Preparation of Reconciliation Statements

Reconciliation Statement is prepared to reconcile the differences between two related accounts, such as the profit as per cost accounts and financial accounts. In cost accounting, a reconciliation statement is typically used to align the profit or loss shown by the cost accounts with that shown by the financial accounts.

The need for such reconciliation arises because the principles and practices in cost accounting often differ from those in financial accounting. Differences may be due to factors such as the treatment of overheads, depreciation, stock valuation, and the inclusion or exclusion of certain items.

Steps in Preparing a Reconciliation Statement:

1. Identify the Starting Point:

The reconciliation statement can start either with the profit as per the cost accounts or with the profit as per the financial accounts. The choice depends on which figure is available or preferred.

2. List the Items Causing Differences:

Differences between the cost and financial accounts arise due to various reasons. These include:

• Items Only Recorded in Financial Accounts: Certain expenses (like interest on loans, dividends, or income tax) and incomes (like rent received or dividends earned) are only recorded in financial accounts, not in cost accounts.
• Items Only Recorded in Cost Accounts: Abnormal gains or losses like scrap sales, abnormal wastage, or abnormal idle time might be included only in cost accounts.
• Differences in Stock Valuation: Stocks may be valued differently in cost accounts (e.g., FIFO, LIFO) and financial accounts (e.g., average cost).
• Over/Under Absorption of Overheads: In cost accounting, overheads may be absorbed based on estimates, leading to under or over absorption when compared to actual overheads in financial accounts.
• Depreciation Methods: The method of calculating depreciation might differ, leading to variances in the profit figures.

3. Adjust the Differences:

Add or subtract the identified items based on whether they increase or decrease the profit as per one account compared to the other.

• If starting with the profit as per cost accounts:
  • Add expenses or losses charged only in financial accounts.
  • Subtract incomes or gains credited only in financial accounts.
  • Adjust for differences in stock valuation, overhead absorption, and depreciation.
• If starting with the profit as per financial accounts:
  • Add expenses or losses recorded only in cost accounts.
  • Subtract incomes or gains recorded only in cost accounts.

4. Calculate the Adjusted Profit or Loss:

After making all necessary adjustments, calculate the final reconciled profit or loss.

5. Present the Reconciliation Statement:

The statement is typically presented in a tabular format for clarity. Here’s a simple format:

Example of Reconciliation Statement:

Assume the following data:

• Profit as per cost accounts: ₹150,000
• Items charged only in financial accounts:
  • Income tax: ₹20,000
  • Interest on loan: ₹10,000
• Over-absorption of overheads: ₹5,000
• Incomes credited only in financial accounts:
  • Rent received: ₹8,000
• Under-absorption of overheads: ₹3,000

The reconciliation statement would be: