Integral & Non integral Accounts

In the era of cut throat competition, where one not only has to run his/her business but also ear n sufficient profits to continue running his/her business. For this proper recording of sales, cost & accurate profit calculation is must which is achieved through an appropriate accounting system. Financial accounting system prepares accounts for only the monetary aspects of every business transaction whereas under cost accounting costs are classified according to functions, departments, or products. In cost accounting although real accounts and nominal accounts are of direct relevance; personal accounts and cash or bank account are not directly related to cost ascertainment. However, it is not necessary to maintain cost account under double entry system.

There are two systems of maintaining cost accounts

Where cost and financial accounts are maintained in a combined way, the system is called as integrated while if the records are maintained separately, the system is called as non-integrated system of maintaining accounts.

Non integral system is a system of accounting where two separate sets of account books are maintained; one recording costing transactions and the other financial transactions.

CIMA London defines Non – Integral system as, “a system in which the cost accounts are distinct from the financial accounts, the two sets being continuously kept in agreement by the use of control accounts or made readily reconcilable by other means.” Under this system cost accounts restricts it’s recording to 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.

The BASIC FEATURES of non integral accounts are as follows:

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.

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.

The important ledgers to be maintained in cost accounting department are

(a)        Cost Ledger –This is the principle ledger of the cost department in which impersonal accounts are recorded and made self-balancing by maintaining therein a Control Account for each subsidiary ledger.

(b)     Stores Ledger – It contains an account for each item of stores entries for which are made from the invoice, goods received note, material requisitions, material received note etc. Accounts in respect of each item of stores show receipt, issue and balance in physical as well as in monetary terms.

(c)     Work-in-Process Ledger – This ledger is also known as job ledger, it contains accounts of unfinished jobs and processes. All material costs, wages and overheads for each job in process are posted to the respective job account in this ledger. The balance in a job account represents total balance of job/work-in-process.

(d)     Finished Goods Ledger – It contains an account for each item of finished product manufactured or the completed job. If the finished product is transferred to stores, a credit entry is made in the work-in-process ledger and a corresponding debit entry is made in this ledger.

The subsidiary books maintained under non-integrated system of accounting are:

(1) Stores ledger: It is used to record both the quantity and amount of receipts, issues and balance of materials and supplies. It consists of 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.

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

• General ledger adjustment account: It is also known as cost ledger control account or nominal ledger control account. In this account 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

• Opening Balance of materials, work in progress and finished stock
• Expenses of material, wages, direct expenses & all types of overheads
• Profit transferred from Costing P&L A/c

On the DEBIT SIDE of this account are recorded

• Returns of materials to supplier
• Sales income and
• Balancing entries of P&L account(Loss) and closing stock values.

(2) Stores ledger control account: It is debited with purchase of materials for the stores and credited with issues of material.

(3) Wages control account: In this account the wages accrued and paid and allocation of wages in this account are recorded.

(4) Work in progress control account: It includes of all direct materials, direct wages, direct expenses, special purchases and expenses.

(5) Finished goods stock ledger control account: This account represents finished goods stock ledger transactions in total form.

(6) Selling, distribution, and administration overhead control account: This account represents selling, distribution and administration overheads.

• Materials purchased

Stores Ledger Control account                                         Dr

To General Ledger Adjustment a/c

• Material purchased for a special job

Work in Progress Control a/c                                            Dr

To General Ledger Adjustment a/c

• For issue of direct materials to production department

Work in Progress Control a/c                                            Dr

To Stores Ledger Control account

• For issue of indirect materials to production departments

Production Overhead Control a/c                                                             Dr

To Stores Ledger Control a/c

• For returning materials to supplier

General Ledger Adjustment a/c                                        Dr

To Stores Ledger Control a/c

• For materials returned from production department

Stores Ledger Control a/c                                                             Dr

To Work in Progress Control a/c

• For materials transferred from Job- 1 to Job- 2

No entry is passed in control account but in work in progress ledger the following Entry is passed

Transferee Job- 2 a/c                                                                     Dr

To Transferor Job- 1 a/c

• For total salary and wages paid

Wages Control a/c                                                                         Dr

To General Ledger Adjustment a/c

• For allocation of direct and indirect labour

Work in Progress Control a/c (DL)                                               Dr

Overhead Control a/c (IDL)                                       Dr

To Wages Control a/c

• For recording direct expenses

Work in Progress Control a/c                                            Dr

To General Ledger Adjustment a/c

• For recording overhead incurred and accrued

Overhead Control a/c                                                        Dr

To General Ledger Adjustment a/c

• For adjusting under or over absorption overheads

The overhead control account is closed by transferring to overhead suspense account.

