Introduction

Bookkeeping involves the recording, storing and retrieving of financial transactions for a company, 

nonprofit organization, individual, etc.

Common financial transactions and tasks that are involved in bookkeeping include:

- Billing for goods sold or services provided to clients.

- Recording receipts from customers.

- Verifying and recording invoices from suppliers.

- Paying suppliers.

- Processing employees' pay and the related governmental reports.

- Monitoring individual accounts receivable.

- Recording depreciation and other adjusting entries.

- Providing financial reports.

Today bookkeeping is done with the use of computer software. 

COST Book keeping refers to a system of recording various cost information in the books of 

account. There two main systems of cost book keeping. That is:

1. Integrated cost accounting system - A system of accounting where the cost and financial 

accounts are kept in the same set of books. This system avoids the need for separate set of 

books for financial and costing purposes

2. Interlocking cost accounting system. - Interlocking accounting system; this is an 

accounting system where separate cost accounting and financial

THE FLOW OF COSTS IN AN A BUSINESS ENTERPRISE 

Flow of costs refers to the manner in which costs move through a firm. Typically, the flow of costs 

is relevant to a manufacturing environment where accountants must quantify what costs are in raw 

materials, work in process, finished goods inventory and cost of goods sold. Flow of costs does not 

only apply to inventory, but also to factors in other processes to which a cost is attached such as 

labor and overhead. 

We say that costs flow through an accounting system. That is because they accumulate as the 

product progresses through the various stages of production. Let's look at a typical product. 

Before a product is started, no costs have been incurred. Workers stand ready to make the product, 

inventory waits patiently in the warehouse, and the manufacturing plant contains all the resources 

necessary to perform the manufacturing operation.

We first add materials into production, from the inventory. At the same time the accounting 

department transfers the cost of inventory items to the Work in Process account, and the product or 

job now has a value.

Next the workers start to convert the raw inventory into a product. As labor is added, the accounting 

department transfers payroll costs to the Work in Process account, increasing the value of the 

product or job.

Overhead costs are allocated to the product or job, based on the costing method used. As work 

progresses on the product or job, it accumulates labor, materials and overhead costs. Finally, the 

total finished product or job cost is transferred to Finished Goods, and when it is sold the cost is 

transferred to cost of goods sold

COST BOOK KEEPING – INTERLOCKING AND INTEGRATED LEDGER SYSTEMS

There are two systems of cost book keeping

1. Non- integrated/inter locking system

2. Integrated system

INTERLOCKING LEDGER SYSTEMS

Interlocking accounting system is a system in which company records his transactions on the basis 

of financial accounting principles and cost accounting principles separately. It means, there will be 

two records of accounts. One is financial accounts record and second is cost accounts record.

Features of Interlocking Accounting System

1. In interlocking accounting system, two set of accounts are prepared.

2. In interlocking accounting system, all big organisation, take benefits of cost accounts 

separately from financial accounts. So, it can more control on cost.

3. In interlocking accounting ledger, cost accounts are maintained in cost ledger and financial 

accounts are maintain in financial ledger.

Advantages of Interlocking Accounting System

Main benefit of interlocking accounting system is for big companies. Big companies keep double 

record by independent accountants. So, there is less chance of fraud and mistake because in 

reconciliation process, such fraud and mistake can be found by auditor. So, both cost and financial 

accountants will be more careful about this.

Disadvantages of Interlocking Accounting System

1. Because we keep double set of accounts, so there is more need of reconciliation of cost and 

financial accounts for finding the reason of not matching cost accounts records with financial 

accounts records. So, this time may be saved in integrated accounting system.

2. This is costly system because we need separate accounting staff for keeping separate set of 

two accounts.

3. Sometime, all the users of our accounting records may be confused by seeing cost profit and 

financial profit in our interlocking accounting system.

INTEGRATED LEDGER SYSTEMS

This is a system where cost accounts and financial accounts are combined in one set of accounts.

Features/Advantages

In integrated account, ledger system has a number of features which may be viewed as preferable to 

the interlocking ledger system. In the recent decade, there has in fact been a movetowards greater 

integration of accounting information requirements in a single unified system (an integrated ledger 

system). 

Such an integrated ledger system has the following advantages

1. Only one set of account is maintained and therefore there would be one profit results hence no 

need of reconciling.

2. There is no duplication of work hence a saving in clerical cost.

3. Information obtained can be used by the management for decision making as well as for 

financial reporting purposes.

4. Integrated account system help to coordinate the various forms of an organization.

5. It facilitates the use of IT systems.

6. Cost data can be obtained without delay as cost accounts are posted directly from the basics of 

original entry.

Disadvantages 

1) Differences in the valuation of stock – In financial accounting stock is valued base on the lower 

of cost and net realizable value whole in cost accounting stock is valued based on the input cost. 

The difference in the valuation often brings a challenge in integrated accounts.

2) Problems associated with items appearing in cost accounting only e.g. overhead absorption, 

notion cost and changing of depreciation based on the usage.

Items of expenditure that is unique to the two systems of accounting.

i. Appropriations of profits not dealt within the costing systems e.g. corporations tax, dividends 

paid and proposed etc.

ii. Expenditure of a purely financial nature (i.e. nothing to do with manufacturing e.g. losses on 

sale of fixed assets, interest on bank loans, bank charges etc.

