Reconciliation Between Financial and Cost Accounting
Meaning of Reconciliation
Reconciliation refers to the process of comparing and adjusting the profits as shown by two different sets of accounting records. In the context of cost and financial accounting, reconciliation is done to ensure that the profit or loss shown by the cost accounts matches with the profit or loss shown by the financial accounts.
Why Reconciliation is Needed
- To identify and explain the reasons for the difference in profits shown by cost and financial accounts
- To ensure accuracy and consistency of records
- To verify correct allocation of expenses and incomes
- To improve internal controls and reporting mechanisms
Common Reasons for Differences
| Particulars | Cost Accounting | Financial Accounting |
|---|---|---|
| Depreciation Method | May use different rates | As per accounting standards |
| Stock Valuation | Standard cost | Actual cost |
| Items Included | Only factory costs | Includes financial incomes and expenses |
| Notional Costs | Included (e.g. rent on owned building) | Not included |
Steps to Reconcile
- Start with profit as per cost or financial accounts
- Add items that increase profit in financial accounts but are not in cost accounts
- Deduct items that reduce profit in financial accounts but not in cost accounts
- Arrive at the reconciled profit
Example of Reconciliation Statement
Given: Profit as per Cost Accounts = ₹80,000
| Add: | |
|---|---|
| Interest Received (financial only) | ₹5,000 |
| Over-absorption of overheads in cost accounts | ₹2,000 |
| Less: | |
| Under-absorption of factory overheads | ₹3,000 |
| Loss on sale of assets (financial only) | ₹4,000 |
| Reconciled Profit (Financial Accounts) | ₹80,000 + 7,000 - 7,000 = ₹80,000 |
Conclusion
Reconciliation helps ensure accuracy between the cost and financial records. It reveals errors, improves decision-making, and ensures that all expenses and incomes are accounted for properly.
