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1. Introduction
In the integrated accounting system, separate set of accounts under cost accounting and financial
Accounting systems are not maintained. The accounts are integrated and only a single set of accounts are
Maintained. This enables a firm to eliminate separate Profit and Loss Accounts under financial
accounting and cost accounting systems and only one Profit and Loss Account is prepared. Thus there is
no question of two separate amounts of profits being disclosed from the two different set of books. The
need for reconciliation of profits shown by cost accounts and financial accounts is therefore is eliminated.
This chapter proposes to discuss the mechanics of this integrated system of accounting.
Thus it is ensured that the expenses, which is related to the period only is charged to the work-in-progress
account. In case of outstanding expenses, the outstanding expenses account is credited and the overhead
control account is debited. At the time of actual payment, the expenses outstanding account is debited and
corresponding credit is given to either cash account or bank account or it is adjusted through overhead
control account.
VI. Direct Wages and Overhead Costs Control Accounts: When these costs are incurred, the appropriate
control accounts are debited and cash account is credited. Thus, when direct wages are paid, they are
Debited to direct labour control account and transferred to the work-in-progress account on the debit side.
Appropriate overhead control account is credited. In case the actual payment do not tally with the
expenditure related to that period, appropriate adjustment is made.
VII. Cost Centre Account: An account is kept for each department or cost centre. This helps in knowing
the cost of a department and controlling costs associated with different departments.
VIII. Cash Account: All cash receipts and payments are recorded in this account.
5. Interlocking Accounts
Cost and Financial Accounts are said to be interlocked, when independent set of books are maintained
For each of them. These accounts are interlocked through control accounts maintained in the two sets of
books. Cost Ledger Control Account is maintained in the financial books and a General Ledger
Adjustment Account is maintained is costing books. In this manner, connection between the two sets of
books is maintained. In costing books, all entries relating to fixed assets, cash etc. are posted in General
Ledger Adjustment Account. In case it is desired to integrate the two trial balances into one, the Cost
Ledger Control Account and General Ledger Adjustment Account can be omitted because they are
maintained on contra principle.
The integration as discussed in the above paragraphs, aims at maintenance of only one set of books in
which all transactions are recorded By eliminating, cost ledger, all control accounts are maintained in the
general ledger. The main benefit of integration is elimination of two sets of records and thus the need for
Reconciliation is eliminated. Integration is beneficial from economy angle also as considerable cost can
be saved through maintaining only one set of records. However due to some difficulties, that may crop
up in the implementation of the same, sometimes interlocking of accounts is preferred. For example, a
separate Cost Accounting Department may become necessary considering the growing importance of cost
accounting and hence an interlocking accounting system may have to be operated.
6. Accounting Entries
The journal entries under integral and non-integral accounting systems are given in the following table.
Items
Non-integrated System
Non-integrated System
Integrated Systems
Financial Books
Cost Books
1. Purchase of
Purchase A/c Dr
Materials
To Purchase Ledger
A/c Dr.
A/c- Dr.
To Purchase Ledger
To General Ledger
To Creditors A/c
Control A/c
Adjustment A/c
[or creditors]
2. Issue of
Work-in-progress Ledger
Work-in-progress
materials for
Control A/c Dr
A/c Dr
production
To Stores Ledger
To Stores Ledger
Control A/c
Control A/c
Wages A/c Dr
To Cash/bank A/c
To General Ledger
To General Ledger
Adjustment A/c
Adjustment A/c
Work-in-progress Control
Work-in-progress
A/c Dr
Control A/c Dr
[Direct labour]
Factory overhead
Factory overhead
A/c Dr
3. Payment of wages
4. Analysis and
Distribution of wages
No entry
No entry
Control A/c Dr
Administration
Administration Overhead
Overhead
Control A/c Dr
Control A/c Dr
[Admn.indirect labour]
S & D Overhead
S & D overhead
Control A/c Dr
Control A/c Dr
Expenses A/c Dr
Factory/Adm/S & D
Factory/Adm/S & D
indirect expenses
To Cash A/c
Overhead A/c Dr
Overhead A/c Dr
To Creditors A/c
To General Ledger
To Cash A/c
Adjustment A/c
To Creditors A/c
Work-in-progress Control
Work-in-progress
Factory Overheads
A/c Dr
Control A/c Dr
at pre-determined
To Factory Overheads
To Factory Overheads
rates
Control A/c
Control A/c
Factory Overhead
A/c Dr
Control A/c Dr
A/c
Loss A/c
A/c Dr
A/c Dr
To work-in-progress
To work-in-progress
etc.
