Integrated Accounting System
Posted by khuram on June 22, 2010
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Financial Accounting is basically Non-Integrated Accounting which accounts for only the monetary aspects of every business transaction. You purchase hundreds of inventory items but to record purchase, you only debit one “Purchase” Account with purchase value without any mention of quantities involved. Similarly you sell different trade items and record them by giving credit to only “Sales” Account. Consequently your Financial Accounts fail to tell you the complete story of your business affairs. You get a Trial Balance and Final Accounts. You know your Gross Profit and Net Profit. You also know financial worth of your business on the Balance Sheet date. The things you don’t know in this way are the details of your inventory items purchased/ sold, inventory stocks, inventory costs taken up in every sales transactions (Trading Businesses) or ongoing production activities (Manufacturing Businesses).
To overcome these limitations of Financial Accounting, large businesses usually adopt and implement another difficult and expensive Accounting System which is known as Cost and Management Accounting. This is also non-integrated accounting method because it functions parallel to the Financial Accounting. Small businesses end up in the maintenance of only some “Stock Registers”, in addition to the usual Financial Accounting. It means that under non-integrated accounting systems, Financial Accounting and Inventory/Cost Accounting books/ ledgers are separately maintained.
To explain an Integrated Accounting System, I here assume that reader already knows the usual procedure of recording transactions where entries are basically recorded in Cash Book and General Journal, then posted to Ledger, then summarized in the form of Trial Balance and then results are taken in the form of Final 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. Such a system would be very difficult to maintain if accounts are maintained manually. But most available Computerized Accounting Systems are Integrated Systems.
I take the example of an Integrated Accounting System (which I have developed myself by the name: “Soft Accounting System”) and explain how it’s functionality differs with Non-Integrated manual Accounting system.
Whereas in manual Financial Accounting, you enter Cash/Bank transactions in Cash Book and enter all other transactions in General Journal; in Soft Accounting System, you record Sale/Purchase transactions in Sale Invoice or Purchase Invoice. In the case of cash purchase/sale, that entry shall automatically be recorded in Cash Book. And in the case of credit purchase/sale, there will be no need to record it in General Journal. With a simple entry in sale or purchase invoice, you will not only get all the Financial Accounting Ledgers and Trial Balance, you will also automatically get your inventory and cost registers. If yours is a trading Business, then with a simple entry in sales invoice form, you will also automatically get Cost of that particular Sale calculated on the basis of both Weighted Average Costing and LIFO Costing methods.
If yours is a manufacturing business, then there is another simple Production Entry Form. You will enter in it only the basic ongoing production data but as a result, not only you will get detailed Production Reports, you will also get updated inventory registers of raw-materials and semi-finished items with a proper breakup of location/process where those semi-finished items have reached so far. When final production process on semi-finished items have been performed, then automatically those semi-finished items are removed from semi-finished inventory registers and go to Finished Goods Inventory Register. And when you will enter new sale invoice, then finished goods stock shall be automatically reduced from the Finished Goods Inventory Register. Not only this, you will also get detailed automated Direct Labor Payroll Reports. In addition, you will also get automated costing reports like Batch Cost Report and like etc. And since Soft Accounting System is an Integrated System, so you will also get automatically updated information in your Financial Accounting Ledgers and Trial Balance as well.
To record daily expenditure and transactions other than Sale/Purchase (or Sale/Purchase Returns – which are to be recorded in Debit/Credit Notes), there are also Cash Book and General Journal entry forms. So this is the way an Integrated Accounting System works.
Details about my self developed Integrated and Non-Integrated Accounting Software Applications ON THIS LINK.