Basics of Accounting

Preparation of Reconciliation Statement

When there is a difference between the profits disclosed by cost accounts and financial accounts, the following steps shall be taken to prepare a Reconciliation Statement :

1. Ascertain the various reasons of disagreement (as discussed above) between the profits disclosed by two sets of books of accounts.
2. If profit as per cost accounts (or loss as per financial accounts) is taken as the base :

ADD :

(i) Items of income included in financial accounts but not in cost accounts.
(ii) Items of expenditure (as interest on capital, rent on owned premises, etc.) included in cost accounts but not in financial accounts.
(iii) Amounts by which items of expenditure have been shown in excess in cost accounts as compared to the corresponding entries in financial accounts.
(iv) Amounts by which items of income have been shown in excess in financial accounts as compared to the corresponding entries in cost accounts.
(v) Over-absorption of overheads in cost accounts.
(vi) The amount by which closing stock of inventory is under-valued in cost accounts.
(vii) The amount by which the opening stock of inventory is over-valued in cost accounts.

DEDUCT :

(i) Items of income included in cost accounts but not in financial accounts.
(ii) Items of expenditure included in financial accounts but not in cost accounts.
(iii) Amounts by which item of income have been shown in excess in cost accounts over the corresponding entries in financial accounts.
(iv) Amounts by which items of expenditure have been shown in excess in financial accounts over the corresponding entries in cost accounts.
(v) Under absorption of overheads in cost accounts.
(vi) The amount by which closing stock of inventory is over-valued in cost accounts.
(vii) The amount by which the opening stock of inventory is undervalued in cost accounts.
3. After making all the above additions and deductions, the resulting figure will be profit as per financial accounts.

Note : If profit as per financial accounts (or loss as per cost accounts) is taken as the base, then items added shall be deducted and items to be deducted shall be added, i.e., the procedure shall be reversed.

Illustration 1 :
  Rs.
Profit as per Cost Accounts                                         - 10,000
Works overheads under-recovered in cost accounts - 500
Interest on capital included in financial accounts      - 500
Dividends received                                                     - 1,000
Rent for owned building charged in cost accounts    - 300
Profit as per financial books                                       - 10,300

There is a difference of Rs. 300 between the profit as shown by the financial books and the profit as shown by the cost books. A reconciliation statement can be prepared to reconcile, on the following basis, the profits shown by two sets of books :

(i) Profit as per cost accounts may be taken as the base. In other words, the profit as shown by the financial books can be found out if suitable adjustments are made in this figure of profit and after taking it account the above causes of difference.

(ii) Works overheads have been charged more in financial accounts than those in cost accounts. This means profit as shown by the financial accounts is less than the profit as shown by the cost accounts by Rs. 500 (the amount of under recovery). Since profit as per cost accounts has been taken as the base, the amount of Rs. 500 should be subtracted from this base profit to arrive at the profit as shown by the financial accounts.

(iii) The inclusion of interest on capital as an expense has resulted in decrease in profits as shown by financial books. In other words, the profit as shown by the cost books is more than the profit as shown by the financial books by Rs. 500 (the amount of interest). The amount should, therefore, the subtracted from the base profit.

(iv) Dividend received has been credited in financial books. This means the profit as shown by the financial books is more than the profit as shown by the cost books by Rs. 1,000. The amount should, therefore, be added to the profit as shown by the cost books.

(v) No charge is made in financial books for rent on owned buildings. The amount has however been charged in the cost books. It means the profit as shown by the financial books is higher than the profit as shown by the cost books by this amount. The amount, therefore, should be added to the profit.

Points to be noted:

To work out the problems on Bank Reconciliation Statement, the following points are to be remembered.

i. The heading is given as “Bank Reconciliation Statement as on ____________”
ii. All items to be added are grouped together and shown in the inner column and the total is taken to the outer column for the purpose of addition (B ).
iii. All items to be deducted are grouped together in the inner column and the total can be shown in the outer column for deduction (D).
iv. Favourable balance means the cash book will have a debit balance and the passbook will have a credit balance.
v. Bank overdraft or unfavourable balance means cash book will have a credit balance and passbook will have debit balance.

For easy reference the table given below will be useful.