Reconciliation of Cost and Financial Accounts, Worked
Chapter Eight
Syllabus topic 4, "Practical problems based on Reconciliation of cost and Financial accounts"
Pages 20 to 21 of 82
How this question is marked
State which profit you are starting from, in the heading. "Reconciliation statement showing profit as per cost accounts reconciled with profit as per financial accounts" is not decoration; it fixes the direction of every sign that follows.
Give each item its reason, not just its sign. "Interest on loan, charged in financial accounts only" earns more than "interest, less".
Two columns, additions and deductions, then one net figure. A single running column is hard to follow and easy to get wrong.
The question
The cost accounts of Ratnagiri Products show a profit of Rs 4,86,000 for the year ended 31 March 2027. The financial accounts show a different figure. On examination:
- interest received on investments, Rs 24,000, was not recorded in the cost accounts;
- dividend received, Rs 16,000, likewise;
- interest paid on a bank loan, Rs 74,000, appears in the financial accounts only;
- a donation of Rs 15,000 was paid;
- a loss of Rs 22,000 arose on the sale of old furniture;
- factory overhead was over-absorbed in the cost accounts by Rs 42,000;
- administration overhead was under-absorbed by Rs 29,000;
- opening stock of finished goods was valued Rs 18,000 higher in the cost accounts than in the financial accounts;
- closing stock of finished goods was valued Rs 30,000 higher in the cost accounts.
Prepare a reconciliation statement and ascertain the profit as per financial accounts. Then prepare the statement the other way round.
Sorting the items first
| Item | Group | Direction from the cost profit |
|---|---|---|
| Interest received | Financial accounts only, income | Add |
| Dividend received | Financial accounts only, income | Add |
| Interest paid on the bank loan | Financial accounts only, expense | Less |
| Donation | Financial accounts only, expense | Less |
| Loss on sale of furniture | Financial accounts only, expense | Less |
| Factory overhead over-absorbed | Absorption | Add |
| Administration overhead under-absorbed | Absorption | Less |
| Opening stock higher in cost accounts | Valuation | Add |
| Closing stock higher in cost accounts | Valuation | Less |
Sort before you compute. Every mark in this question is in the direction, and the arithmetic is trivial once the sorting is right.
Statement 1: from the cost profit to the financial profit
Additions.
| Particulars | Amount, Rs |
|---|---|
| Interest received on investments, not in cost accounts | 24,000 |
| Dividend received, not in cost accounts | 16,000 |
| Factory overhead over-absorbed in cost accounts | 42,000 |
| Opening stock of finished goods overvalued in cost accounts | 18,000 |
| Total, being the additions | 1,00,000 |
Deductions.
| Particulars | Amount, Rs |
|---|---|
| Interest paid on the bank loan, in financial accounts only | 74,000 |
| Donation paid, in financial accounts only | 15,000 |
| Loss on the sale of furniture, in financial accounts only | 22,000 |
| Administration overhead under-absorbed in cost accounts | 29,000 |
| Closing stock of finished goods overvalued in cost accounts | 30,000 |
| Total, being the deductions | 1,70,000 |
The reconciliation.
Reconciliation of Cost and Financial Accounts, Worked
| Particulars | Amount, Rs |
|---|---|
| Profit as per cost accounts | 4,86,000 |
| Add: Total of the additions above | 1,00,000 |
| Less: Total of the deductions above | (1,70,000) |
| Total, being profit as per financial accounts | 4,16,000 |
Statement 2: the same figures, the other way round
| Particulars | Amount, Rs |
|---|---|
| Profit as per financial accounts | 4,16,000 |
| Add: Items deducted in Statement 1, now added | 1,70,000 |
| Less: Items added in Statement 1, now deducted | (1,00,000) |
| Total, being profit as per cost accounts | 4,86,000 |
Every sign has reversed and nothing else has changed. That is the whole of the second direction, and it is worth saying in one line in the answer: the items and the amounts are identical, only the column each sits in has swapped.
The five checks to run on your own answer
Did you state the direction in the heading? The examiner reads it before the figures.
Are the two stock rows on opposite sides? Opening overvalued is an addition; closing overvalued is a deduction. A candidate who puts both on the same side has misunderstood the mechanism, and the error is worth two marks.
Are the two absorption rows on opposite sides? Over-absorbed is an addition; under-absorbed is a deduction. The two overheads here are deliberately one of each.
Did every financial income go up and every financial expense go down? Interest and dividend received up; interest paid, donation and loss on sale down.
Does the reverse statement return to the starting figure? Rs 4,16,000 plus Rs 1,70,000 less Rs 1,00,000 is Rs 4,86,000. If it does not, one of the signs in Statement 1 is wrong, and this is the cheapest way to find it.
In short
- Sort into the four groups first, then compute.
- Financial income adds, financial expense deducts.
- Over-absorbed adds, under-absorbed deducts.
- Opening stock higher in cost accounts adds; closing stock higher deducts.
- Going the other way, every sign reverses and nothing else changes.
- Reconcile back to your starting figure as a check.
Answer in one sentence
How is a reconciliation statement prepared? By starting from the profit shown by one set of books, adding the incomes recorded in the financial accounts only, the overhead over-absorbed in the cost accounts and any opening stock valued higher there, deducting the expenses recorded in the financial accounts only, the overhead under-absorbed and any closing stock valued higher in the cost accounts, and so arriving at the profit shown by the other set, every sign reversing if the statement is begun from the other end.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.