PROFORMA OF A RECONCILIATION STATEMENT

The statement of Reconciliation between Financial Profits and Costing Profits is prepared in the format given below. It is similar to a BANK RECONCILIATION STATEMENT. The Reconciliation Statement can be prepared in two ways starting with Financial Profits or starting with Costing Profits.

I)

The Reconciliation Statement when prepared with financial Profits as the starting point appears as follows:
Statement of Reconciliation

Between Financial Profit and Costing Profit for the year ending . Particulars Profits as per Financial Accounts ADD: 1. Items not charged or debited to cost accounts. e.g. - preliminary expenses written off, Goodwill written off, etc. 2. Under Recovery of Factory/ administration/ Selling and Distribution expenses. 3. Depreciation Undercharged. 4. Finance expenses NOT charged in cost accounts. LESS: 1. Items NOT credited in Cost Accounts. e.g. interest on investments, Dividend Earned, etc. 2. Over Recovery of Factory/ Administration/ Selling and Distribution expenses. 3. Depreciation overcharged Profits as per Cost Accounts xx xx Rs. Rs. xxx

xx

xx xx xxx

xx xx xx xxx xxx

II)

Reconciliation statement (starting with cost profits)

The basic rule for preparing the Reconciliation Statement i.e. Do As The Other Has Done is equally applicable in this case too. Thus, when we start with the costing profits, we have to do as the financial Accounts have done. We have to start with the Cost Profits, and - exclude the items which we ignored by financial Accounts. - Consider the items accounted only in Financial Accounts. - Adopt the amounts of stocks, depreciation, overheads, etc. adopted by financial accounts. - And finally adjust the costing profits accordingly. This process of Doing What The Other Has Done will finally reconcile the costing profits with the Financial Profits. Statement of Reconciliation Between Costing Profit and Financial Profits for the year ending Particulars Profits as per Cost Accounts ADD: 1. Items NOT credited in Cost Accounts. e.g. interest on investments, dividend earned, etc. 2. Over recovery of Factory/ Administration/ selling and Distribution expenses. 3. Depreciation. LESS: 1. Items NOT charged or Debited to Cost Accounts. e.g. Preliminary expenses written off, goodwill written off, etc. 2. Under Recovery of Factory/ Administration/ selling and distribution expenses. 3. Depreciation undercharged. 4. Finance expenses NOT charged in cost accounts. Profit as per Financial Accounts xxx xxx xxx xxx xxx xxx xxx Rs. Rs. xxx

xxx xxx xxx xxx

EXAMPLE OF RECONCILIATION STATEMENT

PROBLEM:
A company named as ARYA ENTERPRISES furnishes its financial data or information in the form of Trading and Profit and Loss Account as follows : Particulars Purchase 37,815 Less : Closing stock 6,120 Wages [ Direct ] Works expenses Selling Expenses Administration Expenses Depreciation Net Profit TOTAL 31,695 15,750 18,195 10,650 8,010 1,650 30,450 1,16,400 TOTAL 1,16,400 Rs. Particulars Sales 75,000units @Rs.1.50each Profit on sale of Machinery Rs. 1,12,500 3,900

The profit as per Cost Accounts was Rs. 29,655. Prepare Reconciliation Statement to reconcile Cost Profit with Financial Profits. Further information as per Cost Accounts: (a) (b) (c) Closing stock was taken at Rs.6,420 The works Expenses were taken at 100% of Direct Wages. Selling and Administration Expenses were charged at 10% of sales and at Re.0.10 per unit respectively. (d) Depreciation was taken at Rs.1,200.

Solution:

Statement of Reconciliation Between Financial Profit and Costing Profit For the year ending ..

Particulars
Profit as per the FINANCIAL ACCOUNTS ADD: 1. Closing Stock Undervalued in Financial A/c (Rs.6,420 Rs.6,120) 2. Depreciation Overcharged in Financial A/c (Rs.1,650 Rs.1,200) 3. Overheads Under recovered in Cost A/cs - Works Expenses (Rs.18,195 Rs.15,750) - Administration Expenses (Rs.8,010 Rs. 7,500)

Rs.

Rs.
30,450

300 450 2,445 510 3,705 34,155

LESS: 1. Income Credited in Financial A/cs only - Profit on Sale of Machinery 2. Overheads Over recovered in Cost A/cs - Selling expenses (Rs.11,250 Rs.10650)

3,900

600 4,500

COSTING PROFIT

29,655

Conclusion Thus at the end of this very valuable project work we would
like to conclude that the RECONCILIATION OF FINANCIAL AND COST STATEMENT is a necessary practice which must be undertaken by the management of each and every company which does not follows the integrated system of Accounting and whose financial statements profit does not tally with that of the profit of cost statements. The Reconciliation statement of Cost and Financial Statement is a statement which ensures accuracy of costing data furnished to the management on which many important decisions will be based. It also acts as a cross checks on both the sets of accounts and makes them reliable. In other words, the Reconciliation statement is a statement which determines the difference between the profits, if any shown by both the financial and cost accounts due to many reasons and tries to find out the reasons for such difference and further reconcile or amend it. This is how the concept of Reconciliation works. Though Reconciliation of financial and cost statement is very similar to a Bank Reconciliation statement but the significance or the value it has got is more than any statement since, it is the most important tool with the management with the help of which they can cross check the statements prepared both the departments i.e. Finance and cost and also assures reliability for quick decision making, saving future time and money, and a firm control of the management. Therefore it is quite essential and necessary for any company in this modern world to be equipped with this important tool as backup in their financial toolbox RECONCILIATION OF FINANCIAL AND COST STATEMENT.

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