1.1 Where accounts are maintained on the integral system, there are no separate cost accounts and financial accounts. Hence, the question of reconciliation of cost and financial accounts does not arise. However, where separate sets of books are maintained for cost accounting and financial accounting system, it is imperative that periodically the two accounts are reconciled. A memorandum of reconciliation is prepared, indicating the reasons for difference between the results disclosed by each system.
1.2. The difference between the two sets of accounts arises because of the following reasons-
a) Items includes only in financial accounts-
There are number of items which appear only in financial accounts, and not in cost accounts, since they do not relate to the manufacturing activities, such as,
i) Purely financial charges, reducing profit
- Losses on Capital assets.
- Stamp duty & expense son issue and transfer of stock , shares and bonds.
- Loss on debentures.
- Discount on debentures, bond.
- Fines & penalties.
- Interest on bank loans.
ii) Purely financial income, increasing financial profit
- Rent received.
- Profit on sale of assets.
- Share transfer fee
- Share premium.
- Interest on investment, bank deposits.
- Dividend received.
iii) Appropriation of Profit- Donations and charities.
b) Items included only in cost accounts-
There are very few items, which appears in cost accounts, but not in financial accounts. Because, all expenditure incurred, whether for cash or credit, passes through the financial accounts, and only relevant expenses are incorporated in cost accounts. Hence, only items which can appear in cost accounts but not in financial accounts is a notional charge., such as, I) interest on capital which is not paid but included in cost accounts to show the notional cost of employing capital,
Or II) Rent i.e. charging a notional rent of premises owned.
c) Items included for differently in cost and financial accounting –
i) Overheads- in cost accounts, overheads are applied to cost units at predetermined rates based on estimates, and the amount recovered may differ from actual expenses incurred. If such under-or –over recovery of overheads are not charged off to costing profit & loss a/c, the profits on two sets of books will differ.
ii) Stock Valuation – in financial accounts, stock is valued at lower of cost or market value. In cost accounts, stock is valued at cost adopting one of her methods such as FIFO, LIFO, average etc, which is suitable to the unit. Thus, there may be difference in stock valuation which will reflect difference in profit between the two sets of books.
iii) Depreciation- if different basis is adopted for charging depreciation in cost accounts as compared to financial accounts, the profits will vary.