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Integrated Accounting System: The Future of Financial Management
Tired of manual data entry? Discover how integrated accounting streamlines finances, boosts accuracy, and gives you a complete view of your business health.
Introduction and Meaning
Integrated Accounting is a system where financial and costing transactions are recorded in a single, self-contained ledger, known as the Integrated Ledger. This approach involves maintaining only one set of books for both financial and cost accounts, eliminating the need for separate records.
Definition:
The term “integral accounts” refers to a unified accounting system. It generates a single profit figure and utilizes information from the financial ledger for both financial and managerial purposes. This eliminates the necessity of operating Cost Ledger Control Accounts and reconciling cost and financial profits.
The Chartered Institute of Management Accountants, London, defines it as
“a system in which the financial and cost accounts are interlocked to ensure that all relevant expenditure is absorbed into cost accounts.”
Objectives and Benefits of Integrated Accounting
This system aims to combine both cost and financial data to avoid issues related to integration, such as unnecessary clerical effort, wasted time, and duplication of work.
Key Benefits and Advantages:
- Elimination of Reconciliation: There is no need to prepare reconciliation statements, saving time and effort as cost and financial records are in complete agreement, resulting in one figure of profit.
- Simplicity and Economy: The system is simple, economical, and centralizes accounting functions, leading to reduced clerical costs and overall economy. Duplicate record-keeping is avoided.
- Prompt Information: Cost data is obtained promptly and regularly as entries are posted directly from the books of original entry.
- Accuracy and Confidence: Automatic checks on the correctness of cost data ensure accuracy, building management confidence in the figures.
- Management Information: It provides detailed information regarding the cost of each product, job, process, or operation. It also helps ascertain marginal cost, variances, abnormal losses, and gains.
- Legal Compliance: It facilitates the preparation of the profit & loss account and balance sheet as per legal requirements and helps control business liabilities and assets.
- Functional Classification: Transactions are classified both functionally and by nature, aiding cost ascertainment and control.
- Facilitates Modernization: It facilitates the introduction of mechanised accounting.
Features of Integral Accounts
The typical features that define integrated accounting include:
- Control Accounts: Control accounts for Stores, Work-in-Progress (WIP), and Finished Goods are maintained within the general ledger itself.
- Wages and Overhead Treatment: Wages and overhead accounts are maintained as usual, but at the end of a period, an analysis is performed, and transfers are made to WIP, service departments, and production departments.
- Accruals and Prepayments: Accruals and prepaid expenses are accounted for during each cost period, rather than only when preparing the final accounts.
Requirements and Prerequisites
The successful implementation of an integral accounting system is based on certain prerequisites:
Requirements:
- Degree of Integration: The management must first decide on the extent of integration (full or partial). Partial integration might go up to prime cost or factory cost, while full integration covers the entire costing and financial accounting records.
- Coordination of Work: Personnel involved in both cost and financial accounting must coordinate and cooperate in processing source documents to generate accounting information.
- Accruals and Prepayments Procedure: A clear procedure must be established for handling accruals, prepayments, and other adjustments required for preparing interim accounts.
- Coding System: A suitable system of coding is necessary to serve the purposes of both financial and cost accounts, allowing expenditure to be analyzed both by nature (for financial accounts) and functionally (for costing).
Prerequisites:
- A suitable coding system should be developed.
- Management must decide the extent of integration.
- An agreed routine for treating provisions for accruals, prepaid expenses, and other adjustments must be in place.
- Perfect coordination between the cost and financial staff is essential.
- Computerization is desirable for efficient maintenance.
- Suitable formats should be introduced to increase speed and data generation.
- Accounting staff must be properly trained.
Procedure and Structure for Integrated Accounting
The integration is achieved by incorporating the essential Cost Accounts into the financial books.
1. Elimination of General Ledger Adjustment Account:
All accounts maintained in the cost ledger under a Non-integrated Accounting System (except the General Ledger Adjustment Account) are continued. The General Ledger Adjustment Account is eliminated in the integrated system.
2. Additional Accounts Maintained:
In addition to financial accounts (e.g., Share Capital, Assets, Creditors, Debtors, Bank), the financial books will also include nominal accounts necessary for cost ascertainment, such as:
- Debtors Control Account
- Creditors Control Account
- Accrual and Prepayment Accounts
- Depreciation Account
- Discounts Account
- Profit and Loss Account
- Cost Control Account (acts as a central control account)
3. Subsidiary Ledgers and Control Accounts:
While all accounts are maintained in the General or Integrated Ledger, the system uses the following subsidiary ledgers, each with a corresponding Control Account in the main ledger:
| Subsidiary Ledger | Control Account in General Ledger |
| Stores Ledger (for each item in stores) | Stores Ledger Control Account |
| Work-in-Progress (WIP) or Job Ledger | Work-in-Progress Ledger Control Account |
| Stock Ledger (for finished products) | Finished Stock Ledger Control Account |
| Overhead Ledger (factory, office, selling) | Production/Works Overhead Control Account, Administrative Overhead Control Account, Selling and Distribution Overhead Control Account |
| Creditor’s or Bought Ledger | Total Creditors or Bought Ledger Control Account |
| Debtor’s or Sales Ledger | Total Debtors or Sales Ledger Control Account |
| N/A | Wages Control Account |
4. Valuation of Inventories:
Since there is one set of accounts, inventory valuation must be consistent. Valuation as per Cost Accounting is generally preferred for Integrated Accounts due to its reliability. Adjustments (Stock Adjustment Accounts) can be made at year-end to reflect any difference from Financial Accounting valuation for final accounts purposes.
