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eHow Business Business Accounting Accounting Systems What Is An Integrated Accounting System?

What Is An Integrated Accounting System?

By Sheila Shanker, eHow Contributor

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An integrated accounting system uses affordable and easy-to-use software. Even small businesses can purchase such a system, which includes many functions and features designed to be compatible with each other. An integrated system often includes accounts payable, receivable, fixed assets and an inventory management module -- all connected to each other and to the general ledger.

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Significance
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The main feature of an integrated accounting system is that information is entered once and is shared with other modules, including the general ledger. One single information database is used and accessed by all applications. This level of efficiency cannot be achieved by a system that is not integrated, where the same data may need to be entered repeatedly in different modules. For instance, if you use a non-integrated accounts payable module, you need to enter journal entries in the general ledger to recognize changes in cash, expenses and accounts payable, a huge burden to any accounting department.

Types

Integrated systems can be designed for specific industries, such as manufacturing, where the cost accounting module is integrated with the general ledger and allows for easy transfer of information between the two programs. Sometimes programs are purchased separately, and they are integrated later. Large firms often develop customized systems in-house, which are more expensive but work very well with in-house customer service and support. Sponsored Links CIMA Certificate Online CIMA Online Tuition & Revision. Join over 12,000 Students Now! StudyInterActive.org/CIMA-Online

Benefits
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The main benefit of an integrated accounting system is the increase in efficiency. For instance, when a sale is made, inventory is decreased automatically along with the recognition of the sale in the general ledger. There is no need for manual intervention or a second step in this process -all is done at the same time by the integrated system, a level of efficiency only available with this type of software.

Considerations
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When reviewing integrated accounting systems, look for long-term solutions for your business. For instance, if you plan on selling online or retail, be sure the system you select can accommodate these needs later with no major problems. Furthermore, consider the long-term costs of such a system, including new versions and staff training. If you purchase a system and don't get its new versions with new functionalities and updates, you may be missing opportunities for efficiencies in your business.

Read more: What Is An Integrated Accounting System? | eHow.com http://www.ehow.com/info_7748832_integrated-accountingsystem.html#ixzz2Lz5mRbrG Meaning of integrated ang non integrated systeam an Integrated Accounting System, we here assume that reader already knows the usual procedure of recording transactions where entries are basically recorded in Cash Book

and General Journal, then posted to Ledger, then summarized in the form of Trial Balance and then results are taken in the form of Final Accounts. An Integrated Accounting System would be one where only a single set of books would contain all the information of Financial Accounting as well as Inventory/ Cost Accounting. Such a system would be very difficult to maintain if accounts are maintained manually. But most available Computerized Accounting Systems are Integrated Systems. Here we take the example of an Integrated Accounting System (our own product by the name: Soft Accounting System) and explain how its functionality differs with NonIntegrated manual Accounting system. Whereas in manual Financial Accounting, you enter Cash/Bank transactions in Cash Book and enter all other transactions in General Journal; in Soft Accounting System, you record Sale/Purchase transactions in Sale Invoice or Purchase Invoice. In the case of cash purchase/sale, that entry shall automatically be recorded in Cash Book. And in the case of credit purchase/sale, there will be no need to record it in General Journal. With a simple entry in sale or purchase invoice, you will not only get all the Financial Accounting Ledgers and Trial Balance, you will also automatically get your inventory and cost registers. If yours is a trading Business, then with a simple entry in sales invoice form, you will also automatically get Cost of that particular Sale calculated on the basis of both Weighted Average Costing and LIFO Costing methods. If yours is a manufacturing business, then there is another simple Production Entry Form. You will enter in it only the basic ongoing production data but as a result, not only you will get detailed Production Reports, you will also get updated inventory registers of rawmaterials and semi-finished items with a proper breakup of location/process where those semi-finished items have reached so far. When final production process on semi-finished items have been performed, then automatically those semi-finished items are removed from semi-finished inventory registers and go to Finished Goods Inventory Register. And when you will enter new sale invoice, then finished goods stock shall be automatically reduced from the Finished Goods Inventory Register. Not only this, you will also get detailed automated Direct Labor Payroll Reports. In addition, you will also get automated costing reports like Batch Cost Report and like etc. And since Soft Accounting System is an Integrated System, so you will also get automatically updated information in your Financial Accounting Ledgers and Trial Balance as well. To record daily expenditure and transactions other than Sale/Purchase (or Sale/Purchase Returns which are to be recorded in Debit/Credit Notes), there are also Cash Book and General Journal entry forms. So this is the way an Integrated Accounting System works.

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:
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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. The integral accounting system is discussed in a separate chapter.

