by Memorandum Reconciliation Statement is a statement prepared to reconcile the difference between the profit or loss as per cost accounts and financial accounts. It is called a “memorandum” because it is not a part of the double-entry system; it is an informal statement prepared only for internal use. The statement starts with the profit as per one set of accounts (usually cost accounts) and adjusts for items causing the difference — such as over- or under-absorbed overheads, stock valuation differences, or items recorded only in one set of books — to arrive at the corresponding profit in the other.
Preparation of Memorandum Reconciliation Statement:
1. Understand the Purpose and Basis
Before preparing a Memorandum Reconciliation Statement, it is important to understand its purpose: to find the reasons for the difference between the profits as per cost accounts and financial accounts. One must decide the starting point, either profit as per cost accounts or profit as per financial accounts. This starting figure is adjusted by adding or deducting various items responsible for the differences. The main objective is not to pass accounting entries but to create clarity between the two sets of profits for internal analysis and managerial understanding.
2. Identify Items Causing Differences
The next step is identifying all items that lead to differences between cost and financial profits. These include:
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Purely financial items (e.g., interest, donations, fines)
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Notional items (e.g., imputed rent or interest on owned funds)
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Over- or under-absorption of overheads
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Stock valuation differences
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Treatment of abnormal gains or losses Each item should be clearly classified whether it increases or decreases the profit. A careful study of both financial and cost records is necessary at this stage to avoid missing any adjustments during reconciliation.
3. Decide Adjustment Direction
After listing the items, the preparer must decide whether each item should be added or deducted. For example:
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Add items like under-absorbed overheads, incomes appearing only in financial accounts.
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Deduct items like over-absorbed overheads, expenses recorded only in financial accounts. Remember, if starting from cost profit, and a particular item reduces financial profit, it must be deducted; if it increases financial profit, it must be added. This logical flow is important for arriving at an accurate final profit figure and maintaining consistency throughout the statement.
4. Format of Memorandum Reconciliation Statement
The statement is typically formatted in a simple, logical manner. It starts with:
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Profit as per cost accounts (or financial accounts)
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Add: Items that increase financial profit compared to cost profit
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Less: Items that decrease financial profit compared to cost profit
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Result: Profit as per financial accounts (or cost accounts) The presentation should be clean and easy to follow, showing all adjustments separately. A clear and simple format helps ensure no adjustment is missed and makes verification easy for internal auditors and managers.
5. Treatment of Stock Valuations and Overheads
Special attention must be given to stock valuation differences and overheads:
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If closing stock is higher in financial accounts than cost accounts, add the difference.
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If closing stock is lower, deduct the difference.
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Over-absorbed overheads (more charged in cost accounts) should be deducted.
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Under-absorbed overheads (less charged in cost accounts) should be added. Correct treatment of these two areas is critical because they often cause major profit differences. Careful checking ensures that the reconciliation statement is accurate and matches with accounting records.
6. Finalization and Verification
Once all adjustments are made, the final figure should match the profit as per the other set of accounts. It is important to verify all calculations thoroughly to ensure no item is wrongly added or omitted. The Memorandum Reconciliation Statement should be reviewed by the accounts team or auditors if necessary. Though it is an informal statement, its accuracy plays a major role in building trust in internal reporting. Regular reconciliation also improves the efficiency and reliability of the company’s accounting system over time.
