Meaning, need ,reason for disagreement in profits, methods of reconciliation

1. RECONCILIATION OF COST AND FINANCIAL
ACCOUNTS
BY NEERU JASWAL

2. CONTENT TO BE COVERED IN THE TOPIC:
 Meaning of Reconciliation
 Reasons for reconciliation procedure
 Need for reconciliation of cost and financial accounts.
 Methods of reconciliation

3. LEARNING OUTCOMES:
 After this presentation students will be able to understand
various reasons for difference in profits or loss shown by books
of financial accounts and cost accounts.
 Students will be able to reconcile or tally the different profit or
loss that arises in two books due to difference in nature of two
accounts.

4. Meaning of Reconciliation :
 The word reconcile in general means to tally ,harmonize, bring together or
equate two things or two statement.
 So reconciliation of cost and financial accounts means to reconcile or tally the
results (profit/loss) shown by cost accounts on hand and financial accounts on
other hand of the same business concerned with same basic transaction.
 Reconciliation of cost and financial accounts is required in the concern where
cost and financial accounts are maintained independently of each other where
no separate accounts are maintained for costing and finance reconciliation is not
required.

5. REASONS FOR DISAGREEMENT IN PROFITS :
 Now from the meaning we discovered that profits shown by cost accounts and
financial accounts are not same so we need to reconcile them but why these
profits are not same ?? What are the reasons for disagreement in profits of two
books????
 So reasons for difference in cost and financial accounts are as follows:
1) Items Shown Only in Cost Accounts: There are certain items which are shown
in cost accounts only and they are not shown in financial accounts. such items
are very few and usually are notional charges. For example interest on capital
employed charged but not paid.

6. 2. Items Shown Only in Financial Accounts: There are number of
items which are included in financial accounts but not in cost accounts.
They can be item of income and expenses. For example financial charges
like loss arising from sale of fixed assets, income tax, dividend paid,
Goodwill, patents, interest received , dividend received etc.
3. Separate Base of Stock Valuation: Stocks in cost accounts are
valued on FIFO or LIFO or Average method, and cost price depending upon
type of inventory (raw material , work in process or finished goods) but the
stock in financial accounts is valued on the principles of cost or market
price, whichever is less.

7. 4. Separate Base for Depreciation: In cost account, machine hour
rate, production unit method, may be used for charging
depreciation, while in financial accounting straight line or
Diminishing method may be used.
5. Under Absorption or over Absorption of Overheads:
In cost accounts overheads are recorded on percentage basis, while
in financial accounting, actual expenses are recorded.

8. NEED FOR RECONCILIATION:
 So from the earlier discussion we found that there are various reasons for
difference in profits or loss of cost and financial accounts. It reveals those
reasons for difference in profit or loss between cost and financial accounts.
 It ensures that no income or expenditure item has been omitted to record and
there is no under- or over-recovery of overheads.
 It helps in checking the arithmetical accuracy of both the sets of accounts.
 It ensures the reliability of cost accounts in order to correct ascertainment of
cost of production.
 It facilities internal control by highlighting the variations causing increase or
decrease in profit.
 It promotes co-ordination and co-operation between cost and financial
accounting departments in order to generate correct and reliable accounting
data.
 It enables management to formulate policies regarding overheads, depreciation
and stock valuation

9. Methods of Reconciliation:
 There are two methods of reconciliation of costing and
financial profits:
a) By preparing a Reconciliation statement
b) By preparing memorandum Reconciliation account

10. 1. PREPARING RECONCILIATION STATEMENT:
 Under this method profit shown by one set of books(usually cost
accounts) is taken as base profit and items which do not tally are
added to it or deducted from it to arrive at the figures of profit
shown by other set of accounts(i.e. financial accounts).
 If profit shown by financial accounts is taken as base profit then
entire procedure will be reversed.

11. PROCEDURE FOR RECONCILIATION:
RECONCILIATION STATEMENT Rs Rs
Profit as per cost accounts (base) - xxxx
Add: (i) Over Recovery of overhead in cost accounting
(ii) Incomes included in financial accounting not in cost
accounting
(iii) over valuation of opening stock in cost accounts
(iv)Under valuation of closing stock in cost accounts
(v) Expenses charged in cost accounts only
-
-
-
-
-
Xxxx
Xxxx
Xxxx
Xxxx
xxxx
xxxx
Less: Under recovery of overheads in cost accounts
(ii) Expenses charged in financial accounts only
(iii) Under valuation of opening stock in cost accounts
(iv)Under valuation of closing stock in cost accounts
Xxxx
Xxxx
Xxxx
xxxx
Profit as per financial accounts xxxx

12. 2. PREPARING MEMORANDUM RECONCILIATION
ACCOUNT:
 If reconciliation statement is prepared in a ledger format, it is
called Memorandum Reconciliation Account (or) Statement.
Starting profit or base profit is taken on the credit side of the
memorandum reconciliation account. All items to be added are
shown on the credit side of the Memorandum Reconciliation
account.
 All items to be deducted are shown on the debit side.

13. The following is the proforma of a Memorandum Reconciliation Account:
Particulars amount particular amount
Under recovery of
overheads in cost accounts
Profit as per cost accounts (base)
Expenses charged in
financial accounts only
Over Recovery of overhead in cost
accounting
Under valuation of opening
stock in cost accounts
Incomes included in financial accounting
Under valuation of closing
stock in cost accounts
over valuation of opening stock in cost
accounts
Under valuation of closing stock in cost
accounts
Expenses charged in cost accounts only
Profit as per financial
accounts(b/f)
Loss as per financial accounts(B/F)

14. SUMMARY:
 So students through this presentation we have covered theoretical aspect of
reconciliation statement.
 What is reconciliation
 What is the need of reconciliation
 What are the various methods of reconciling
 Now for practical questions I will be providing my video lectures to you and will
show you through notes also how to solve the questions
 Will give you questions to solve on your official class groups (wtsapp) you have
to solve those question and get your doubts cleared by me.

15. THANK YOU