6. Recording of
7. Factory Overheads
No entry
No entry
over absorbed
8. Jobs completed
No entry
9. Interest paid
Interest A/c Dr
No entry
To Cash A/c
10. Rent of own
No entry
Works Overhead
To General Ledger
A/c Dr
Adjustment A/c
P & L A/c Dr
To Wages A/c
To Wages A/c
General Ledger
A/c Dr
Adjustment A/c Dr
A/c Dr
To Sales A/c
To Sales A/c
No entry
time
12. Sales [Credit]
To Cash A/c
Works Overhead A/c
premises
Interest A/c Dr
1. Journalize the following transactions in the integrated books of account in the books of XYZ
Ltd.
Particulars
Amount Rs.
Credit purchases
7, 00, 000
8, 00, 000
4, 50, 000
1, 50, 000
1, 20, 000
4, 60, 000
Credit Rs.
7, 00, 000
7, 00, 000
03
8, 00, 000
8, 00, 000
4, 50, 000
4, 50, 000
1, 50, 000
1, 50, 000
1, 20, 000
1, 20, 000
4, 60, 000
4, 60, 000
2. Journalize the following transactions assuming that the cost and financial accounts are integrated.
_ Raw materials purchased: Rs.40, 000
_ Direct materials issued to production: Rs.30, 000
_ Wages paid [30% direct]: Rs.24, 000
_ Direct wages charged to production: Rs.16, 800
_ Manufacturing expenses incurred: Rs.19, 000
_ Manufacturing overheads charged to production: Rs.18, 400
_ Selling and distribution costs: Rs.4, 000
_ Finished products [At cost] : Rs.40, 000
_ Sales: Rs.58, 000
_ Closing stock: Nil
_ Receipts from debtors: Rs.13, 800
_ Payment to creditors: Rs.22, 000
Solution:
Journal Entries
Date Particulars
01
L.F.
Debit Rs.
Credit - Rs.
40, 000
40, 000
30, 000
30, 000
03
24, 000
To Bank A/c
24, 000
7, 200
7, 200
16, 800
16, 800
19, 000
To Bank A/c
19, 000
18, 400
18, 400
4,000
To Bank A/c
4,000
40, 000
40, 000
44, 000
40, 000
4, 000
11
58, 000
58, 000
Bank A/c Dr
13, 800
13, 800
2, 200
2, 200
* On the assumption that all units produced are sold and selling and distribution overheads are charged
to production.
3. From the following transactions, pass the journal entries under an integral accounting system
a) Issued materials Rs.3, 00, 000 out of which Rs.2, 80, 000 [standard Rs.2, 40, 000] is direct material
b) Net wages paid Rs.70, 000, deductions being Rs.12, 000 [standard Rs.75, 000]
c) Gross salaries payable for the period Rs.26, 000 [standard Rs.25, 000] deductions Rs.2, 000
d) Sales [credit] Rs.8, 00, 000
e) Discount allowed Rs.5, 000
f) Salaries and wages allocation Rs.60, 000 direct and out of balance of Rs.42, 000, 50% production,
30% administration and 20% selling and distribution overheads
Solution:
Journal Entries
Date Particulars
01
L.F.
Debit Rs.
2, 40, 000
40, 000
20, 000
Credit Rs.
