reconciliation

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RECONCILIATION OF COST AND FINANCIAL ACCOUNTS

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DEFINITION Cost Accounting A method of accounting, which provides for assembling and recording of all elements of cost incurred to accomplish a purpose, to carry on an activity or operation, or to complete a unit of work or a specific job. Financial Accounting Financial accountancy (or financial accounting) is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders.

WHEREBY PROFITS REVEALED BY TWO SETS OF BOOKS-FINANCIAL ACCOUNTS AND COST ACCOUNTS ARE TALLIED AFTER ASCERTAINING THE REASONS FOR DISAGREEMENT OF TWO PROFITS.: 

WHEREBY PROFITS REVEALED BY TWO SETS OF BOOKS-FINANCIAL ACCOUNTS AND COST ACCOUNTS ARE TALLIED AFTER ASCERTAINING THE REASONS FOR DISAGREEMENT OF TWO PROFITS. RECONCILIATION IS A PROCESS

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When cost and financial accounts are maintained separately, the profit shown by one set of books may not agree with that of the other set. In such a situation, it becomes necessary to reconcile the results (profit / loss) shown by two sets of books Cause for difference between profit shown by cost and financial accounts is that there are certain items which appear in financial books only and are not recorded in cost accounting books Similarly, there may be some items which appear in cost accounts only and do not find a place in the financial books Need for Reconciliation:

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ITEMS INCLUDED IN FINANCIAL ACCOUNTS ONLY... APPROPRIATION OF PROFITS PROVISION OF TAXATION TRANSFER TO RESERVES GOODWILL PRELIMINARY EXPENSES WRITTEN OFF

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PURELY FINANCIAL CHARGES LOSSES ON SALE OF INVESTMENT PENALTIES AND FINES EXPENSES ON TRANSFER Of COMPANY’S OFFICE. PURELY FINANCIAL INCOMES INTEREST RECEIVED ON BANK DEPOSITS PROFITS MADE ON SALE OF INVESTMENT,FIXED ASSETS TRANSFER FEE RECEIVED.

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ITEMS INCLUDED IN COST ACCOUNTS ONLY... COST OF ABNORMAL IDLE TIME UNDER/OVER ABSORPTION OF EXPENSES IN COST ACCOUNTS ABNORMAL WASTAGE OF MATERIALS NOTIONAL RENT DEPRECIATION ON AN ASSET EVEN WHEN THE BOOK VALUE OF AN ASSET IS REDUCED TO A NEGLIGIBLE FIGURE.

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THE PREPARATION OF RECONCILIATION STATEMENT INVOLVES THE FOLLOWING STEPS: 1. PROFITS AS PER ANY SET OF BOOKS(COST OR FINANCIAL) MAY BE TAKEN AS A BASE. THE EFFECT OF THE PARTICULAR CAUSE OF DIFFERENCE SHOULD BE STUDIED ON THE PROFITS SHOWN BY THE OTHER SET OF BOOKS. IN CASE,THE CAUSE HAS RESULTED IN AN INCREASE IN THE PROFIT SHOWN BY OTHER SET OF BOOKS,THE AMOUNT OF SUCH INCREASE SHOULD BE ADDED TO THE PROFIT AS PER THE FORMER SET OF BOOKS WHICH HAS BEEN TAKEN AS A BASE. PREPARATION OF RECONCILLIATION STATEMENT

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4. IN CASE,THE CAUSE HAS RESULTED IN A DECREASE IN THE PROFIT SHOWN BY OTHER SET OF BOOKS,THE AMOUNT OF SUCH DECREASE SHOULD BE SUBTRACTED FROM THE PROFIT AS PER THE FORMER SET OF BOOKS WHICH HAS BEEN TAKEN AS A BASE . IN THE RECONCILIATION IT DOES NOT MATTER IN WHICH FORM THE STOCK IS KEPT ,i.e, RAW MATERIAL,WORK-IN-PROGRESS OR FINISHED STOCKS.THE BASIC PRINCIPLE IS THAT IF THE OPENING STOCK IS HIGHER, PROFIT IS LOWER WHEREAS IF THE CLOSING STOCK IS HIGHER, PROFIT IS HIGHER, AND VICE VERSA. FOR EXAMPLE: IF OPENING RAW MATERIAL IS LOWER IN COST ACCOUNTS,THE COSTING PROFIT WILL BE HIGHER . IF CLOSING WORK IN PROGRESSS IS HIGHER ON COST ACCOUNTS,COSTING PROFITS WILL BE HIGHER.

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ILLUSTRATION FROM THE FOLLOWING FIGURES PREPARE A RECONCILIATION STATEMENT NET PROFIT AS PER FINANCIAL RECORDS RS.10,300 NET PROFIT AS PER COSTING RECORDS RS10,000 INTEREST ON CAPITAL INCLUDED IN FINANCIAL ACCOUNTS RS.500 WORKS OVERHEADS UNDER-RECOVERED IN COST ACCOUNTS RS500 DIVIDEND RECEIVED RS1,000 RENT FOR OWNED BUILDING CHARGED IN IN COST ACCOUNTS RS300

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RECONCILIATION OF STATEMENT PARTICULARS + - PROFIT AS PER COST ACCOUNTS 10,000 LESS: WORK OVERHEAD UNDER CHARGED IN COST ACCOUNTS INTERSET ON CAPITAL INCLUDED IN FINANCIAL ACCOUNTS 500 500 ADD: DIVIDEND RECEIVED RENT ON OWNED BULIDINGS 1,000 300 11,300 1,000 PROFITS AS PER FIANCIAL ACCOUNTS 10,300 RS RS

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