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INTRODUCTION

Businesses or the activities relating to business all over the world are living in an age of uncertainty. Today in the modern times when traditional rules are no longer applicable, survival and success in such an age depends on the ability to be creative, flexible and adaptable. And even in that there are no defined models that can be followed. The best course is to simply trust your own instincts, stay from conformity, set your own rules and embrace challenges. This means treading untrammeled roads in every aspect of business. Be it developing new products or services, carving out new relationships with old customers external or internal, strengthening core businesses or boldly going into new areas. All this demand risk taking of the strategic kind where you step into untested waters, but those that reflect your core strengths and those that will you deliver more to your customer and investor. The managerial process of the management of any company includes planning, organizing, directing and controlling. This process is applicable in all the functional areas of management. In every company or any industrial firm the effectiveness of the management is judged in financial terms. That is why the management of any company is always in search of new Ways to reduce the cost of scarce resources and try to ensure that the Estimated or predetermined results adhere to the actual results. Cost which is at the heart of any business is to be well understood by all Managers for right decision making so that the organization achieves its major goal, namely to maximize shareholders wealth. To serve this purpose the most important science employed by the Management is COST ACCOUNTING. The main objective of cost accounting is to help the management in controlling the cost. It is a type of accounting which records the transactions relating to the cost of goods and services. The costs accounts resemble to financial accounts in one respect viz. that the basis for recording transactions is common for both the accounting methods. As for example, invoices constitutes the basis for transactions relating to materials, payroll for recording wages and salaries and vouchers for recording indirect expenses such as rent, taxes, insurance, etc. From this point of view, the results shown by cost accounts must be the same as shown by financial accounts. But wing to subjective recording of transactions (i.e. according to the nature of expense) in financial accounts and objective recording (i.e. according to purpose for which costs are incurred) in cost accounts often gives rise to a difference in profit as revealed by these two sets of books. Hence, a need arises to reconcile the profit as shown by these two accounting systems. Thus, the mismatch in the profits arised from these two systems of accounting is the only reason for the emergence and preparation of RECONCILIATION OF COST AND FINANCIAL STATEMENTS

RECONCILIATION OF COST AND FINANCIAL STATEMENTS


When two sets of accounts are prepared i.e. financial accounting and cost accounting the profit shown by both the sets of accounts varies. This variation is due to the subjective recording of transactions i.e. according to the nature of expense in final accounts and objective recording i.e. according to the purpose for which the costs are incurred in cost accounts. The Reconciliation of cost and financial statement is prepared to settle the difference between the Cost Accounts and the Final Accounts. Thus, a reconciliation of cost and financial statement is a statement indicating the causes of difference in such a profit.

Need and importance of reconciliation between cost and financial accounts:


It helps to state the reasons for difference between the profit or loss as indicated by financial accounts and cost accounts. A reconciliation statement checks the arithmetical accuracy of both the sets of accounts.

A reconciliation statement helps in detecting frauds.

A reconciliation statement helps in detecting errors in one or both the sets of books.

NEED FOR RECONCILIATION

As we all know Cost Accounts help to ascertain the cost of products,


processes or contracts. Cost accounts also reveal the profit or loss in
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respect of the products, processes or contract. Such profit or loss as per the cost Accounts is however, likely to be different from the profit or loss shown by the financial Accounts of the concern for many reasons. This difference may be due to:-

(1)

Some items of income and expenses appearing only in the Financial Accounts and not in the Cost Accounts. For Example: Income from dividends, Goodwill written off etc.

(2)

Some items of income and expenses appearing only in Cost Accounts. For Example: Notional interest on Owners capital etc.

(3)

Different treatment given to some items in the two sets of accounts. For Example: Different methods in the valuation of stock, different methods of charging of depreciation, or the overheads being taken on estimated basis in Cost Accounts etc.

All these factors lead to difference in the figures of profit as per Cost accounts and profit as per Financial Accounts. It should be noted that some concern maintain Integrated System Of Accounts in which the Financial Accounts and Cost Accounts are integrated or kept in the same sets of books. In such cases, the Financial profits and costing profits will always tally and there will be no such need for reconciliation. However, in Nonintegrated Systems of Accounting, since the financial records and costing records are distinct and separate, reconciliation of costing profits and financial profits becomes necessary. Reconciliation, in such cases, ensures accuracy of costing data furnished to the management on which many important decisions will be based. Reconciliation also acts a cross check on both the sets of accounts and makes them more reliable. Thus, RECONCILIATION OF COST AND FINANCIAL STATEMENTS has got a lot of importance on the part of the management decision making and overall performance of the firm or the enterprise. Hence, it is very much essential for the firm
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OBJECTIVES OF RECONCILIATION
The Reconciliation of Financial and cost statements is a statement prepared for the purpose of settling the difference between the profits shown by both the financial accounts and cost accounts. Thus, the profit reconciliation is built to fulfill the following objectives:
(a)

TO ENSURE RELIABILITY OF COST ACCOUNTS : The correct ascertainment of production in cost accounts depends upon proper analysis, allocation, apportionment and recording of costs. If these steps are incorrect, naturally the cost of production will be incorrect. Reconciliation with financial accounts help in checking the reliability of cost accounts.

