from what is disclosed by the financial accounts and this establishes the need for a reconciliation of profit between cost account and financial accounts. Thus, reconciliation between the results of the two sets of books is necessary due to the following reasons: 1. It finds out the reasons for the difference in the profit or loss in cost and financial accounts. 2. It ensures the mathematical accuracy and reliability of cost accounts in order to have cost ascertainment, cost control and to have a check on the financial accounts. 3. It contributes to the standardization of policies regarding stock valuation, depreciation and overheads. 4. It facilitates more coordination and promotes better co-operation, between the activities of financial and cost sections of the accounting department. 5. Reconciliation places management in better position to acquaint itself with the reasons for the variation in profits paying the way effective internal control. FI
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CONCLUSION o There are basically three cost accounting systems. Financial Accounting System. Non-Integrated Accounting System. Integrated Accounting System. o Non-integral accounting system where separate accounts books are maintained to record financial and cost transactions. o Non-integral accounting system is also known as ‘Cost Control Accounts’. o Two set of accounts books are kept in non-integral system one for recording cost transaction another for financial transaction. o Double entry system is adopted for recording the transactions in both accounts books. o Integral system is a system of accounting under which only one set of books of account is maintained to record the both transactions (cost & financial). It is also known as integrated accounts system. There is no need for cost ledger and cost ledger control account. o Integrated accounts are like a hybrid between non-integrated and the financial system of accounting. o In case of the non-integrated system, no personal or real accounts are prepared and all entries are passed through the General Ledger Adjustment account. o In the financial accounting system, there is no base of the cost accounting. o In the integrated system of accounting, personal and real accounts are prepared but there exists a base of the cost accounting system.
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o In non-integral accounting system shows the two different profits due to two separate books of account.
o Reconciliation statement reconciles the profit as per Cost Accounts with the profit as per Financial Accounts by showing all causes of differences between the two.
o Reconciliation places management in better position to acquaint itself with the reasons for the variation in profits paying the way for more effective internal control
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REFERENCE V.Rajesekaran, R.Lalitha, Cost Accounting, Pearson Education in South Asian. Cost and Management Accounting; Kalyani Publishers.
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