After studying this chapter you should be able to:
Understand and explain the meaning, advantages and disadvantages of integrated (integral) accounting system.
Know the pre-requisites of successful integration of accounts.
Explain the meaning of third entry method.
Pass appropriate accounting entries in non-integrated accounting system (financial books and cost books) and integrated accounting system.
Distinguish between interlocking and integration of cost and financial accounts.
Know how to value stocks in integrated accounts.
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.
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.
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
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
Important note
See the difference in journal entry for the following:
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
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.
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:
The production overhead absorption rate is 150% of direct wages charged to work-in-progress.
Required:
Prepare the following accounts for the month:
[C.A (Inter). Modified]
Solution
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 |
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
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 |
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).
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.
I: State whether the following statements are true or false
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)
Answers:
III: Multiple choice questions: choose the correct answer
Answers:
1. (c) |
2. (a) |
3. (b) |
4. (d) |
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 |
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:
[C.A. (Inter)]
[Ans:
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:
[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 |
|
|
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: