How to Solve Integrated Accounting Problems

Understand Preparing Ledger Accounts and Final Statements

Key rules to remember

Purchase of materials on credit

Stores Ledger Control A/c Dr. ; To Creditors (or Bank) A/c

Stores is debited at cost. Creditors are credited. Returns to suppliers reverse this entry.

Issue of direct materials

Work-in-Progress Control A/c Dr. ; To Stores Ledger Control A/c

Indirect material goes to Factory Overhead Control A/c instead. Abnormal loss of material goes to Costing P&L A/c.

Wages paid or payable

Wages Control A/c Dr. ; To Bank (or Wages Payable) A/c

Use the gross wages. Deductions such as PF and TDS are credited to their own liability accounts.

Allocation of wages

WIP Control A/c Dr. (direct) ; Factory Overhead Control A/c Dr. (indirect) ; Costing P&L A/c Dr. (abnormal idle time) ; To Wages Control A/c

Wages Control A/c should have a nil balance after allocation.

Overhead incurred and absorbed

Incurred: Factory Overhead Control A/c Dr. ; To Bank etc. | Absorbed: WIP Control A/c Dr. ; To Factory Overhead Control A/c

The balance left in Factory Overhead Control is under or over absorption. Transfer it to Costing P&L A/c.

Completion of production

Finished Goods Control A/c Dr. ; To WIP Control A/c

Transfer at the cost of goods completed.

Sale of goods

Debtors A/c Dr. (sales value) ; To Sales A/c | Cost of Sales A/c Dr. ; To Finished Goods Control A/c (cost)

Two entries are needed: one at selling price and one at cost.

Closing of cost of sales and sales

Costing P&L A/c Dr. ; To Cost of Sales A/c | Sales A/c Dr. ; To Costing P&L A/c

Administration and selling overheads are debited to Cost of Sales A/c or directly to Costing P&L A/c, as the question's treatment requires.

Closing balance of an inventory account

Closing balance = Opening balance + Debits during the period − Credits during the period

The closing balances of stores, WIP and finished goods go to the balance sheet.

How to solve Preparing Ledger Accounts and Final Statements questions

1. 1Read the whole question and list the accounts you will need: Stores, Wages, Factory Overhead, WIP, Finished Goods, Cost of Sales, Costing P&L, plus Creditors, Debtors and Bank where needed. Note every opening balance.
2. 2Write the journal entry for each transaction in rough, in the order given. Mark each figure with its account and Dr or Cr. Decide at this stage whether each item is direct, indirect or abnormal.
3. 3Post the entries to the ledger accounts. Open each account with its opening balance and enter every figure on the correct side with a clear narration or the name of the opposite account.
4. 4Balance the Wages Control and Factory Overhead Control accounts first. Wages should clear to nil. The overhead balance is under or over absorption, which goes to Costing P&L.
5. 5Balance Stores, then WIP, then Finished Goods, in that order. Each closing balance is a carried-down figure for the balance sheet. Check that the totals of both sides agree.
6. 6Prepare Cost of Sales and the Costing Profit and Loss A/c. Include sales, cost of sales, abnormal losses, under or over absorption and any other items the question states. The balancing figure is profit or loss.
7. 7Write the balance sheet extracts or the final answer asked for: closing stores, WIP, finished goods, debtors, creditors and so on. Check that your profit agrees with a quick recomputation.

Quickest way: Account-by-account flow check

Common mistakes in Preparing Ledger Accounts and Final Statements

• Treating indirect material or indirect wages as direct and debiting them to WIP

  Students see 'materials issued' and 'wages paid' and send everything to WIP without reading the nature of the item.

  Fix: Split every issue and every wage figure into direct, indirect and abnormal. Direct goes to WIP, indirect to Factory Overhead Control, abnormal to Costing P&L.

• Leaving under or over absorbed overhead in the Factory Overhead Control A/c

  The account looks balanced after absorption is posted, so the leftover balance is ignored.

  Fix: Always balance the Factory Overhead Control A/c. Debit balance means under absorption and goes to the debit of Costing P&L. Credit balance means over absorption and goes to the credit.

• Taking abnormal loss or abnormal idle time into WIP cost

  Students treat all losses as part of production cost.

  Fix: Normal losses stay in cost. Abnormal losses and abnormal idle time are written off to the Costing P&L A/c.

• Recording sales only at selling price and forgetting the entry at cost

  The sales entry feels complete, so the movement of goods out of Finished Goods is missed.

  Fix: Make two entries on every sale: Debtors to Sales at selling price, and Cost of Sales to Finished Goods Control at cost.

• Not carrying down closing balances correctly into the balance sheet extract

  Students rush to the profit figure and forget that the unbalanced inventory accounts are the balance sheet items.

  Fix: After balancing each inventory account, write the closing balance in a separate list. Then copy that list to the extract, with debtors and creditors from their accounts.

• Including financial-only items such as interest paid or income-tax in cost accounts

  Because the books are integrated, students assume every expense in the question belongs in cost.

  Fix: Follow the question. Items of a purely financial nature go straight to the financial profit and loss account or the relevant ledger account, not through cost control accounts, unless the question says otherwise.

Worked examples