In the financial Systems, the required ledgers are:

a) The General Ledger

b) Debtors Ledger (or Sales ledger)

c) Creditors Ledger (or Purchases ledger)

In the cost book-keeping system, the required ledgers are:

i) General Ledger Adjustment Account: It is sometimes called the cost ledger account.

ii) All the items 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.

iii) 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.

iv) Work in Progress Ledger Control Account: It shows the total work in progress at any 

particular time.

v) 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.

vi) Production Overheads Control Account: It gives the total production overheads incurred in 

the manufacture or production of goods in question.

vii) Wages Control Account: It shows the total wages incurred in the production of goods.

viii) Selling and Distribution Overheads Control Accounts: It gives the overheads incurred in 

marketing the goods produced. Examples of such costs will include advertising costs, sales 

commission, repairs made to the distribution van etc.

ix) Administrative Overheads Control Accounts: This will give the total of administrative 

overheads incurred in the organization. These costs are not related to production. Such costs 

will include salary to the general manager, salary to accounts department staff

Link between Cost and Financial Books

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.

Difference between Integrated and Interlocking system

Integrated and interlocking system is two cost book keeping methods. Interlocking system maintains 

two set of ledger which allows detail analyses of costs and cost related processes. Integrated system 

keeps only one set of ledgers and both financial and cost accounting information needs are met from 

the same books.

1. Duplication of record

In Integrated system there is no duplication of record due to single set of ledgers where in 

interlocking system there is duplication of record due to two set of ledgers.

2. Cost

Interlocking system require more resources than integrated system. More time is required to 

maintain the interlocking system similarly interlocking system requires more human effort than 

integrated system. More resources require more cost therefore interlocking system is deemed to be 

more costly than integrated system.

3. Detailed analyses

Interlocking system allows more detail analyses of cost and other cost related process. These 

analyses can be performed without any difficulty and delay due to separate set of ledger.

4. Avoid confusion

Interlocking system creates much confusion due to two set of ledger and too much information is 

being produced from different record and therefore the information management is more difficult in 

interlocking system. In integrated system this confusion can be avoided.

5. Computerized environment

Integrated system is the only system followed in computerized environment and detail cost analyses 

are controlled through coding system (Charts of accounts). Interlocking system has no relevance in 

the computerized system

DOUBLE ENTRY SYSTEM IN INTEGRATED A/C

To record purchase on materials

Dr: stores control/raw materials A/C

 Cr: Bank/creditors A/C

To record materials returned to suppliers

Dr: Suppliers/Creditors

 Cr: Stores control/Raw materials

To issue materials to production

Dr: Work in progress A/C Direct materials

Dr: Production overhead A/C- (for indirect materials)

 Cr: Stores control A/C

To record wages

Dr: Wages A/C

 Cr: Bank/Wages payable A/C

To change wages in production

Dr: Work in progress A/C (Direct wages)

Dr Production wages A/C (Indirect wages)

 Cr: Wages A/C

To record manufacturing expenses

Dr: Production OHDs A/C

 Cr: Bank/Expenses payable A/C

To change overheads to production

Dr. Work in progress A/C

 Cr: Production OHD A/C

N/B

If the actual overheads is different from the OHD absorbed there is a case of over or under 

absorption and the difference should be posted to in OHD adjustment A/C and later transferred to 

the part A/C

To record the cost of goods produced

Dr: Finished goods A/C

 Cr: Work in progress A/C

To record the cost of goods sold

Dr: Cost of sales A/C

 Cr: Finished goods A/C

To record sales

Dr: Bank/Debtors A/C

 Cr: Sales A/C

Illustration

Bora Ltd. Commenced its operations on 1 march 2005 with a fully paid up issued share capital of 

Sh.500,000 represented by fixed assets of Sh.275,000 and cash at bank of Sh.225,000. The company 

has two departments; A and B.

As at 30 may 2005, the following transactions had taken place:

1. Credit purchases from suppliers amounted to Sh.573, 500 of which Sh.525, 000 were in respect 

of raw materials and Sh.48, 500 were in respect of purchases classified in the ledger accounts as 

production overhead items

2. Production overhead costs absorbed in the period were:

3. The following overhead costs were paid out by cheque

4. Issues of raw materials from the stores were as follows:

5. The amount of staff wages was Sh.675, 000, Sh.500, 000 was paid out in cash while Sh.175, 000 still owed. 

6. The staff wages were analyzed as follows

7. Accruals as at 30 May 2005 were Sh.26, 000 for security of productions facilities and Sh.39, 000 

for consultancy on production procedures.

8. The costs of finished goods were

9. Sales on credit amounted to Sh. 870,000 and the cost of these credit sales was Sh. 700,000.

10.Depreciation on production plant and equipment was Sh. 15,000.

11.Cash received from debtors totaled Sh. 520,000 and payments made to creditors 

totaledSh.150,000. 

Required:

(i). Using integrated cost accounting system, record the above transactions for the three months 

ended 30 May 2005.

(ii). Profit and loss account for the period ended 30 May 2005 and balance sheet as at 30 May 2005

Causes of Difference between Financial Accounting and Cost Accounting Profits Results

- Purely financial expenses e.g. bud debts, discount allowed, interest expenses, losses on disposals 

of assets etc.

- Purely financial incomes e.g. dividends received, gain on sale of assets, decrease in provision for 

bad and doubtful debts etc.

- Appropriation of profits e.g. dividend paid, transfer to reserved, tax 

- Differences in the valuation of stock

- Differences in depreciation charged.

- Notional cost appearing in cost accounting

- Over under absorption of overheads in cost accounting

- Timing differences