3, 00, 000
75,000
7,000
To Deductions A/c
12,000
To Cash A/c
70,000
03
25,000
1,000
To Deductions A/c
2,000
To Cash A/c
24,000
8,00,000
To Sales A/c
8,00,000
5,000
To Debtors A/c
5,000
62,000
20,000
12,000
8,000
75,000
25,000
2,000
4. The following are the extracts of balances of X Co Ltd. in its integrated ledgers as on 1st January
2007.
Particulars
Debit Rs.
36,000
Work-in-progress A/c
34,000
26,000
Cash at bank
20,000
Credit Rs.
16,000
1,10,000
24,000
1,60,000
10,000
64,000
Total
2,50,000
2,50,000
Transactions for the twelve months ended on 31st December 2007 were as follows:
_ Direct wages: Rs.1, 74, 000
_ Indirect wages: Rs.10, 000
_ Stores purchased on credit: Rs.2, 00, 000
_ Stores issued to repair order: Rs.4, 000
_ Stores issued to production: Rs.2, 20, 000
_ Goods finished during the period at cost: Rs.4, 30, 000
_ Goods sold at sales value [on credit]: Rs.6, 00, 000
_ Goods sold at cost: Rs.4, 40, 000
_ Production overhead recovered: Rs.96, 000
Solution:
Dr.
Dat
Particulars
J.F Amount
Rs.
Date Particulars
e
Jan
To Balance B/d
36, 000
1
Dec
Dec.
Cr.
J.F Amount
Rs.
.
By work-in-progress
2, 20,000
By Production
Overheads
4, 000
By Balance c/d
12, 000
Total
2, 36,000
31
To Creditors Control
A/c
2, 00, 000
. 31
Dec.
31
Dec.
31
Total
2, 36, 000
Dr.
Date Particulars
Dec.
L.F.
To Bank A/c
Amount
Rs.
Date Particulars
1, 84,000
Dec.
31
31
Total
Dr
1, 84,000
To Wages Control
A/c
L.F.
1, 74,000
By Production
Overhead Control
A/c
10, 000
Total
1, 84,000
31
Dec.
Cr.
L.F.
Amount
Rs.
By Prepayments A/c
-Rent
600
By Work-in-progress
A/c
96, 000
Total
96, 600
31
To Stores Control
A/c
4, 000
31
Dec.
By work in progress
a/c
Date Particulars
Dec.
L.F. Amount
Rs.
31
Dec.
Dec.
Cr.
Dec.
31
To Bank A/c
80, 000
To Depreciation
Provision A/c
2, 600
Total
96, 600
31
Dec.
31
Dr.
Date
Particulars
Dec.
To Bank A/c
L.F.
Amount
Rs.
Date Particulars
24, 000
Dec.
31
Cr.
L.F. Amount
Rs.
24, 000
Total
24, 000
31
Total
24, 000
Dr.
Date
Particulars
Dec.
To Bank A/c
L.F.
Amount
Rs.
Date
Particulars
28, 000
Dec.
By Cost of Sales
31
A/c
31
Total
Dr.
Date
28, 000
Cr.
L.F.
28, 000
Total
28, 000
L.F.
Amount
Rs.
Date Particulars
34, 000
Dec.
Amount
Rs.
Cr.
L.F. Amount
Rs.
By Finished Goods
A/c
4, 30,000
By Balance c/d
94, 000
Total
5, 24,000
Cr.
31
Dec.
To Wages Control
A/c
1, 74,000
To Stores Control
A/c
2, 20,000
To Production
Overhead A/c
96, 000
31
Dec.
31
Dec.
31
31
Total
5, 24,000
Dec.
Particulars
94, 000
L.F.
Amount
Rs.
Date
Particulars
L.F.
Amount
Rs.
26, 000
Dec.
4, 40,000
By Balance c/d
16, 000
Total
4, 56,000
31
Jan 1 To Work in progress
A/c
4, 30,000
Dec.
