What is Reconciliation of Cost & Financial Accounting ?

Reconciliation of Cost & Financial Accounting?

Under the integral system of accounting, no separate set of books are maintained for costs and financial accounts. So, there is no problem of reconciliation in that case. But under a non-integral system of accounting, there are separate sets of books for cost and financial accounts. Both the books are prepared from the same basic transactions.

So the profit or loss disclosed by both cost and financial accounts should be equal. But in actual practice, that doesn’t occur. So, in order to reconcile both the profits, a Statement is prepared by taking the reasons of the difference. That statement is known as the reconciliation statement of cost and financial accounting.

Reasons for Preparing statement of Reconciliation

1.The reconciliation statement indicates the reasons for disagreement of cost and financial profit.

2.It ensures arithmetical accuracy of cost and financial accounting.

3.It promotes co-ordination between cost accounting and financial accounting departments.

4.It encourages adoption of standard policy for stock valuation, depreciation and treatment of overheads.

5.It indicates to the management the reasons for difference in profit and motivates mangement to exercise effective internal control.

Reason for disagreement of Financial and costing profits

The following reasons are responsible for such disagreement.

1.Items shown in financial accounts only

The following items appeal only in financial accounts but not in cost accounts:

i.Financial Charge

Loss on sale of fixed assets, discounts on issue of debentures/bonds, loss on investment, interest on bank loan and mortgage, fines and penalties, provision for bad debt, damage payable by low, amount retain of for goodwill discount on debentures, preliminary expenses etc, loss due to theft, pilferage etc, expenses on transferring company’s office.

ii.Purely financially income

These incomes are only shown in financial accounts but not in cost accounts.

For example- profit on sale of any fixed asset, rent receivable divided and interest received on investment, interest received on bank deposit, share transfer fees received, income tax refund etc.

iii.Appropriation of profit

The following appropriations are made in financial accounts only.

For example- dividend paid, income tax paid, charitable donations transferred to reverses etc.

2.Item Shown only in Cost Accounts

There are certain items which are shown in cost accounts only but not in financial accounts.

Exm:- National rent, national salary, interest on capital, depreciation on fully depreciated assets still in use.

3. Under & Over- absorption of Overhead

Actual amounts of overheads incurred are taken in financial accounts whereas in cost accounts, estimated amounts of overheads are shown. As a result there may occur under or over absorption of overhead. Such under or over absorption of overhead will cause disagreement between financial and costing profit.

4. Different methods of Stock Value

In cost accounting, costing stocks are valued as per LIFO, FIFO or Average stock Method whereas in financial accounts stocks are available at cost or market price whichever is less. Difference in stock valuation will make the financial and costing profit different.

5. Different methods of charging depreciation

There are different methods of depreciation such as straight line methods, written down value methods etc. If financial accounts adopt one method of charging depreciation whereas cost accounting adopts another method then there will be a difference in financial and cost profit.

6. Abnormal Gains and Losses

Abnormal items contained like abnormal theft material or wastage, wages of abnormal idle time, bad debt, abnormal gain and losses on the manufacturing process may be kept in the financial accounts but are extracted from the cost accounts. These abnormal gains and losses kept directly to the cost accounting and profit & loss account. This causes disagreement of financial accounts and costs profits.

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