ENTRIES TO RECORD TRANSACTIONS UNDER INTERLOCKING SYSTEM

1. Materials
(a) Purchase of materials for stock (cash or credit basis): Stores ledger control a/c Dr. To General Ledger adjustment a/c (b) Returns to suppliers: General ledger adjustment a/c Dr. To stores ledger control a/c (c) Materials purchased specifically for a job (i.e., direct issue) Work-in-progress control a/c Dr. To General ledger adjustment a/c (d) Direct material issued from stores to Job: Work-in-progress control a/c Dr. To stores ledger control a/c (e) Materials returned from jobs to stores: Stores ledger control a/c Dr. To work-in-progress a/c (f ) Issue of indirect materials: Factory overhead control a/c Dr. To stores ledger control a/c (g) Transfer of materials from one job to another: Receiving job a/c Dr. To giving job (h) Normal wastage of materials and stores: Factory overhead control a/c Dr. To stores ledger control a/c (i) Abnormal wastage of materials: Costing P & L a/c Dr. To stores ledger control a/c (j) Abnormal gain of materials: Dr. Stores ledger control a/c To costing P & L a/c

2. Labour
(a) Payment of direct wages: Wages control a/c Dr. To General Ledger adjustment a/c
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(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 (f) Abnormal idle time cost: Costing P & L a/c Dr. To wage control a/c

3. Direct Expenses 4. Overheads

Work-in-progress control a/c Dr. To General ledger adjustment a/c (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 (i) Production overhead a/c Dr. To production overhead suspense a/c (For over recovery) (ii) Administration overhead suspense a/c Dr. To Administration overhead a/c (For under recovery)
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(iii)Selling and distribution overhead suspense a/c Dr. To S & D overhead a/c (For under recovery) (f) In case of under/over absorbed overheads are transferred to costing P & L a/c then the relevant entries will be as follows: (i) For over recovery: Overhead control a/c Dr. To costing P & L a/c (ii) For under recovery: Costing P & L a/c Dr. To overhead control a/c

5. Finished Goods or Completed Jobs

(a) Transfer of completed jobs or finished goods produced to finished goods ledger: Finished stock ledger control a/c Dr. To work-in-progress control a/c (b) Transfer of finished goods sold:

Cost of sales a/c Dr. To finished stock ledger control a/c (c) Transfer of cost of sales a/c to P & L a/c: Costing P & L a/c Dr. To cost of sales a/c (d) To record sales: General ledger adjustment a/c Dr. To costing P & L a/c

6. Transfer of Profit or Loss

(a) In case of profit: Costing P & L a/c Dr. To General ledger adjustment a/c (b) In case of loss: General ledger adjustment a/c Dr. To costing P & L a/c

LEDGERS MAINTAINED UNDER COST ACCOUNTING SYSTEM

Under cost accounting system the following ledgers are maintained:

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
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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 workinprogress. 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.

4. Finished Goods Ledger

This ledger contains a separate account for each item of finished product or completed job. This account is debited with the cost of finished product and the amount of administration overhead absorbed and credited with the cost of goods sold. The balance in this account shows the closing stock of finished goods in terms of value.

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 selfbalancing.

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.

IMPORTANT CONTROL ACCOUNTS MAINTAINED UNDER INTERLOCKING SYSTEM

The various control accounts under interlocking system are as follows:

1. Stores Ledger Control Account

This account is maintained in cost ledger. This records a summary of the value of stores received, issued and balances on hand. Receipts are posted from materials received notes to the debit side of this account. Similarly, issue of materials from material requisition or
354 METHODS AND TECHNIQUES OF COSTING

material abstract is posted to the credit side of the account. Thus for each entry in stores ledger, there is a corresponding debit or credit, (though in total) in this account. The balance of this account represents the total balance of stock which should agree with the aggregate of the balances of individual accounts in the stores ledger.

2. Wages Control Account

This account records labour transactions in aggregate i.e., direct and indirect wages. This account is debited with gross wages shown in wages analysis sheet. It is closed by transfer

of direct labour to work-in-progress and indirect labour to overhead, i.e., production administration or selling and distribution overhead account; as the case may be. Wages paid for abnormal idle time are transferred to costing profit and loss account.

3. Factory Overhead Control Account

This account records factory overhead expenses in aggregate. It is debited with the amount of indirect materials, indirect labour and indirect expenses as available from indirect materials analysis sheet, wages analysis sheet etc. This account is credited with the amount of overheads recovered. The balance in the control account represents under or over-absorption which is transferred to overhead adjustment.

4. Administration Overheads Control Account

This account is debited with the administrative overheads incurred and credited with the amount of administrative overhead absorbed by finished goods. Any balance in this account represent under or over-absorption of administrative overhead which is transferred to overhead adjustment account.

