RECONCILIATION OF

COST AND FINANCIAL

ACCOUNT
By:
ARUN
SONU JHA
RAHUL
NEERAJ
NITIN
CONCEPT OF RECOCILIATION
 When cost accounts and financial accounts are
separately maintained in two different sets of
book, two profit and loss accounts will be
prepared- one for costing books and other for
financial books .The profit or loss shown by
costing books may not agree with that shown
by financial books. Therefore, it becomes
necessary that profit or loss shown by the two
sets of accounts is reconciled.
 Important point to remember:-
 The question of reconciliation of cost financial
accounts arises only under non-integral system.
However, under the integral accounts, since
cost and financial accounts are integrated into
one set of books and only one Profit and Loss
Account is prepared , the problem of
reconciliation does not arise.
NEED FOR RECONCILIATION
 Reconciliation reveals the reason for difference
in profit or loss between cost and financial
accounts.
 It also helps in checking the arithmetic
accuracy of costing data.
 It promotes coordination and cooperation
between cost accounting and financial
accounting department.
Reasons for disagreement in Profit/Loss

1. Items shown only in financial accounts. (a)

Purely financial charges- examples:- #
loss on the sales of capital assets. #
Discount on bonds, debentures, etc. # losses
on investments. # Expenses of
company’s transfer office. # Interest on bank
loans and mortgages. # Fines and penalties.
# Provision for bad and
doubtful debts. # Loss due to theft, pilferage
etc.
 Cont…….
(b) Purely financial incomes- examples:-
# profits arising from the sales of capital assets.
# rent receivable.
# dividend and interest received on investment.
# interest received on bank deposits.
# transfer fees received.
# income tax refund.
 Cont…..
(c) Appropriations of profit- examples:-
# Dividends paid.
# Transfer to reserves.
# Charitable donations.
# Income-tax.
# Any other items which appears in profit and loss
appropriation account.

2. Items shown only in cost accounts.

(a) Notional rent, i.e. charge in lieu of rent when
premises are owned and no rent is payable.
 Cont…
(b) Interest on capital employed but not actually
paid, i.e., the notional cost of employing
capital.
(c) Notional salaries.
(d) Depreciation on fully depreciated assets still
in use.

3.Under-absorption or over-absorption of
overheads.
4.Different bases of stock valuation.
5. Different charges for depreciation.
 Method of Reconciliation
The following procedure is recommended for preparing a
Reconciliation statement:
1. Ascertain the points of difference between cost accounts and
financial accounts.
2. Start with the profit as per cost accounts.

3. (a)Regarding items of expenses and losses:

Add: items over-charged in cost accounts.

Deduct: items under-charged in cost accounts.
For example, depreciation in cost accounts is Rs. 2,500 and
that in financial accounts is Rs. 2,700.This has the effect of
increasing costing profit by Rs.200 as compared to financial
profit. Then in order to reconcile, Rs. 200 will be deducted
from costing profit.
 Cont…..
(b) Regarding items of incomes and gain:
Add: items under-recorded or not recorded in cost
accounts.
Deduct: items over-recorded in cost accounts.
For example.
Interest on investment received amounting to Rs.1,500
is not recorded in cost accounts. This will have the
effect of reducing profit as per cost books. Thus in
order to reconcile , this amount of Rs.1,500 for
interest should be added in the costing profit.
 Cont……
(c) Regarding valuation of stock:
(a) opening stock-
Add: amount of over-valuation in cost accounts.
Deduct: amount of under-valuation in cost accounts.
(b) closing stock-
Add: amount of under-valuation in cost accounts.
Deduct: amount of over-valuation in cost accounts.
 Cont…
4. After making all the above additions and
deductions in costing profit, the resulting
figure shall be the profit as per financial books.

5. The above treatment of timer will be reversed

when the starting point in the Reconciliation
Statement is the profit as per financial accounts
or loss as per cost accounts.
 PERFORMA RECONCILIATION
STATEMENT.
PROFIT AS PER COST ACCOUNT Rs. Rs.
Add: 1. over-absorption of overheads.

