Submitted by:

Binoo Gupta

Associate professor

PG Department of Commerce and Management

Hans Raj Mahila Maha Vidyalaya, Jalandhar

E-module on

Reconciliation of Cost and Financial Accounts

Reconciliation of Cost and Financial Accounts is the process to find all the reasons behind disagreement in profit which is calculated as per cost accounts and as per financial accounts.

Financial accounting

is concerned with the ascertainment of profit/loss for the whole operations of the organisation, for a relatively long duration usually a year, without being too much concerned with cost computations,

whereas

Cost accounting

aims at ascertaining the profit/loss made by different manufacturing or product divisions for attaining the efficiency in the organisation by cost comparision and for cost control.

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In those organisations, where non-integral system exists, two accounting systems deal with the same basic transactions (say, purchase of materials, consumption of materials, payment of wages and other expenses etc) in different manner and transactions therein are recorded with a different approach.

The difference in purpose and approach give rise to different figure of profit in cost accounts as compared to the profit figure disclosed by the P&L A/c in financial set of books.

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Consequently, the need for reconciliation between cost accounting's profits and financial accounting's profit amount arises.

Need of Reconciliation

• To find out the reasons for the difference in profits/loss shown by cost accounts and financial accounts
• To ensure the mathematical accuracy and reliability of cost accounts (to have appropriate cost ascertainment and cost-control) and to have check on the financial accounts as well
• To facilitate coordination and promote better cooperation between the activities of financial and cost sections of the accounting departments.
• To place the management in better position to acquaint itself with the reasons for variation in profits and paving the way for more effective internal control and for standardisation of policies regarding stock valuation and recovery of overheads etc.

• Items Shown Only in Financial Accounts
• Items Shown Only in Cost Accounts
• Over or Under-absorption of Overheads
• Different Bases of Stock Valuation
• Different Methods of Charging Depreciation
• Abnormal Gains and Losses

Reasons for the difference

Students read from book the above topic in detail and discussion will be held in class

Effect of Various Items on Profit:

Methods of Reconciliation -

Reconciliation of financial accounts and cost accounts can be presented using any of the following two methods i.e.

(1) Statement of Reconciliation or Reconciliation statement

(2) Memorandum Reconciliation Account.

A reconciliation statement is a statement which is prepared to reconcile the profit as per cost accounts with the profit as per financial accounts by suitably treating the causes for the difference between the cost and financial profit.

The reconciliation of cost and financial profits may also be presented in the form of an account styled as ‘Memorandum Reconciliation Account’. In this account, the base profit (financial or cost) is taken as opening balance and shown on the credit side. All items of difference required to be deducted are debited and those to be added are credited to this account.

PRACTICAL

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The net profits of Y Limited according to financial accounts was ` 84,377 while profits shown by cost accounts was ` 106,200 for the same year. Prepare reconciliation statement to reconcile both the profits from the following information:

(i) Depreciation charged in financial accounts ` 5600

while recovered in cost accounts ` 6250

(ii) Works overheads under absorbed in cost accounts ` 1560

(iii) Office overheads over-recovered in cost accounts ` 850

(iv) Interest on loans (credit) not included in cost accounts ` 4000

(v) Loss due to obsolescence charged in financial accounts ` 2850

(vi) Bank interest and dividends received ` 375

(vii) Income-Tax paid ` 20,150

(viii) Loss due to depreciation in inventories charged in financial accounts ` 3375

(ix) Stores adjustment credited in financial accounts ` 237

Solution Reconciliation Statement