INTRODUCTION

Accounting information is important for every business which will serve

the needs of variety of interested parties. To satisfy the needs of all
interested parties a sound accounting system is very necessary. It may be
divided in to three parts: Financial accounting, Management accounting,
and Cost accounting.
Financial accounting is mostly concerned to record the business
transactions in books of accounts so that final accounts can be prepared.
Management accounting is an extension of management aspects of cost
accounting. It provides the information to management so that planning,
organizing, directing and controlling of business operations can be done
in an orderly manner
Cost accounting developed to help the internal management in decision
making. The information provided by cost accounting acts as a
managerial tool so that business can utilize the available resources at
optimum level.
The Costing terminology of C.I.M.A. London defines cost accounting as
The establishment of budgets, standard costs and actual costs of
operations, processes, activities or products, and the analysis of
variances, profitability or the social use of funds.
Cost Records have a very important role in the accounting of a
manufacturing organization. Cost records provide the details about
components of cost of a product or services i.e. material, labour and
overhead.
There are two system used in maintenance of cost records i.e. integrated
records and non- integrated records.

Under non-integrated accounting systems, Financial Accounting and

Inventory/Cost Accounting books/ ledgers are separately maintained. In
other words if the records are maintained separately, the system is called
as non-integrated system of maintaining 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.
Integrated system would be difficult to maintain if accounts are
maintained manually but most available Computerized Accounting
Systems are Integrated Systems. In integrated system, the problem of
reconciliation of financial accounts and cost accounts does not arise.
The objective is to understand:
1. The meaning of Integrated and non integrated system.
2. Difference between integrated and non integrated systems.
3. Reconciliation of cost and financial accounts.

NON-INTEGRATED ACCOUNTING SYSTEM

It is a system of accounting under which separate ledgers are maintained
for cost and financial accounts by Accountants. Under such a system the
cost accounts restricts itself to recording 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.
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. The accounting of notional rent facilitates comparisons amongst
factories (some owned and some rented). Similarly, recognition of
interest on capital tied up in stock could help make the stores and works
managers aware of the money being blocked because of holding 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.

FEATURES OF NON-INTEGRATED
ACCOUNTING SYSTEM
1. Separate Books: In a non-integrated Cost accounting system there
are separate cost accounts, cost journals and cost ledger.
2. Principle of Double-Entry: However, it too follows the
fundamental principles of double entry book keeping 9debit and
credit) for this purpose.
3. Cost Manual: It is a document which sets out the responsibilities
of the persons engage in, and the routine of, and the reforms and
records required for, costing accounting.
4. Voucher: As in the case of financial accounting system,
transactions are recorded in the cost journal voucher, which
provides the details necessary to support an entry in the cost
accounts.
5. Accounts/Code: Each entry is debited / credited to a cost account.
Cost Account is defined as an account in the cost ledger. Each
account may be given a cost code. A cost code is a series of
alphabetical and / or alpha-numerical symbol representing a
descriptive title in a cost classification.
6. Journal: These vouchers are first entered in to Cost Journal. There
may be one general journal to summarise all original entries or
separate journal may be kept to record labour, material and
overhead transactions.
7. Ledger: From the Cost Journal, entries are posted in the Cost
Ledger. It is defined as a cost ledger whose accounts record those
transactions which are included in cost.In financial accounting,
ledger may be divided in to General and subsidiary ledgers like
debtors ledger, creditors etc. Similarly, Cost ledger may be divided
in two main and subsidiary ledgers. There may be a main ledger
known as cost ledger and other subsidiary ledgers like Store ledger,
Work-in-progress ledger and finished stock ledger.

PRINCIPAL LEDGER
Subsidiary books maintained under non-integrated system of
accounting.
The following are some of the subsidiary books maintained under
interlocking system of accounting.
1. Stores ledger:
It is used to record both the quantity and amount of receipts, issues
and balance of materials and supplies. It consists 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.