2. financial incomes not recorded in cost books.

3. items charged only in cost accounts.

(Notional rent and interest on capital etc.)

4. over-valuation of opening stock in cost book.

5. under-valuation of closing stock in cost book. -----------------

-----------

Less: 1.under-absorption of overhead

2. purely financial charges.
3. under-valuation of opening stock in cost books.
4.over-valuation of closing stock in cost book. ----------- -----------------

profit as per financial accounts -----------------

 Problem and solution
Rs.
Net profit as per financial books 63,780
Net profit as per costing books 66,760
Factory overhead under-recovered in costing 5,700
Administration overhead recovered in excess 4,250
Depreciation charged in financial books 3,660
Depreciation recovered in costing 3,950
Interest received but not included in costing 450
Income-tax provided in financial books 600
Bank interest credited in financial books 230
Stores adjustment (credited in financial book) 420
Depreciation of stock charged in financial accounts 860
Dividends appropriate in financial accounts 1,200
Loss due to theft and pilferage provided only in financial book. 260
 SOLUTION
Rs. Rs.
Profit as per costing books 66,760
Add:1. Adm. OverheadReconciliation Statement 4,250
recovered in excess
2. Depreciation overcharged in cost book
(3950-3660) 290
3. Interest received but not included in costing 450
4. Bank interest credited in financial books only 230
5. Stores adjustment credited in financial book 420 5,640
-----------
------------ 72,400

Less:1. Factory overhead under-recovered 5,700

2. Income tax provided in financial books 600
3. Dividends appropriated 1,200
4. Depreciation of stock in financial books 860
5. Loss due to theft and pilferage not shown in 8,620
cost books 260 --------------
63,780
----------
Profit as per financial books
Memorandum Reconciliation Account

This is an alternative to Reconciliation Statement .

The profit as per cost accounts is the starting
point and is shown on the credit side of this
account. All items which are added to costing
profit for reconciliation are also shown on
credit side. The items to be ‘deducted’ from
costing profit for reconciliation are shown on
the debit side. The balance figure is the profit
as per financial account.
 PROFORMA MEMORANDUM
RECONCILIATION ACCOUNT
Rs. Rs.

To (item to be deducted) ---------- By profit as per cost accounts-

To (item to be deducted) ---------- By (item to be added)

----------
To (item to be deducted) ------------
By (item to be added) ---------
To (item to be deducted) -----------
By (item to be added)
To (item to be deducted) ----------- ----------

To Profit as per financial accounts- ------ By (item to be added)

(balancing figure) ----------

By (item to be added) ---------

 PROBLEM
 The profit as per cost account is Rs.1,50,000.
The following details are ascertained on
comparison of cost and financial accounts.
cost A/C financial A/C
(a) Opening stock:
materials 10,000 15,000
finished goods 18,000 16,000
(b) Closing stock
materials 12,000 13,000
finished goods 20,000 17,000
 Cont…..
(c) Interest charge but not paid Rs.10,000
(d) Write off: preliminary exp. Rs.500 Goodwill
Rs. 1,500.
(e) Dividend on Unit Trust of India received
Rs.1,000.
(f) Indirect exp. Charged in financial accounts
Rs.80,000 but Rs.75,500 recovered in cost
account.
Find out the financial profit by preparing a
Memorandum Reconciliation Account.
 solution
Rs. Rs.
Opening stock of Profit as per cost account 1,50,000
materials(under valued in
cost a/c) 5,000 Opening stock of finished
goods (overhead value in
Closing stock of finished cost a/c) 2,000
goods(over valued in cost
a/c) 3,000 Closing stock of
materials(under valued in
Preliminary exp. Written off 5,00 cost a/c) 1,000

Goodwill written off 1,500 Interest charged only in cost

a/c 10,000
Overheads under recovered 4,500
Dividend received 1,000
Profit as per financial
accounts 1,49,500
----------- -----------
164,000 1,64,000
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THANK YOU