31
Total
4, 56,000
Dr.
Date
Particulars
Dec.
31
To Finished Goods
A/c
Dec.
31
To Selling &
Distribution
Overheads A/c
Total
Particulars
By Costing
Prot & Loss
A/c
Cr.
J.F.
Amount
Rs.
4, 68,000
28, 000
4, 68,000
Total
4, 68, 000
Dr. Costing Profit & Loss A/c for the year ended 31st December 2007 Cr.
Particulars
To Cost of Sales A/c
To Administration
Overheads A/c
To Prot & Loss A/c
Total
Amount Rs.
Particulars
4, 68, 000
24, 000
Amount
Rs.
6, 00,000
Total
6, 00,000
1, 08, 000
6, 00, 000
Dr. Profit & Loss A/c for the year ended 31st December 2007 Cr.
Particulars
Amount Rs.
Particulars
Amount
Rs
64, 000
To Charitable
donation
To Fines
2, 000
By Balance b/d
1, 000
1, 08,000
To Interest on bank
loan
To Income tax
To Net Prot for the
year
Total
200
Total
1, 72,000
40, 000
1, 28, 800
1, 72, 000
Dr.
Prepayment A/c
Cr.
Date Particulars
Dec.
31
To Balance
c/d
Total
Dr.
Jan.
1
Dec.
31
J. Amount
F. Rs.
10, 000
2, 600
12, 600
Particulars
Cr.
J.F. Amount
Rs.
To Bank
2, 02,000
Jan. 1
By Balance
b/d
16, 000
To Balance
c/d
Total
14, 000
Dec.
31
By Stores
Control a/c
2, 00,000
Total
2, 16,000
Dr.
Date
Date Particulars
Dec.
31
Dec.
31
J.F.
Cr
2, 16,000
Cr.
44, 000
6, 24,000
Dr.
Bank Account
Date
To Balance b/d
Jan. 1
To Debtors
Control
A/c
J.F.
Dec.
31
Cr.
Dec.
31
Dec.
31
Dec.
31
Dec.
31
J.F. S
1,84,000
By Fixed asset
A/c
By Production
overheads A/c
By
Administration
overhead A/c
By Selling &
distribution
overhead
A/c
By Creditors
control
A/c
4, 000
By Fines
1, 000
By Charitable
2, 000
donation
By Interest on
bank
200
80, 000
24, 000
28, 000
2, 02, 000
loan
Dec.
31
Dec.
31
Total
Dr.
40, 000
By Balance c/d
34, 800
Total
6, 00, 000
Date
Particulars
Jan. 1
Dec.
31
6, 00,000
By Income tax
J.F.
Cr.
To Balance
b/d
To Bank A/c
Amount Date
Rs.
1, 10,000 Dec.
31
4, 000
Total
1, 14,000
Total
1, 14,000
Dr.
Date
Particulars
Dec.
31
To Balance
c/d
Total
J.F.
Amount Date
Rs.
1, 60,000 Jan. 1
1, 60,000
Cr.
Trial Balance
Particulars
Stores Control A/c
Work-in-progress A/c
Finished goods A/c
Cash at bank
Creditors control A/c
Fixed assets A/c
Debtors control A/c
Share capital A/c
Depreciation provision A/c
Prepayments A/c
Debit
Rs.
12, 000
94, 000
16, 000
34, 800
14, 000
1, 14, 000
44, 000
1, 60, 000
12, 600
600
Total
Credit
Rs.
1, 28, 800
3, 15, 400
3, 15, 400
INTRODUCTION
Just as financial accounting system is maintained with certain objectives in view, cost
accounting system is often distinctively maintained with a view to achieve its objectives. All
transactions are collected from the same invoices, vouchers or receipts which are also common
for financial accounts. Costs are then classified according to functions, departments or
products.
