In this article we will discuss about:- 1. Benefits of Integrated Accounting System 2. Prerequisites for Integration of Accounts 3. Accounting Entries under Both Methods.
CIMA defines that “integrated accounting system refers to the interlocking of the financial and cost accounting systems to ensure all relevant expenditure is absorbed into the cost accounts. Under this accounting system transactions are classified both according to their function and nature.”
Under integrated accounting system, both Financial and Cost Accounting records are maintained in one set of books to meet the requirements of Financial Accounting and Cost Accounting purposes. In other words, we can say, that Cost Accounting is integrated into the Financial Accounting System.
Integrated accounting records provide the necessary information for ascertainment of cost of each unit, batch or job or any other cost unit and simultaneously financial statements viz., Profit and Loss Account and Balance Sheet can be prepared without any distortion of the Financial Accounting information.
In this system transactions are recorded based on double entry bookkeeping and costs are classified on the basis of function which enables the firm in ascertainment of product cost with necessary classification.
For example, the purchase of raw material is analyzed by its nature and instead of posting it to the Purchases Account as in Financial Accounts, directly posted into Stores Ledger Control Account, Work-in-progress Ledger Control Account or Overhead Account. Similarly the payment of direct wages instead of posting into Direct Wages Account, posting is directly made into Wages Control Account or Overheads Control Account.
Benefits of Integrated Accounting System:
The important benefits of maintaining records on Integrated Accounting System are as follows:
(a) In this system only one set of accounts are maintained and there will be single profit figure. The necessity of preparation of reconciliation statement does not arise.
(b) The maintenance of one set of accounts avoids the duplication of efforts and substantial time and expense is saved.
(c) There will not be any delay in getting information from the accounting records for financial and costing purposes.
(d) This system can be more advantageous only if operated in computerised environment and mechanized accounting.
(e) With the integration of cost and financial accounts, centralization of accounting and information is possible and it saves both time and expense.
(f) The simplification of accounting procedures helps in better control of the operations.
(g) Costing information is generated from the books of original entry. It avoids delay in obtaining information.
(h) It furnish all information regarding cost of each product, job or operation and variances will also be highlighted for effective control purpose.
(i) It provides all information about the profit or loss of the whole organization and financial position of the concern and help the management in better control over the operations.
(j) This accounting system ensures the ascertainment of marginal cost, variances, abnormal loss and gains.
Prerequisites for Integration of Accounts:
The important prerequisites for integration of Cost and Financial Accounts are as follows:
(a) The top management must be convinced of the advantages of maintenance of records under Integrated Accounting System and should decide upon the degree of integration is necessitated for the concern. Some firms may prefer to full integration and certain firms may prefer to integrate upto a certain stage of process i.e., prime cost, factory cost, cost of production etc.
(b) The next step is that convenient coding system should be adopted to identify the accounts for the purpose of Cost Accounting and Financial Accounting.
(c) Accounting staff should be properly trained in dealing with the accounting records for recording of transactions and generation of information for financial and costing purposes.
(d) Close coordination is required between staff dealing with the financial information and costing information.
(e) The formats are to be developed for increase of speed in accounting and generation of information for financial and costing purpose.
(f) Computerization of integrated accounting is highly desirable.
(g) The adjustment entries for prepaid expenses and outstanding expenses should made routine for ascertainment of cost and profit.
Accounting Entries under Both Methods:
(1) Administrative overheads may be treated as cost of manufacture. In that case administrative overheads are absorbed to Work-in-progress A/c instead of finished goods A/c.
(2) Administrative overheads may be treated as cost of sales. In that case administrative overheads are transferred to Cost of sales A/c instead of finished goods A/c.
The simple illustrations explaining the entries that are passed in integrated and non-integrated accounting is given below:
The raw material purchased during the month Rs. 4,25,000 and its standard cost is Rs. 4,00,000.
The wages paid to the direct labour during the month amounts to Rs. 2,65,000 and its standard cost is Rs. 2,50,000:
Factory expenses incurred during the month is Rs. 1,40,000 compared with standard cost of Rs. 1,20,000:
Sales during the month is Rs. 9,80,000 compared with the budgeted sales of Rs. 9,50,000:
The valuation of stock as shown in Financial Accounts and Cost Account of a company are as follows:
Journalize the following transactions assuming that Cost and Financial Accounts are Integrated:
From the following information you are required to pass journal entries and prepare necessary accounts under the system of integrated accounts: