Grade 12 Account Note

Cost Reconciliation Statement

Concept

In a manufacturing concern two accounts financial and cost accounts both are used. They are two different accounting systems that are maintained separately. Profit and loss account is prepared under financial account. Unlike that 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. Cost sheet shows net profit or net loss by deducting the cost of goods sold out of sales revenue. The two accounts show dissimilar profits since financial account records actual incomes and expenses and cost account records estimated cost figure also. Therefore, preparation of cost reconciliation statement is essential since two accounts show dissimilar profits.

 

NEEDS OF RECONCILIATION

It ensures the reliability of cost data.

It helps to check the arithmetic accuracy of both sets of account.

It helps to decision making internal control.

Management is enabling to know the reason for the difference in results of both cost and financial accounts.

 

REASONS FOR DIFFERENCE

The difference in the net profits of cost and financial accounts may arise because of the following reasons.

1. One sided entry

i)Transactions shown in financial account

Transfer from profit
Financial charges
Financial incomes

ii)Transaction shown in cost account

2.Indirect expenses recovered

3. Stock valuation

4. Different methods of charging depreciation.

5. Abnormal loss on gain

 

 

1.Transaction shown in one book:There are some financial transaction which are never recorded in cost accounting those are only recorded in financial accounting which leads incomes and expenses are shown in only one account. A few examples of incomes and expenses shown in one book are as follows:

a)Transaction shown in financial account:Some financial transaction are recorded only in financial book. Those financial transactions are not recorded in cost account. The financial transaction shown in financial account are as follows:

Transfer from profit: The provision of bad and doubtful debt, provision for depreciation, transfer of profit to general reserve, dividend payable, sinking fund for discharge of debentures and long term loans are made in financial account.

Financial charge: The loss on sale of assets, investment, writing off goodwill, preliminary expenses, discount and commission on issue of shares and debentures, interest paid on borrowed amount are financial charges item.

Financial incomes: The profit on sale of assets, interest received on investments, transfer fees of shares, rent, income, increase in values of assets, dividend earned, bad debts recovered are financial accounts.

b)Transaction shown in cost account: Some transactions like rent of owner's assets, interest on owner's capital, depreciation of the plant with zero book value operated in the firm are shown only in cost account.

2.Indirect expenses recovered: Financial account records entire actual expenses. But cost account shows entire indirect expenses on the basis of estimates.

3.Difference in inventory valuation: Financial accounting ascertains value of inventory either at cost price or market price whichever is less. The inventory valuation in cost accounting is always made in the bases of cost price.

4.Diffenence in depreciation charged: The depreciation on fixed assets may be charged by using different methods. Thus, if two accounting systems use two different method of depreciation then net profit remains dissimilar.

5.Abnormal loss or gain: Abnormal loss or gain affects the profit of the two sets of book. It is shown in financial account. Those are not shown by cost account. Therefore, abnormal loss or gain makes the net profits of two accounts different.


PREPARATION OF COST RECONCILIATION STATEMENT

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 statement also helps to know the items of incomes and expenses that made difference in net profits of the two accounts.

 

METHODS OF PREPARING COST RECONCILIATION STATEMENT

1.On the basis on net profit

Net profit of cost account
Net profit of financial account

2.On the basis of net loss

Net loss of cost account
Net loss of financial account

 

The cost reconciliation statement shows either positive or negative net balance after adjustment made by the items of difference located in two accounts. The positive net balance means net profit of the next book.

 

STEPS FOR PREPARING COST RECONCILIATION STATEMENT

Reconciliation statement is a statement which reconciles the differences of net profits between cost and financial accounts. It is prepared with objectives of showing the reasons of differences.

The given belows are the steps taken for reconciliation of net profits between cost and financial account:

Start with the use of a net profit or net loss shown by any one of account either cost or financial account.
Verify the net profit or net loss and find out the reasons for differences and make note for each items of differences.
Find out the decrease or increase in the net profit due to the reasons of differences.
Add the amount of differences if the net profit is decreasing and deduct if the profit is increasing due to the reason of difference.
Complete the difference in a statement and find out the net profit shown by another account.

 

ITEMS ONLY INCLUDED IN FINANCIAL ACCOUNTING

There are many expenses and incomes recorded only in financial account. Those items do not get place in cost account. The items are given below:

1.Profit or loss on sale of fixed assets
2.Income tax paid
3.Interest paid on capital and loan
4.Interest received on investment
5.Divindend paid or received.
6.Underwriting commission
7.Discount on issues of shares and debentures
8.Amortization of goodwill and other fictitious assets
9.Transfer fees
10.Rent received
11.Transfer to sinking fund or any creation of reserve
12.Other capital gains or losses.


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