It is often practical for a manufacturing company to include a factory ledger in its accounting system. Generally, this procedure is followed when manufacturing operations are remote from the main office, or when the nature of such operations requires a large number of accounts.
Some manufacturing-related accounts are kept in the books of the factory office, while others are kept in the general books of the office. Which accounts and other records will be kept in the factory journal and ledger and which accounts and records will be kept in the general journal and ledger will depend on various factors and the nature of manufacturing concerns. However, there are certain accounts that are normally kept on the books of the factory. These are accounts related to manufacturing costs and include store or materials accounts, labor or payroll accounts, factory overhead accounts, general ledger, they are also included in factory books.
Most organizations keep cash and other factory assets in general office records. Therefore, the general ledger includes accounts like sales, cost of goods sold, factory plant and machinery, accumulated depreciation, and liabilities, etc. It also includes the control account, factory ledger.
Entries related to the general ledger and factory ledger are first recorded in the general ledger and factory journal. The control account factory ledger and the general ledger are reciprocal in nature, that is, a debit to one is an automatic credit to the other and vice versa; so they allow each ledger to be self-balancing.
To verify cross accounts (factory ledger control account in general office books and factory ledger control account in office books), interoffice vouchers, also called transfer vouchers, are used. Through these inter-office or transfer vouchers, the general office is informed by the factory office; and the factory office is reported by the general office.
In the cost accounting system, the volume of accounting data that must be accumulated is usually very large. Because of this, many companies find it convenient to have separate books in the factory offices and in the headquarters. By establishing a separate group of factory accounts, financial accounting records are freed from many details that are usually essential in cost accounting work. The need to segregate factory accounts from other accounting data also arises due to the following factors:
A. When the general or administrative offices and the factory offices are not located in the same place or in the same premises or under the same roof.
b. When the decentralization policy must be followed in numerous production plants, each with its own management and administration.
When the above conditions are met, it is convenient and advantageous to keep some books in the factory offices and others in the general offices. General offices generally maintain: All vouchers payable or accounts payable, cash accounts and accounts receivable, sales and administrative accounts, etc. Manufacturing accounts related to materials or warehouses, work in process, finished goods, labor, and factory overhead are maintained at the factory offices. When both offices are involved, the reciprocal entry is passed on the books.