5. Selling and Distribution Overhead Control Account

This account is debited with the amount of selling and distribution overhead incurred and credited by the amount of such overheads absorbed by the cost of sales. Balance in this account represents under or over-absorption of selling and distribution overhead which is transferred to overhead adjustment.

6. Overhead Adjustment Account

This account is debited with under-absorbed overheads and credited with overabsorbed overhead amount. The net balance in this account is transferred to costing profit and loss account.

7. Work-in-Progress Control Account

This account represents the total work-in-progress at any time. This account is debited with the totals of materials, wages and overheads as transferred from the respective control accounts. This account is credited when a job is completed. Thus, this account shows the total value of unfinished jobs.

8. Stock Ledger Control Account

This account contains the summary of all finished goods transactions in total. It is debited with the cost of finished goods transferred from work-in-progress control account and the amount of administration overhead absorbed which is transferred from Administration overhead control account. This account is credited with the total cost of goods sold which is transferred to the cost of sales account. NON-INTEGRAL OR COST LEDGER ACCOUNTING
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9. Cost of Sales Account
This account is debited with the cost of goods sold by transfer from finished goods ledger control account and also by the selling and distribution overhead absorbed. It is closed by transferring its balance to costing profit and loss account.

10. Costing Profit and Loss Account

This account reveals the result of the business i.e., profit or loss of the business. This account is debited with the cost of sales, abnormal losses and under-absorbed overhead and credited with the sales value, abnormal gain and over-absorbed overhead. The balance in this account represents profit and loss which is transferred to cost ledger control account.

11. Cost Ledger Control Account or General Ledger Adjustment Account

This account is also known as financial ledger control account. This account is maintained to make the cost ledger self-balancing. Cost ledger contains only impersonal accounts. As no 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 (2) Carriage inwards 5,850

(3) Stores issued 3,58,800 (4) Productive wages 3,46,320 (5) Unproductive wages 1,21,680 (6) Works on cost 3,48,400 (7) Materials used in repairs 3,120 (8) Cost of completed jobs 12,80,630 Solution: COST JOURNAL (1) Stores ledger control a/c Dr. 3,90,000 To general ledger adj. a/c 3,90,000 (Being the entry for purchase of materials)
356 METHODS AND TECHNIQUES OF COSTING

(2) Stores ledger control a/c Dr. 5,850 To general ledger adj. a/c 5,850 (Being carriage inward treated as part of the cost of materials purchased) (3) Work-in-progress ledger control a/c Dr. 3,58,800 To stores ledger control a/c 3,58,800 (Being stores issued to production) (4) Wages control a/c Dr. 3,46,320 To general ledger adj. a/c 3,46,320 (Being payment of wages) (5) Factory overhead control a/c Dr. 1,21,680 To cost ledger control a/c 1,21,680 (Being indirect wages incurred) (6) Factory overhead control a/c Dr. 3,48,400 To cost ledger control a/c 3,48,400 (Being works overhead other than indirect wages) (7) Factory overhead control a/c Dr. 3,120 To stores ledger control a/c 3,120 (Being materials used in repairs) (8) Finished stock ledger control a/c Dr. 12,80,630 To work-in-progress ledger control a/c 12,80,630 (Being completed production transferred to finished stock) 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 Credit purchases for job no. 20 1,000 (2) Return to suppliers 500 (3) Direct materials issued to jobs 4,000 (4) Indirect materials issued to jobs 400 (5) Materials returned from jobs to stores 200 (6) Materials transferred from job no. 8 to job no. 12 300 Solution: COST JOURNAL (1) (a) Stores ledger control a/c Dr. 10,000 To general ledger adj. a/c 10,000 (Being the amount of credit purchases) (b) Stores ledger control a/c Dr. 8,000 To general ledger adj. a/c 8,000 (Being cash purchases) (c) Work-in-progress ledger control a/c Dr. 1,000 To general ledger adj. a/c 1,000 (Being purchases for a special job no. 20) (2) General ledger adj. a/c Dr. 500 To stores ledger control a/c 500 (Being the return to supplier)
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(3) Work-in-progress ledger control a/c Dr. 4,000 To stores ledger control a/c 4,000 (Being the direct materials issued to jobs) (4) Factory overhead control a/c Dr. 400 To stores overhead control a/c 400 (Being issue of indirect materials) (5) Stores ledger control a/c Dr. 200 To work-in-progress control a/c 200 (Being the materials returned from jobs to stores) (6) Job no. 12 a/c Dr. 300 To job no. 8 a/c 300 (Being the transfer of materials from job no. 8 to job no. 12)