Definition: The integrated accounts are statements in which financial and cost accounting transactions are maintained jointly. In other words, when the cost and financial accounts are merged and recorded in the same set of books, it is referred to as Integrated Accounts.
Integrated accounts accommodate complete information about both areas. The transactions are recorded based on the double-entry system.
It reduces duplication, increases accuracy and facilitates control over the assets & liabilities. When it comes to suitability, integrated accounting works best for mechanized accounting as well as similar data processing methods. It majorly focuses on the concept of centralized accounting. This approach ascertains a variety of factors like:
- Cost of product
- Job cost
- Process cost
- Operations cost
- Marginal cost
- Variance
- Abnormal loss and gains, etc
Cost accounting records transactions functionally, whereas transactions are recorded based on their nature in financial accounts. Integrated accounts inculcate both the above qualities while preparing books.
Content: Integrated Accounts
- Advantages and Disadvantages
- Features
- Journal Entries
- Third Entry Method
- Difference between Integrated and Non-Integrated Accounting System
- Example
- Conclusion
Advantages and Disadvantages of Integrated Accounts
Following are the advantages of the Integrated accounts:
- Avoids duplication of work: As it combines statements, one entry for one transaction is made. It reduces the duplication of work because the transaction is recorded in one place only.
- No reconciliation required: Reconciliation can be avoided as we get only one profit and loss figure in the set of accounts.
- Accuracy: The data and information recorded are more accurate as it considers two essential aspects of accounting.
- Centralization of Accounts: The centralization of accounts occurs as accounts of two departments are prepared by one.
- Improved coordination: It facilitates coordination among the cost and finance departments.
- Economical: Instead of multiple ledgers, only one set of books is prepared, saving time and money.
- Cumulative knowledge: A combination of cost and financial knowledge results in better output.
Following are the disadvantages of the Integrated accounts:
- Unsuitable for large units: The integrated accounting method is not suitable for large units as cost & financial data is required continuously.
- Lacks perfection: The data and information are vast, so perfect integration is impossible.
- Complicated system: Integrating requires expertise while merging the two broad accounting areas. Hence, it’s a complex task for accountants.
Features of Integrated Accounting System
Distinctive features of integrated accounts are as follows:
- Management: Management plays an essential role in this system. The management has to decide the required degree of integration.
- Accounts Head: The accounts heads should be classified in subsidiary ledgers like:
- Sales Ledger
- Purchase Ledger
- Store Ledger
- Stock Ledger
- Overhead ledger, etc
- Training: The responsible person should be provided with proper training to perform this accounting system.
- Coding: Proper codes should be allotted to the accounts to provide relevant information timely.
- Control Accounts: The control accounts are prepared for each subsidiary account. These control accounts follow the concept of a double-entry system. Some control accounts are listed below:
- Store Ledger Control Account
- Stock Ledger Control Account
- Job Ledger Control Account
- Overhead Ledger Account
- Debtor Account
- Creditor Account, etc
- Accounts Manual: The managers prepare an accounts manual that provides necessary information regarding accounting format, method of calculation, etc.
Journal Entries of Integrated Accounts
The cost ledger control account is not prepared in an integrated accounting system as the cost & financial records are maintained in a single book. The accounts head like cash, bank, debtor and creditors are debited and credited.
The journal entries passed for integrated accounts concerning different transactions are explained in the table below:
Materials
Labour
Direct Expenses
Overheads
Other Transactions
Third Entry Method
The third entry method is another alternative to the integrated accounting system. It follows the approach of the double-entry system but differs from it in respect of cost. All the cost items are recorded under an additional account called the ‘Cost Ledger Control Account’.
Steps involved in the Third Entry Method are as follows:
- An additional account is opened called a cost ledger control account.
- When any expense is incurred, this account is debited along with that expense account.
- No double entry is made for the cost ledger control account.
- The third entry analysis sheet called cost ledger is prepared to show the cost of production of various jobs.
- This cost ledger control account is credited and closed when the expenses are transferred to the profit and loss account, work-in-progress account, etc.
For example, the journal entry under the third entry method for raw material purchased of Rs.10,000/- will be recorded as shown below:
Difference between Integrated and Non-Integrated Accounting System
Basis | Integrated Accounts | Non-Integrated Accounts |
---|---|---|
Meaning | It is a combination of financial and cost accounts | It is a system in which financial and cost accounts are prepared separately |
Reconciliation | Reconciliation is not required | Reconciliation is required |
Number of books | One set of books is prepared | Separate books for cost and financial accounts are prepared |
Duplication | Duplication of work doesn't take place | Duplication of work occurs, as one transaction is recorded in two books and reconciled at the end |
Economical | It is economical as it saves time and money while maintaining books of accounts | It is less economical as compared to Integrated Accounts |
Profit and Loss Figure | Only one profit and loss figure is shown because of a single set of books | Profit and loss are displayed in both books |
Ledger | Subsidiary ledgers are prepared | Cost ledgers are prepared |
Interdependence | Cost and Financial accounts are dependent on each other | It is an independent system of accounting |
Example of Integrated Accounts
Anita Enterprises operates an integrated system of accounting. You are required to make journal entries for the following transactions:
- Raw material purchased (50% on Credit) Rs. 3,00,000/-
- Materials issued to production Rs.2,00,000/-
- Wages paid (50% Direct) Rs.1,00,000/-
- Wages charged to production Rs.50,000/-
- Factory overheads incurred Rs.40,000/-
- Factory overheads charged to production Rs.50,000/-
- Selling and distribution overheads incurred Rs.20,000/-
- Finished goods at cost Rs.2,50,000/-
- Sales (50% credit) Rs.3,75,000/-
- Closing stock nil
- Receipts from debtors Rs.1,00,000/-
- Payments to creditors Rs.1,00,000/-
Conclusion
An integrated accounting system implies the maintenance of cost and financial accounts into one. It requires data and information from both departments and prepares a summary of all the costs and financial transactions.
Through an integrated accounting system, one can reduce duplication of work and save costs as the accounts are prepared in a consolidated form.
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