CONTROL ACCOUNTS
The following important accounts are maintained under non-integrated
accounting system:
A. General ledger adjustment account:
It is also known as cost ledger control account or nominal ledger
control account. In this accounts 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
(a) Opening Balance of materials, work in progress and finished
stock,
(b) Expenses of material, wages and overheads on the credit
side,
(c) On the debit side returns of materials to the supplier,
(d) Sales income and
(e) On the debit side balancing entries of P&L account and
closing stock.
B. Cost control Accounts: The three cost control accounts Stores
ledger control account, Work-in-progress control account and
Finished Goods control account-helps to exercise control over the
concerned subsidiary ledgers. Transactions kept in detail in one or
more accounts of the subsidiary ledger are stored in totals, at the
end of a period, to the control accounts. Thus the balance in a
control account represents the total contained in number of
accounts of similar nature in a subsidiary ledger. For example, the
balance in the work-in-progress control account represents, in
aggregate, the balances of the respective Job Accounts.

1. Stores ledger control account: It is debited with purchase of

materials for the stores and credited with issues of material.
Debit &Credits: Receipts are posted in goods received notes and
issues from materials requisitions or materials issue analysis sheet.
The account also records issues of new materials to outside parties,
returns through return notes, and stores adjustments through
material transfer notes.
Balance: The balance of this account represents the total balance
of stock which should agree with the aggregate of the balances of
the individual folios in the stores ledger.
2. Wages control account: In this account the wages accrued and
paid and allocation of wages in this account are recorded.
Debits &Credits: Entries are made from wages analysis sheet.
This account is debited with the gross wages and is cleared by the
transfer of direct labour to work-in-progress and indirect labour to
factory, administration and selling and distribution overhead
control accounts or research and development account or Capital
Account as the case may be.
3. Work in progress control account: It includes of all direct
materials, direct wages, direct expenses, special purchases and
expenses.
Debits: This account is debited with the opening balance of workin-progress and material, labour and factory overhead costs.
Credit: This account is credited with the cost of finished goods.
Balance: The balance of this account represents unfinished closing
stock in process carried over.

4. Finished Goods Control Account:

Debits: This account is debited with the opening balance of
finished goods; the cost of finished goods for the period transferred
from the work-in-progress control account and the amount of
administration overhead recovered, if administration overhead is
not treated as period cost.
Credit: It is credited with the cost of sales.
Balance: The balance of the account after writing back the
uncovered administration overheads represents unsold stock
carried over.
5. Administration overhead account:
Debit: Administration overhead cost is debited to this account.
Credits: The amount of overhead recovered in the finished goods
sold is credited. Another method is to close the administration
overhead account by transfer to costing profit and loss account.
When administration overhead is prorated to manufacturing and
selling and distribution overheads the account is credited with the
amount so transferred.
6. Cost of sales account:
Debit: The account is debited with the cost of goods sold and
selling and distribution overhead recovered.
Credits: It is credited by transfer to Costing Profit and Loss
account.
7. Selling and Distribution Overhead Account:
Debit: Selling and distribution costs are debited to the account.
Credit: At the end of the period the account is closed by transfer to
cost of sales account.

8. Overhead Adjustment Account:

Debits and Credits: The amount of under-absorbed or overabsorbed factory, administration, selling, and distribution
overheads may be debited or credited to this account. Sometimes
this account is not maintained and the amount of under-absorption
or over-absorption is transferred directly to the Costing Profit and
Loss Account.
Balance: The balance at the end of the period may be
either1.carried over to the next accounting period2.or transferred to
the Costing Profit and Loss Account3.or prorated to Cost of Sales
Account, Work-in-progress account and Finished Stock account.
9. Costing Profit and Loss account:
Debits and Credits: This account records the transfer of the
amounts of under-absorbed or over-absorbed overhead, the sale
value of goods sold, and the balance from the cost of sales account.
Abnormal losses or gains to be kept out of costs are also debited or
credited to this account
Balance: The closing balance of this account represents the costing
profit or loss which should be reconciled with the financial profit
or loss.