Accounting Entries
In the integrated system, only essential accounts are debited and credited, eliminating the need for a General Ledger Adjustment Account. For example, a credit purchase of raw materials is recorded as:
| Non-Integral System | Integral System |
| Stores Ledger Control A/c (Dr.) | Stores Ledger Control A/c (Dr.) |
| General Ledger Adjustment A/c (Cr.) | Creditors A/c (Cr.) |
This streamlined process is followed for all transactions like wages and overheads.
Making Third Entries
“Making third entries” refers to the day-to-day analysis of cost. These are simply cost analysis recordings or explanatory entries and are not part of the double-entry system.
In non-integrated systems, a “Cost Ledger Control Account” is often maintained in the financial records and debited for cost-related expenditure. This cost is then further analyzed into “third entry-accounts” (not double entry) for elements like materials, overheads, etc., the totals of which are transferred to Finished Goods Account, Profit and Loss Account, etc., with the double entry being in the Cost Control Account.
Limitations and Disadvantages of Integrated Accounting
Despite its advantages, the integrated system has limitations:
- Superfluous Data: Financial details included in the integrated system can sometimes be superfluous to pure cost accounting information, potentially distracting from the primary objective of cost control and reduction.
- Complexity and Delay: To serve both costing and financial requirements, the system can become complicated, potentially causing a delay in providing information.
- Suitability for Large Concerns: The system is often considered less suitable for large organizations that require extensive, continuous, detailed cost and financial information. Non-integral systems might be preferred in this case.
- Need for Expert Staff: Integrated accounting is relatively sophisticated, requiring trained and more efficient personnel for handling, and can be costly to implement.
- Coordination Problems: If introduced without proper organizational knowledge, it may lead to coordination problems, especially between the cost and financial accounting departments.
- Incomplete Integration: Since 100% integration is rarely possible, the need for a reconciliation statement might still occasionally arise.
Integrated Accounting: Examples, Problems, and Solutions
Integrated accounting systems combine financial and cost accounting into a single unified system, eliminating the need for separate cost ledgers. Here are comprehensive examples and problems with detailed solutions.
Example 1: Basic Integrated Accounting System
Scenario: IA Ltd produces a product in two processes. Output from Process 1 transfers to Process 2, then to finished goods. Here are the transactions for October Year 2.
Opening Balances (1 Oct, Year 2):
- Raw materials: £350,000
- Work in Process 1: £120,000
- Work in Process 2: £150,000
- Finished goods: £30,000
- Bank: £31,000
- Plant & machinery: £170,000
October Transactions:
- Direct wages: Process 1 £42,400; Process 2 £64,600 (total paid £100,000)
- Production salaries paid: £85,000
- Production expenses paid: £125,000
- Materials purchased (credit): £105,000
- Materials issued: Process 1 £68,000; Process 2 £22,000
- Goods sold (credit): £550,000 (cost £422,400)
- Transfers: Process 1 → Process 2 £242,200; Process 2 → Finished goods £448,400
- Depreciation: £4,000
- Overhead absorption rates: Process 1 = 250% of direct wages; Process 2 = 150% of direct wages
Solution: Key Journal Entries
1. Record Direct Wages:
Work in Process 1 £42,400 (Dr)
Work in Process 2 £64,600 (Dr)
Wages Control £107,000 (Cr)2. Absorb Production Overhead:
Work in Process 1 £106,000 (Dr) [£42,400 × 250%]
Work in Process 2 £96,900 (Dr) [£64,600 × 150%]
Production Overhead Control £202,900 (Cr)3. Transfer Between Processes:
Work in Process 2 £242,200 (Dr)
Work in Process 1 £242,200 (Cr)4. Transfer to Finished Goods:
Finished Goods Control £448,400 (Dr)
Work in Process 2 £448,400 (Cr)5. Record Cost of Sales:
Cost of Sales £422,400 (Dr)
Finished Goods Control £422,400 (Cr)Example 2: Standard Cost Bookkeeping with Variances
Scenario: JC Ltd produces product J with standard variable cost per unit:
| Item | Standard Cost |
|---|---|
| Material X: 10kg @ £20 | £200 |
| Material Y: 5 litres @ £6 | £30 |
| Direct wages: 5 hours @ £6 | £30 |
| Variable overhead | £10 |
| Total | £270 |
Actual Results (800 units produced):