• For recording finished stock produced

Finished Goods Stock Ledger Control a/c                                                    Dr.

To Work in Progress Control a/c

• When finished goods are sold at cost

Cost of Sales a/c                                                                                            Dr

To Finished Goods Stock Ledger Control a/c

• When finished goods are sold at total sales value

General Ledger Adjustment a/c                                                                     Dr

To Costing Profit and Loss a/c

• For recording sales returns

Costing Profit and Loss a/c                                                                           Dr.

To General Ledger Adjustment a/c

• For recording total cost to make and sell

Cost of Sales a/c                                                               Dr

To Costing Profit and Loss a/c

• For recording under absorption of overheads which is not yet adjusted

Costing Profit and Loss a/c                                                          Dr.

To Overhead Suspense a/c

• For recording over absorption of overheads which is not yet adjusted

Overhead Suspense a/c                                                     Dr

To Costing Profit and Loss a/c

• For recording profit

Costing Profit and Loss a/c                                                          Dr

To General Ledger Adjustment a/c

Non-Integrated Accounting System-flowchart

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 difference between the profits reported as per the cost accounting system and the Financial Accounting System.

1. Integrated Accounting is a system in which the accounts are integrated and only a single set of accounts are maintained for Cost & Financial records.
2. It avoids maintenance of separate accounts under cost accounting & financial accounting.
3. This enables a firm to eliminate separate Profit & Loss Accounts under financial accounting and cost accounting systems & only one Profit & Loss Account is prepared.
4. 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.
5. It also provides necessary information as required by the costing and finance department.
6. There is no General Ledger Control A/c is prepared in this system because all control accounts such as Cash/Bank A/c, Debtors A/c & Creditors A/c are maintained in financial ledger.

The benefits of Integrated Accounting System are as follows:

1. No need for reconciliation as it maintains single set of accounting records.
2. Easy method to maintain accounts and avoid unnecessary complications.
3. There is no possibility of different profit figures being reported in integrated accounting system.
4. There is economical as it avoids duplication of recording transactions in two separate set of books.
5. There is no delay in obtaining information because it is provided directly from the books of original entry
6. It is suitable for mechanized accounting.

1. The management’s decision about the extent of integration of the two sets of books. Some concerns find it useful to integrate up to the stage of primary cost or factory cost while other prefer full integration of the entire accounting records.
2. A suitable coding system must be made available so as to serve the accounting purposes of financial and cost accounts.
3. Accounting policy with regards to the treatment of provision for accruals, prepaid expenses & other adjustment necessary for preparation of interim accounts.
4. Perfect coordination should exist between the staff responsible for the financial and cost aspects of the accounts and an efficient processing of accounting documents should be ensured.

1. The following are the essential features of an integral an accounting system:
   1. It records financial transactions not normally required for cost accounting. It will also record internal costing transactions the way we recorded in Non Integral Accounts.
   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 control account is debited with the wages paid and credit is taken in cash or bank account.
   4. Overhead expenses are debited to the overhead control account, corresponding credit being given to cash or bank account or sundry creditors account.
   5. Transactions relating to material, labour cost overheads are posted in the stores, wages and overhead control accounts after making suitable cost analysis and at the end of the period transfer of the totals are made to the work in progress accounts by crediting various control accounts.
   6. All advance payments are credited and accruals are debited to the respective control account by contra entries in the prepayments and accrual accounts.
   7. Capital asset account is debited and respective control accounts are credited in the process of cost analysis of capital expenditure.

   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.

   While passing entries in integrated system, following steps should be followed:

   1. Visualise the accounting entry in the financial system of accounting;
   2. Then replace the cost head, by the head in the costing system of accounting;
   3. In case of the non-integrated system, an additional step is replacing any personal or real A/c by the General Ledger Adjustment A/c.