Cost account is prepared according to manufacturing or process companies.
Financial account is prepared on the basis of trading or service provider company.
Both the process shows the difference profit and losses because they have their own principle and rule.
Difference in profit and loss of two accounts should be reconciled.
The statement which is prepared to adjust them is called reconciliation statement.
It is also called reconciliation of cost and financial account.
In a manufacturing company, two accounts are used.
They are financial and cost accounts.
They are two different accounting systems that are maintained separately.
Profit and loss account is prepared under financial account but cost sheet is prepared under cost account.
Profit and loss account shows net profit or net loss of the firm by summarizing actual incomes and expenses for a specified period.
These two accounts show dissimilar profits because financial account records actual incomes and expenses but cost account records estimated cost.
Therefore, preparation of cost reconciliation statement is essential since two accounts show dissimilar profits.
Definition |
According to Eric L. Kohler, “Reconciliation is the determining of the items necessary to bring the balances of two or more related account or statements into agreement.” |
A cost reconciliation statement is prepared to reconcile the differences in net profits shown by cost and financial accounts. The reconciliation statement provides bases to verify the arithmetical accuracy of the incomes and expenses recorded in the two accounting systems. |
The main needs for reconciliation are as follows:
· Reconciliation helps to check the arithmetic accuracy of both cost and financial account
· It helps to find out the reasons for variation in profit
· It helps to co-ordination between cost account and financial department
· It helps to prepare policies regarding overheads, depreciation, stock valuation etc
The main reasons for differences are:
Transactions are only shown in financial account
Transactions are only shown in cost account
Transfer from profit
Only financial charges
Only financial income
Only cost account charges
Over costing or under costing of overheads
Difference in opening and closing stock
Difference in depreciation charging method
Abnormal loss or gain etc.
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There are some items which are shown only in financial account.
These incomes and expenses are given below:
Extracted Profit and Loss Account
Debited, expenses, loss |
Amount |
Credited, income, profit, gain |
Amount |
To Discount allowed |
xxxx |
By Interest received on investment |
xxxx |
To Commission paid |
xxxx |
By Dividend received |
xxxx |
To Interest on loan or capital |
xxxx |
By Rent received |
xxxx |
To Loss on sales of asset |
xxxx |
By Discount received |
xxxx |
To Loss on sales of investment |
xxxx |
By Commission received |
xxxx |
To Loss by fire |
xxxx |
By Profit on sales of fixed assets |
xxxx |
To Loss by theft |
xxxx |
By Profit on sales of investment |
xxxx |
To Goodwill written off |
xxxx |
By Transfer fees received |
xxxx |
To Preliminary expenses written off |
xxxx |
By Bad debts recovered |
xxxx |
To Trade mark written off |
xxxx |
By Appreciation on asset |
xxxx |
To Discount on issue of debentures |
xxxx |
|
|
To Provision for bad debts |
xxxx |
|
|
To Tax paid (provision for tax) |
xxxx |
|
|
To Dividend paid |
xxxx |
|
|
|
|
|
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There are some kinds of expenses which are related only in cost account:
Extracted Cost Sheet
Particulars |
Amount |
Amount |
Estimating expenses, drawing |
|
|
Rent to warehouse or godown |
|
|
Insurance of warehouse |
|
|
Notional or estimated rent of business owner |
|
|
Salary of owner |
|
|
Notional depreciation on assets which is fully depreciated |
|
|
|
|
|
Most of the financial data are actual basis.
These are related to past.
But in cost account, there are many estimated expenses related to future.
These estimated expenses may be more or less than actual expenses.
While prepare reconciliation statement, these over casting or under casting should be adjusted.
Overhead |
Cost Account |
Financial Account |
Over casting or charging in cost account |
Less profit |
More profit |
Under casting or charging in cost account |
More profit |
Less profit |
|
|
|
Under financial account, stock is valued on the basis of cost and market price which is less.
But in cost account stocks are valued in FIFO, LIFO.
In cost account, stock is valued also factory cost or prime cost.
Stock |
Valuation |
Cost |
Result |
Opening stock |
Over valuation |
Increase |
Decrease profit |
Opening stock |
Under valuation |
Decrease |
Increase profit |
Closing stock |
Over valuation |
Decrease |
Increase profit |
Closing stock |
Under valuation |
Increase |
Decrease profit |
|
|
|
|
Depreciation may be charged on basis of machine hour rate or production unit in cost account.
But straight line or written down value methods in financial account.
These depreciation charging methods can disagreement between cost account and financial account.
Over charge depreciation |
High cost viz cost increase |
Low profit |
Under charge depreciation |
Low cost viz cost decrease |
High profit |
Keep in Mind (KIM)
Debited in financial account means expenses or loss. |
Credited in financial account means receipt or income. |
Interest on investment is income. |
Interest on loan or debentures is expenses. |
Actual means financial account. |
Estimate means cost account. |
|
Reconciliation statement can be prepared by two methods.
According to financial account or cost account; both have two methods.
They are net profit or net loss.
In this way, it is prepared on four ways.
(a) Net profit as per cost account
(b) Net profit as per financial account (profit and loss account)
(c) Net loss as per cost account
(d) Net loss as per financial account (profit and loss account)
Particulars |
Amount |
Amount |
Net profit as per cost account or (Net loss as per cost account) |
|
xxxx (xxx) |
Add: |
|
|
Expenses charged in cost account but not in financial account |
xxxx |
|
Income recorded in financial account but not in cost account |
xxxx |
|
Over charge/absorption of expenses in cost account |
xxxx |
|
Under charge/absorption of expenses in financial account |
xxxx |
|
Under valuation of closing stock in cost account |
xxxx |
|
Over valuation of opening stock in cost account |
xxxx |
|
Depreciation over charged in cost account |
xxxx |
xxxx |
Less: |
|
|
Expenses charged in financial account but in cost account |
xxxx |
|
Income recorded in cost account but in financial account |
xxxx |
|
Under charge/absorption of expenses in cost account |
xxxx |
|
Over charge/absorption of expenses in financial account |
xxxx |
|
Over valuation of closing stock in cost account |
xxxx |
|
Under valuation of opening stock in cost account |
xxxx |
|
Depreciation under charged in cost account |
xxxx |
(xxxx) |
Net profit as per financial account or (Net loss as per financial account) |
|
xxxx (xxx) |
Keep In Mind (KIM)
1. Question can be solved as per cost account in C – F |
2. If answer is in positive figure, it is added |
3. If answer is in negative figure, it is less |
4. These are exception for income and closing stock viz positive figure is less, negative figure is added. |
5. In place of over charge in financial account, we should write down under charge in cost account. |
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