ADVANTEGES OF NON- INTEGRATED

ACCOUNTING SYSTEM

The following are the main advantages of integral accounting:

1. This system tends to coordinate the functions of different selections of
the accounts department since all efforts are integrated and directed
towards achievement of one aim that is providing a high level of
efficiency.
2. The accounting procedures can be simplified and the system can be
centralized with the object of achieving a greater control over the
organization.
3. The system creates conditions which are eminently suitable for the
introduction of mechanized accounting.
4. There is no possibility of overlooking any expense under the system.
5. As cost accounts are posted straight from the books of original entry,
there is no delay in obtaining the data.
6. There is automatic check on the correctness of the cost data. It ensures
that all legitimate expenditure is included in Cost accounts and reliable
and proved data is provided to the management for its decisions.
7. Integrated accounting widens the outlook of the accountant.
8. It can be maintained according to convenience as it need not be
statutorily maintained.

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LIMITATIONS OF NON-INTEGRATED
ACCOUNTING

The following are some of the limitations of this accounting system:

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

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INTEGRATED (INTEGRAL) ACCOUNTING SYSTEM

CIMA has defined integrated system as a system in which the financial

and cost accounts are interlocked to ensure that all relevant expenditure is
absorbed in to the cost accounts.
Integrated Accounting is a system in which the accounts are integrated
and only a single set of accounts are maintained for Cost & Financial
records. It avoids maintenance of Accounts under cost accounting &
financial accounting. This enables a firm to eliminate separate Profit &
Loss Accounts under financial accounting and cost accounting systems &
only one Profit & Loss Accounts are prepared. 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 of the
organization. It also provides necessary information as required by the
costing and finance department. There is no General Ledger Control A/c
is prepared in this system.

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FEATURES OF INTEGRATED SYSTEM

The following are the essential features of an integral an accounting
system:
1. It records financial transitions not normally required for cost
accounting be sided recording internal costing transaction
prepayments and accruals are opened.
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 & Expenses: Wages control account is debited with the
wages paid; contra credit is taken in cash or bank account.
Similarly overhead expenses incurred are debited to the overhead
control accounts by credit to the cash or bank account or sundry
creditors accounts.
4. Third Entries: Transactions relating to material, labour cost
overheads are posted in the stores wages and overhead control
account after making suitable cost analysis and that the end of the
period transfer of the totals is made to the work in progress
accounts by crediting various control accounts. The day to day cost
analysis made for this purpose is known as making third etc. These
entries do not mean entries in the same sense an entry of
transaction in the ledger but such entries are simply a sort of cost
analysis.
5. Accruals & Prepayment: All advance payments are credited and
accruals debited to the respective control account by contra entries
in the prepayments and accrual accounts.
6. Capital asset account is debited and respective control accounts
are credited in the process of cost analysis of capital expenditure.
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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.
7. Work in progress: It may be split in to three separate accounts
viz. Material-in-Process, Labour-in-Process, and Overhead-inProcess Accounts.

8.

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ADVANTAGES OF INTEGRATED ACCOUNTING

SYSTEM
The benefits of Integrated Accounting System are as follows:
1. No separate financial accounts: The need for separate sets of
financial and cost accounts ledgers does not exist. This saves
clerical expenditure.
2. No need for reconciliation as it maintains single set of accounting
records
3. Avoids duplication: Fewer accounts and records are required and
duplication in accounting and analysis is avoided
4. No Delay: As cost accounts are posted straight from the books of
original entry there is any delay in obtaining cost data.
5. Economy: Centralised as well as computerized accounting, which
is possible in the integrated system, results in economy.
6. Pooling of knowledge: The knowledge of financial and cost
accounting may be pooled together.
7. Wider outlook: Integrated accounting widens the outlook of the
accountants and staff who are placed in a better position to
appreciate the entire accounting system.
8. Complementary: Integrate system offers an additional advantage
from the psychological point of view. It shows the complementary
status of cost and financial accounting which need not be
considered as two separate watertight compartment.

9.