Though real accounts and nominal accounts are of direct relevance in ascertaining the cost
of products, personal accounts and cash or bank account are not directly related to cost
ascertainment. When cost accounting system is maintained it involves maintenance of certain
books, for recording day-to-day transactions. It is not necessary to maintain cost accounting
under double-entry system of book-keeping. However, in order to ensure arithmetical accuracy
of data often the principles of double entry system of book-keeping is followed. Under double
entry system cost accounts are maintained in the main ledger which is termed as cost ledger.
In addition to this, many subsidiary ledgers are also maintained. In the cost ledger, control
Accounts are maintained pertaining to each subsidiary ledger. In addition to control accounts,
two other accounts, viz, cost of sales account and costing profit and loss account are also
Maintained in the cost ledger, in order to match cost with revenue. Apart from these accounts,
a general ledger adjustment account is opened in cost ledger to accommodate entries relating
to transactions adjustable against cash, bank, debtors, creditors etc. Entries in the accounts
are made once in each accounting period on the basis of periodical totals of transactions
Contained in subsidiary ledgers.
INTERLOCKING SYSTEM
There two systems of maintaining cost records, viz, interlocking system and integral accounting
system. Under interlocking system, cost records are maintained in a separate set of books
independent of financial accounting. The ICMA terminology defines interlocking system of
accounting as a system in which the cost accounting are distinct from the financial accounting.
The two sets of accounts being kept continuously in agreement or readily recognizable.
The following are some of the advantages of interlocking accounting system:
1. When separate set of costing books are maintained it facilitates ready accomplishment
of its objectives.
2. It avoids the complications of recording the entries if it is integrated with financial
accounting.
3. It can be maintained according to convenience as it need not be statutorily maintained.
The following are some of the limitations of this accounting system:
1. When cost accounting is independently maintained, it amounts to duplication of expenses
along with financial accounting.
2. The profit shown by cost books may vary with that shown by financial accounting.
This requires reconciliation which involves time and effort.
2. Labour
(a) Payment of direct wages:
Wages control a/c Dr.
To General Ledger adjustment a/c
(b) Allocation of direct labour:
Work-in-progress a/c Dr.
To wage control a/c
(c) Payment of indirect labour cost:
Wage control a/c Dr.
To General ledger adjustment a/c
(d) Allocation of indirect labour cost:
Overhead control a/c Dr.
To wage control a/c
(e) Normal idle time cost:
Factory overhead control a/c Dr.
To wage control a/c
3. Direct Expenses
Work-in-progress control a/c Dr.
To General ledger adjustment a/c
4. Overheads
(a) For recording overhead incurred and accrued:
Factory control a/c Dr.
Administration control a/c Dr.
S & D control a/c Dr.
To General ledger adjustment a/c
(b) Allocation of factory overheads:
Work-in-progress control a/c Dr.
To factory overhead control a/c
(c) Absorption of administration overhead
Finished stock ledger control a/c Dr.
To administration overhead control a/c
(d) Absorption of selling and distribution overhead:
Cost of sales a/c Dr.
To S & D overhead control a/c
(e) If under/over absorbed amounts are carried forward to subsequent year, the balance
of each overhead a/c will have to be transferred to respective overhead suspense (or
reserve) account as follows
1. Cost Ledger
It is the main ledger maintained in the cost department. It contains two accounts, viz
(a) control account for each of the subsidiary ledgers. Some of the control accounts maintained
in this ledger are stores ledger control account, work-in-progress ledger control account, etc.
(b) cost ledger control account to make the cost ledger self balancing.
2. Stores Ledger
All transactions relating to materials are found in this ledger. It contains a separate account
for each item of stores such as raw materials, component parts, indirect materials. The
concerned material account is debited with materials received and credited with materials
issued. The entries in each account is made from the invoice, materials received note, material
requisition note, etc. The balance in this account represent the cost of unused materials.
3. Work-in-Progress Ledger
This is also known as job ledger. It contains a separate account for each job or work-inprogress.