- Sales: £320,000
- Material X: 7,800kg @ £20.50/kg
- Material Y: 4,300 litres @ £5.50/litre
- Direct wages: 4,200 hours @ £5.75/hour (total £24,150)
- Variable overhead: £10,500
Solution: Variance Calculations
1. Material Price Variance:
- Material X: (9,000kg × £20) – (9,000kg × £20.50) = £4,500 Adverse
- Material Y: (5,000L × £6) – (5,000L × £5.50) = £2,500 Favourable
2. Material Usage Variance:
- Material X: (800 units × 10kg – 7,800kg) × £20 = £4,000 Favourable
- Material Y: (800 units × 5L – 4,300L) × £6 = £1,800 Adverse
3. Labour Rate Variance:
- (4,200 hrs × £6) – £24,150 = £1,050 Favourable
4. Labour Efficiency Variance:
- (800 units × 5 hrs – 4,200 hrs) × £6 = £1,200 Adverse
5. Variable Overhead Variances:
- Expenditure: (4,200 hrs × £2) – £10,500 = £2,100 Adverse
- Efficiency: 200 adverse hrs × £2 = £400 Adverse
Practice Problem: Journal Entries in Integrated System
Problem: Journalize these transactions under integral accounting:
| Transaction | Amount |
|---|---|
| Direct wages paid in cash | £60,000 |
| Indirect wages paid in cash | £30,000 |
| Purchases made in cash | £15,000 |
| Purchases (credit) | £290,000 |
| Stores issued against production order | £275,000 |
| Works expenses incurred and paid in cash | £55,000 |
| Works expenses allocated to jobs | £80,000 |
| Administration expenses paid in cash | £40,000 |
| Administration expenses allocated to jobs | £48,000 |
| Finished goods transferred to warehouse | £450,000 |
Solution: Journal Entries
1. Direct wages
Work in Process Control £60,000 (Dr)
Cash/Bank £60,000 (Cr)
2. Indirect wages
Production Overhead Control £30,000 (Dr)
Cash/Bank £30,000 (Cr)
3. Materials purchases
Raw Materials Control £305,000 (Dr) (£15,000 + £290,000)
Cash/Bank £15,000 (Cr)
Payables Control £290,000 (Cr)
4. Materials issued to production
Work in Process Control £275,000 (Dr)
Raw Materials Control £275,000 (Cr)
5. Works expenses paid
Production Overhead Control £55,000 (Dr)
Cash/Bank £55,000 (Cr)
6. Works expenses allocated
Work in Process Control £80,000 (Dr)
Production Overhead Control £80,000 (Cr)
7. Administration expenses paid
Administration Overhead Control £40,000 (Dr)
Cash/Bank £40,000 (Cr)
8. Administration expenses allocated
Work in Process Control £48,000 (Dr)
Administration Overhead Control £48,000 (Cr)
9. Finished goods transfer
Finished Goods Control £450,000 (Dr)
Work in Process Control £450,000 (Cr)Key Concepts Explained
1. Integrated vs Non-Integrated Systems
- Integrated: Single set of books for financial and cost accounting. All entries flow through common control accounts .
- Non-Integrated: Separate cost ledger and financial ledger requiring reconciliation.
2. Overhead Absorption
- Predetermined rates: Calculate overhead absorption rates in advance (e.g., % of direct wages)
- Under/over absorption: Difference between actual and absorbed overhead is transferred to income statement .
3. Treatment of Variances
- Price variances: Recorded when materials are purchased (stores held at standard cost)
- Usage variances: Recorded when materials are issued to production
- All variances: Transferred to income statement at period-end .
4. Advantages of Integrated Systems
- 50% faster month-end close (Best Western case study)
- Real-time financial data for decision-making
- Eliminates manual reconciliation between cost and financial ledgers
- Saves 20+ hours/week on repetitive tasks
Common Pitfalls & Solutions
| Problem | Solution |
|---|---|
| Under-absorbed overhead | Charge to income statement; don’t adjust inventory values |
| Overtime premium treatment | Treat as indirect cost unless caused by specific job |
| Bonus allocation | Indirect unless tied to individual task |
| Idle time payments | Always indirect cost |
| Control account reconciliation | Ensure total debits = total credits before preparing income statement |
Study Resources
For more practice problems and solutions:
- Textbook: Integrated Accounting for Windows by Dale A. Klooster (7th Edition) – Solution manual available
- University Materials: Cost accounting textbooks with integrated accounting chapters
- Online: Search for “integral accounting system exercises” for additional problems
Mastering integrated accounting requires practice with double-entry principles and understanding how cost flows mirror physical production flows. Work through these examples systematically, ensuring each transaction affects the correct control accounts.