It is often functional for a manufacturing concern to include a factory ledger in its accounting system. Generally, this procedure is followed when manufacturing operations are far-flung from the main office, or when the character of such operations requires a large number of accounts.
Some accounts relating to manufacturing are kept in factory office books while other are kept in general office books. What accounts and other records be kept in the factory journal and ledger and what accounts and records be maintained in the general journal and ledger would depend on various factors and the character of manufacturing concerns. However, there are certain accounts which are usually kept on the factory books. These are accounts concerned with manufacturing costs and include stores or materials accounts, labor or payroll accounts, factory overhead accounts, general ledger, is also included on the factory books.
Most organizations continue cash and other factory assets on the general office records. consequently the general ledger includes such accounts as sales, cost of goods sold, factory plant and machinery, accumulated depreciation and limitations etc. It also includes the control account, factory ledger.
Entries relating with general ledger and factory ledger are first recorded in the general ledger and factory journal. The control accounts factory ledger and general ledger are reciprocal in character i.e., a debit to one is an automatic credit to the other and vice versa; so they permit each ledger to be self-balancing.
In order to check the reciprocal accounts (factory ledger control account in the general office books and general ledger control account in the factory office books), inter office vouchers, which are also called move vouchers, are used. by these inter office or move vouchers, the general office is informed by the factory office; and factory office is informed by the general office.
In cost accounting system, the quantity of accounting data that must be accumulated is usually very large. Due to this, many enterprises find it appropriate to have separate books at the factory offices and general offices. By setting up a separate group of factory accounts, the financial accounting records are freed from much detail which are usually basic is cost accounting work. The need for segregating 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 at the same place or in the same premises or under the same roof.
b. When the decentralization policy is to be followed in numerous production plants each having its own management and administration.
When the above conditions are present, it is advisable and advantageous to keep some books at the factory offices and some at the general offices. The general offices usually maintains: All vouchers payable or account payable accounts, cash and accounts receivable accounts, selling and administrative accounts etc. The manufacturing accounts relating with materials or stores, work in course of action, finished goods, labor and factory overhead are kept at factory offices. When both the offices are involved, the reciprocal entry is passed in the books.