The elements of cost is debited to this account and is credited with the amount of
finished goods completed and transferred. The balance in this account represent cost of
incomplete job.
Control Accounts
Under interlocking system, control accounts are maintained in the cost ledger to complete
double entry in cost books. These control accounts are nothing but total accounts or adjustment
accounts summarising mass of information contained in the subsidiary ledgers, i.e., stores
ledger, job ledger and finished stock ledger.
A control account is maintained in the cost ledger so that double entry in the cost ledger
may be completed and make it self-balancing. These control accounts are posted with the
totals of items which have been debited or credited in detail to the accounts in the ledgers
to which they relate. The balance in control accounts represents the total of balances in a
number of accounts of similar nature maintained in that subsidiary ledger to which the
control account relates. For example, the balance in stores ledger control account represents
in aggregate the detailed balances of stores accounts.
In addition to these control accounts for each of the subsidiary ledger, a cost ledger
control account is also kept in cost ledger. This is operated to make the cost ledger self
balancing.
Advantages
1. It provides a check for ensuring that all expenditure is accounted for in cost accounts
with the help of control account.
2. It provides a basis for reconciliation with the financial accounts.
3. It provides a ready means of preparing monthly or periodical balance sheet, profit and
loss account and statistics relating to cost.
personal accounts are kept and in order to complete double entry, it becomes necessary to
debit or credit all the transactions which arise in financial accounts to cost ledger control
account. In fact, the account represents the personal accounts shown in the financial ledger.
For example, wages are paid to the extent of Rs. 5,000, as no cash or bank account is
maintained in cost ledger, therefore, in order to complete double entry, wages account will
be debited and in place of Bank or cash account. General Ledger Adjustment account in the
cost ledger will be credited. Thus, all the financial transactions on account of material
purchases, wages, salaries and miscellaneous expenses are credited to cost ledger control
account by contra debit to various control accounts. In a similar way all the financial receipts
are debited to this account. Any transfer from cost books to financial books, e.g., cost of
capital, work done in the factory, will also be entered in this account.
The main object of this account is to complete double entry in cost accounting. Therefore,
purely cost accounting transactions say transfer entries with no relations to the finances are
not passed through this account as double entry is already complete. The balance in this
account represents the total of the balances of all personal accounts in the financial ledger.
Problem 1.
The following figures have been ascertained from the costing records. You are
required to pass the necessary entries in the cost journal. Assume that a system of maintaining control
accounts prevails in the organisation.
Rs.
(1) Purchases
3,90,000
5,850
3,58,800
3,46,320
1,21,680
3,48,400
3,120
12,80,630
Solution:
COST JOURNAL
(1) Stores ledger control a/c
Dr. 3,90,000
3,90,000
Dr. 5,850
5,850
Dr. 3,58,800
3,58,800
Dr. 3,46,320
3,46,320
Dr. 1,21,680
1,21,680
Dr. 3,48,400
3,48,400
Dr. 3,120
3,120
Dr. 12,80,630
12,80,630
Problem 2.
The following transactions pertaining to materials took place during March 2001 in
ABC Company Ltd. Enter the transactions in the cost books.
(1) Materials purchased
Credit purchases
10,000
Cash purchases
8,000
1,000
500
4,000
400
200
300
Solution:
COST JOURNAL
Dr. 10,000
10,000
Dr. 8,000
8,000
Dr. 1,000
1,000
Dr. 500
500
Dr. 4,000
4,000
Dr. 400
400
Dr. 200
200
Dr. 300
300
(Being the transfer of materials from job no. 8 to job no. 12)
Problem 3.
Pass Journal entries in the cost books (non-integrated system) for the following
transactions:
Solution:
JOURNAL ENTRIES
(i) Stores ledger control a/c
Dr. 25,000
To work-in-progress a/c
25,000
Dr. 50,000
50,000
Dr. 20,000
Dr. 12,000
Dr. 10,000
Dr. 8,000
50,000
BIBLIOGRAPHY