Financial Accounting only shows the monetary aspects of every business transactions. When you purchase hundreds of items, you record only one debit “Purchase” Account without any mention of quantities involved. Similarly you sell different items and record under one credit “Sales” Account, again without mentioning quantities involved. Consequently, Financial Accounts fails to give a proper picture of business affairs.
To overcome these limitations of Financial Accounting, large businesses usually adopt and implement another accounting system which is known as Non Integrated Accounting System.
It is a system of accounting under which separate set of books of accounts are maintained for the recording of cost transactions and financial transactions.
At the end of the period, profits derived from both the integrated and non-integrated accounting systems are reconciled and reasons of difference are found out for the purpose of decision making and accuracy.
It is also known as Independent system, separate books system, cost ledger system, interlocking accounting system or traditional system.
- Separate set of books for costing and financial accounting.
- For cost accounting, source of information is same as financial accounting.
- Cost accounts records only costs, which are a part of Nominal Accounts.
- For other accounts, cost control accounts and adjustment accounts are maintained.
- There is no double entry connection between the cost and financial accounts.
Important Ledgers to be maintained
- General Ledger Control Account
- Store Ledger Control Account
- W-I-P Control Account
- Finished Goods Control Account
- General Ledger Adjustment Account
- Stores Ledger Control Account
- Work In Progress Control Account
- Finished Goods Control Account
- Wages Control Account
- Manufacturing Control Account
- Selling & Distribution Overhead Control Account
- Cost of Sales Account
- Costing Profit & Loss Account
Reconciliation of Cost and Financial Accounts
Causes which give rise to the differences in cost and financial accounts are as follows:
- Items included in the financial accounts but not in cost accounts.
- Appropriation of Profits.
- Matters of pure finance.
- Items included in the cost accounts only (notional expenses).
- Under and over recovered expenses.
- Difference due to varying basis of valuation
Some of the advantages of the non-integrated accounting system are as below:
- Maintenance of separate set of costing books facilitates ready accomplishment of its objectives.
- As it is integrated with the financial accounting, complications of recording the entries are avoided.
- It can be maintained according to convenience as it need not be statutorily maintained.
Like everything else, this accounting system also has its own set of limitations. They are as follows:
- When cost accounting is independently maintained, it amounts to duplication of expenses along with financial accounting.
- The profits shown by cost books may vary with that shown by financial accounting. This requires conciliation which involves time and effort.
In my view, Non-integration Accounting system has a more practical integration more than a theoretical aspect. But as per my above discussion, i want to state a view that Non-integrated accounting system has an equal and important aspect for recording and reflection of maintenance of accounting books.
As mentioned above, different countries adopts this system as an important segment of their financials books, so to maintain this book is not an important segment for large organizations, but also for small organization too.
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