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PRE-REQUISITES FOR AN INTEGRAL

ACCOUNTING SYSTEM
The following principles shall be taken into consideration while
designing such a system:
1. Extent of integration: The degree of integration must be determined.
Some undertakings find it satisfactory merely to integrate up to the
stage of primary cost or factory cost while other concerns integrate
the whole of the records in which cost and financial accounts cannot
be distinguished.
2. A suitable coding system should be available to serve the accounting
purposes of financial and cost accounts
3. The degree of integration will determine the classification of
expenditure. The expenditure classified here according to function as
office expenses, selling expenses etc., and not according to nature.
However, control accounts are maintained for each element of cost.
4. Full details of items posted to the control accounts are supplied to the
cost office at convenient intervals. This information is then dealt with
by the cost office in accordance with the system of costing in force.
5. The amount of detail recorded in the ledger is usually kept to a
minimum. Full information regards in each department or process
being contained in tabulators prepared by the cost office. These
tabulations are sometimes referred to as third entries to emphasize
that they are not part of double entry system.
6. For preparation of interim accounts there must be an agreed routine
for treatment after accruals, prepaid expenses and other necessary
adjustments.
7. There should be perfect coordination between the staff responsible
for the financial and cost aspects to ensure an efficient processing of
accounting documents.NRE

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RECONCILIATION OF COST AND FINANCIAL

ACCOUNTS
NEED FOR RECONCILIATION
The two systems of accounting viz. financial and cost accounts co-exist
in the same organisation and they deal with same basic transactions say,
purchases, consumption of materials, wages and other expenses. But the
difference of purpose calls for a difference in approach in collection,
analysis and presentation of data to meet the objective of individual
system. Financial accounts are concerned with the ascertainment of profit
or loss for the whole operation of the organisation for a relatively long
period usually a year, without being too much concerned with cost
computation, whereas cost accounts are provided for ascertaining the
profit or loss made by manufacturing or product divisions/products for
cost comparison and preparation and use of variety of cost statements.
The difference in purpose and approach more often than not results in a
different profit from what is disclosed by the financial accounts and this
establishes the need for a reconciliation of profit between cost account
and financial accounts.
Thus, reconciliation between the results of the two sets of books is
necessary due to the following reasons:
1. It finds out the reasons for the difference in the profit or loss in cost
and financial accounts.
2. It ensures the mathematical accuracy and reliability of cost
accounts in order to have cost ascertainment, cost control and to
have a check on the financial accounts.
3. It contributes to the standardization of policies regarding stock
valuation, depreciation and overheads.
4. It facilitates more coordination and promotes better co-operation,
between the activities of financial and cost sections of the
accounting department.
5. Reconciliation places management in better position to acquaint
itself with the reasons for the variation in profits paying the way
effective internal control. FI

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CONCLUSION
o There are basically three cost accounting systems. Financial
Accounting System. Non-Integrated Accounting System.
Integrated Accounting System.
o Non-integral accounting system where separate accounts books are
maintained to record financial and cost transactions.
o Non-integral accounting system is also known as Cost Control
Accounts.
o Two set of accounts books are kept in non-integral system one for
recording cost transaction another for financial transaction.
o Double entry system is adopted for recording the transactions in
both accounts books.
o Integral system is a system of accounting under which only one set
of books of account is maintained to record the both transactions
(cost & financial). It is also known as integrated accounts system.
There is no need for cost ledger and cost ledger control account.
o Integrated accounts are like a hybrid between non-integrated and
the financial system of accounting.
o 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.
o In the financial accounting system, there is no base of the cost
accounting.
o In the integrated system of accounting, personal and real accounts
are prepared but there exists a base of the cost accounting system.

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o In non-integral accounting system shows the two different profits

due to two separate books of account.

o Reconciliation statement reconciles the profit as per Cost Accounts

with the profit as per Financial Accounts by showing all causes of
differences between the two.

o Reconciliation places management in better position to acquaint

itself with the reasons for the variation in profits paying the way
for more effective internal control

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REFERENCE
V.Rajesekaran, R.Lalitha, Cost Accounting, Pearson Education in South
Asian.
Cost and Management Accounting; Kalyani Publishers.

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