Reconciliation of cost and financial accounts

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:  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: By preparing a Reconciliation statement 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