(b)

TO CHECK THE ARITHMETICAL ACCURACY OF COST ACCOUNTS : Sometimes some transactions in cost accounts are ignored while recording. At other times some items would have been wrongly recorded. This again is responsible for inaccurate results. So to check the arithmetical accuracy of cost accounts, a reconciliation is necessary. However the need for reconciliation does not arise when cost and financial accounts are integrated.

ADVANTAGES OF RECONCILIATION

The following are some of the most important advantages of the Reconciliation of Financial and Cost Accounts.
1. The arithmetical accuracy can be checked in both the sets of books.

2. It enables to set right under or over absorption of overheads in cost accounts by making use of supplementary rates. 3. Reconciliation facilitates location of areas of inefficiencies. For Example: If predetermined overheads are fixed fairly and actual expenditures incurred are more it is a case of inefficiency requiring remedial measures. 4. It helps in detecting frauds. For Example: Any wrong entry of stock of material in stores ledger owing to theft can be brought to light by comparing with the stock of financial accounts. 5. Separate maintenance of cost accounts has the advantages of exemption from statutory audit as the purpose of cost accounts is to ascertain and control cost rather than ascertainment of profit.

REASONS FOR DIFFERENCES IN PROFIT


As for now, it is clearly understood that the Reconciliation of financial and cost accounts is a statement which shows the difference in the profits shown by both the accounting statements and also ensures the settlement of profit between both these accounts. But the probable question arise to this fact is why does there is a difference in the profits shown by the Financial Accounts and Cost Accounts ? The probable answer to this question is that there are many reasons or causes for the differences in the profit shown by the Cost and Financial accounts. Some of the vital important reasons or causes for this difference may be outlined as under:

I.

Items Included in the Financial Accounts but not in Cost Accounts.


(A) Purely Financial Charges : (a) (b) (c) (d) (e) (f) (g) (h) (B) Expenses incurred on share transfer. Interest paid on bank draft Damages payable at law Penalties payable at law Losses on scrapping machinery Losses arising out of natural calamities such as fire, flood, etc. Donations and charities Loss on sale of investments

Purely Financial Incomes : (a) Interest on bank deposit received (b) Dividends on investments received (c) Rent receivable (d) Profit made on sale of assets (e) Amount received on sale of old magazines and newspapers. (f) Transfer fee received.

(C)

Appropriation of profits : (a) Transfer to reserve fund and general reserve, etc. (b) Transfer to income tax (c) Dividend paid (d) Creation of Depreciation fund, sinking fund, Dividend equalization fund, workmens compensation fund, investment fluctuation fund, reserve for bad and doubtful debts. (e) Goodwill, preliminary expenses underwriting commission, etc. written off

II.

Items Included in Cost Accounts only.


The items of transactions recorded only in cost accounts are in the form of notional costs, such as notional rent, notional interest and notional salary.

III. Under or Over-absorption of Overheads.


In financial accounts manufacturing and office expenses are written off as and when they are incurred. However, in cost accounts such expenses are not included until production is completed. Till then such costs are accumulated in suspense account in the cost ledger. This difference in the treatment gives rise to difference in the amount of profit shown by two sets of books. One important point that is to be remembered in this connection is, overheads are charged in the cost accounts on the basis of estimates. Manufacturing overheads are recovered as a percentage of wages, office and administration overheads on cost of production and selling and distribution overheads on the basis of sales. The difference between actual and estimated overheads (either under or over-absorption) is written off either to overhead adjustment account or to costing profit and loss account. The effect of such transfer is the actual amount shown in the financial accounts will now agree with the amount shown in the cost accounts. This means, when reconciling cost and financial accounts no further adjustments is necessary in respect of such overheads.
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However it must also be emphasized that when under or over absorbed are not written off to costing profit and loss, but has been carried forward to next year, the amount of overhead (under or over- absorbed) must be considered for reconciliation purpose. This method of treating over or under absorption is not very popular. But when decided by cost accountant, the adjustment of overhead is to be duly considered while preparing reconciliation statement.

IV. Adoption of Different Bases for stock Valuation : In cost accounts closing stock for balance
sheet purpose is valued at cost, while in financial accounts the basis is cost or market price whichever is less. The difference on the basis of valuation of closing stock is responsible for the disagreement of profit in there sets of books.

V.

Adoption of Different Bases for Depreciation


In cost accounts the assets may be depreciated on the straight line method, whereas in financial accounts a different method of depreciation such as reducing balance method or sinking policy method or a different method is followed. The difference in the method of depreciation followed in these systems of accounts results in a difference of profits.

VI. Adoption of Different Bases for Valuing Work in Progress.Work in progress is valued either at the
stage of prime cost, works cost or cost of production. In cost accounts, the basis followed may be quite different than that followed in financial accounts. This difference in the method of valuing work-in-progress gives rise to preparation of reconciliation statement.

VII. Expenses of Abnormal Nature are excluded in Cost Accounts. VIII. Recording of Costs by Approximation in Cost Accounts in Some Cases. Thus, above all were the reasons or causes for the difference in the profits shown by the Financial and Cost Accounts Statements. Because of this reasons or causes the emergence of Reconciliation of cost and financial statements has taken place.
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