The link between the two sets of books is achieved by operating a cost ledger control account and a financial ledger control account. (Cost Ledger Contra Account) in the financial and cost books respectively. In the cost ledger control account, all the items which affect the costs accounts are recorded, the same items are recorded in the financial ledger control accounts, but on the opposite side of the account hence the account completes the double entry. The Cost Ledger Control Account is just a memorandum entry and is therefore made in addition to the normal entries in the financial books of account. For example:

Materials Transaction

  1. Purchase of Materials on Credit
  2. Return of Materials to Suppliers
  3. Purchase of Materials in Cash.

The above transactions affect both the financial accounts and cost accounts and the entries in the two sets of books will appear as follows:

In the Financial Books In the Costing Books
Purchases on Credit:  
Dr Purchases a/c Dr Stores Ledger Control a/c
Cr Creditors a/c Cr General Ledger Adjustment a/c
Return of Materials to Suppliers  
Dr Creditors Dr. General Ledger Adjustment a/c
Cr. Purchases a/c Cr. Stores Ledger Control a/c
Purchases of Materials in Cash  
Dr. Purchases a/c Dr. Stores Ledger Control a/c
Cr. Cash a/c Cr. General Ledger Adjustment a/c

The following entries of material transactions affect only the cost books because they are merely transfers in the cost ledger:

Issue of Materials to Production

Dr. Work in Progress Ledger Control a/c

Cr. Stores Ledger Control a/c

Labor Transactions

  1. Wages Paid in cash
  2. Wages incurred as a) direct labor or b) indirect labor
In the Financial Books In the Costing Books
  1. Wages Paid in Cash
 
Dr Wages a/c Dr Wages Control a/c
Cr Cash a/c Cr General Ledger Adjustment a/c
  1. Wages Incurred as direct labour
 
Not recorded in Financial Books Dr. W.I.P a/c
  Cr. Wages Control
   
  Dr. Production Overheads Control a/

Additional or Tutorial Note

A cost account ledger system is required to analyze accounting information in order that costs may be accumulated for individual cost centers and charged to cost units. The information in the cost ledger will be used for a range of planning, control and decision making purpose.

The cost ledger control account in the financial ledger is a memorandum account which records the financial information, which has been extracted for use in the cost ledger.

The financial ledger control in the cost ledger has two main purposes:

  1. It makes the cost ledger self-balancing: It takes the place of an asset liability accounts in which one leg of the double entry would appear the financial ledger for each transaction e.g. the purchase of material on credit would be credited to sundry creditors control account in the financial ledger. In the cost ledger, it is credited to the financial ledger control account.
  2. It enables an internal check to be performed by comparing its balances with that of the cost ledger control account in the financial ledger. Both should record a balance which represents stock balances (Raw material, W.I.P and financial goods) the net profit, when all other transactions have been completed. Any difference should be investigated and reconciled. Thus the final trial balance in the cost ledger will show:
  Dr Cr
Stores Ledger Control a/c x  
W.I.P. control a/c x  
Finished Goods Control a/c x  
Costing Profit and Loss a/c   x
Financial Ledger Control a/c   x