In cost account accounts, extensive use is made of control accounts which are based in the same principles as those used in financial accounts. Two basis accounting systems are normally used:
- Interlocking Cost Accounting System
- Integrated Cost Accounting System.
Interlocking Cost Accounting System:
Under this system, separate cost accounting and financial accounting books are maintained although both use the same basic accounting data. The financial accounting books have the normal and credit entries within themselves. In addition, a memorandum account also known as Cost Ledger Control accounts is maintained and all the items to be transferred to the cost accounts are posted in this account.
Cost accounting books on the other hand contain impersonal accounts necessary for costing purposes in addition to a Financial Ledger Control Account, also known as Cost Ledger Control Account which enables the financial and Cost Ledger to be interlocked. The interlocking cost accounting system, costing and financial profit differ and have therefore to be reconciled at the end of the financial year.
In the financial Systems the required ledgers are:
- The General Ledger
- Debtors Ledger
- Creditors Ledger
In the cost book-keeping system, the required ledgers are:
- General Ledger Adjustment Account: It is sometimes called the cost ledger account. All the item extracted from the financial account are recorded in this account. The balance in this account represents the total of all the balances of the impersonal accounts extracted from the financial books. It completes the double entry in the cost accounts.
- Stores Ledger Control Account: This account shows all the transaction of materials e.g. purchases, issuance of materials, returns to suppliers etc. The balance of this account represents in total the detailed balance of the stores account.
- Work in Progress Ledger Control Account: It shows the total work in progress at any particular time.
- Finished Goods Ledger Control Account: Receipts from production and transfer to distribution department are entered in this account and the balance of this account shows the total value of finished goods in stock.
- Production Overheads Control Account
- Wages Control Account
- Selling and Distribution Overheads Control Accounts.
- Administrative Overheads Control Accounts.