Procedure of preparing reconciliation Statement

This procedure consists of the following steps :

Step 1 - Start with taking any one of the figure of profit/loss (either as per cost
books or financial books) which may be called base profit figure.
Step 2 - Secondly, the various reasons of disagreement (as discussed in the
preceding section) between the profits disclosed by two sets of books in a
particular case are ascertained.
Step 3 - Add those items of difference which have the effect of increasing profits
in other set of books to the base profit figure (from which we started in step 1)
(such items may be called '+' items)
Step 4 - Subtract those items of disagreement from the base profit figure which
have the effect of lowering profits in other set of books. (such items may be called
‘-’ items).
The resultant figure after making all the above mentioned adjustments (if all the
calculations are computably and arithmetically correct) will be the profit or loss as
per
 Format of Reconciliation Statement

Less:
• Expenses/ losses and appropriations considered in
Financial Accounts but not in Cost Accounts
• Under- absorption of overheads in Cost Accounts
• Under valuation of opening stock of Raw Material, XXXX
WIP and Finished Goods in Cost Accounts
• Over valuation of closing stock of Raw Material, WIP
and Finished Goods in Cost Accounts
• Lower depreciation charged in Cost Accounts

Profit as per Financial Accounts XXXX

Problem: 1
Profit of JK Ltd. as per cost accounts is Tk. 3, 50,000. The following details are
ascertained on comparison of the cost and financial accounts.
Cost Financial
Particulars
Accounts Accounts

Opening Stock of Raw Material 22,500 25,000

Opening Stock of Work In Progress 27,000 29,000

Loss on sale of Machine - 4,000

Interest on bank loan - 8,000

Provision for Bad debts - 2,000

Goodwill written off - 13,000

Production overheads 1,26,000 1,21,200

Notional Rent of factory 6,000 -

Profit on sale of fixed asset - 8,000

Dividend received on investment - 1,500

Closing Stock of Raw Materials 16,000 17,000

Closing Stock of Work-in-progress 12,000 12,500

Closing Stock of Finished Goods 10,000 8,000

Prepare a Reconciliation Statement and find out profit as per Financial Accounts.
Solution: 1
Reconciliation Statement of JK Ltd.
Particulars Amount Amount

Profit in cost accounts 3,50,000

Add:
Over absorption of production overheads
5,000
Notional rent
6,000
Profit on sale of fixed assets
8,000
Dividend received
1,500
Under valuation of closing stock of raw
1,000
materials
500
Under valuation of closing stock of work in
progress 22,000

Total 3,72,000

Less:
Under Valuation of opening stock of raw
materials 2,500
Under Valuation of opening stock of work in 2,000
progress 4,000
Loss on sale of machine 8,000
Interest on bank loan 2,000
Provision for bad debts 13,000
Goodwill written off 2,000
Over valuation of closing stock of finished
goods (33,500)

Profit as per Financial Accounts 3,38,500

Problem: 2
The financial books of a company show a net profit of Tk.l,27,560 for the year
ending 31st Dec. 2003. The Cost Account shows a net profit of Tk. I,33,520
for the same corresponding period. The following facts are brought to light:
Factory overhead under recovered in costing Alc 1l,400
Administration overhead over recovered in costing Alc 8,500
Depreciation charged in financial accounts 7,320
Depreciation recovered in cost Alc 7,900
Interest received but not included in cost Alc 900
Income Tax debited in financial Alc 1,200
Bank interest credited financial Alc 460
Stores adjustment credited in financial Alc 840
Rent charged in financial Alc 1,720
Dividend paid recorded in financial Alc 2,400
Loss of obsolescence charged in financial Alc 520
You are required to prepare a statement reconciling the profits find out profit
as per Financial Accounts.

Solution:

Particulars Tk. Tk.

Profits as per Cost Accounts 1,33,520

Add:
Administration overhead over recovered in Cost Account 8,500
Depreciation over recovered in Cost Account 580
(7900 - 7320)
Interest received but not included in Cost Alc 900
Bank interest credited in Financial Alc 460
Stores adjustments credited in Financial Alc 840 11,280
1,44,800
Less :
Factory overhead under recovered in Cost Alc 1l,400
Income Tax received but not included in Cost Alc 1,200
Rent charged in Financial Alc 1,720
Dividend paid charged in Financial Alc 2,400
Loss of obsolence charged in Financial Alc 520 17,240
Profit as per Financial Accounts 1,27,560
 Problem: 3
The net profits of Nidhi Limited according to financial accounts were `Tk.
84,377 while profits shown by cost accounts were Tk. 1,06,200 for the same
year. Prepare reconciliation statement to reconciling the profits find out profit
as per Financial Accounts.
(i) Depreciation charged in financial accounts 5600
while recovered in cost accounts 6250
(ii) Works overheads under absorbed in cost accounts 1560
(iii) Office overheads over-recovered in cost accounts 850
(iv) Interest on loans (credit) not included in cost accounts 4000
(v) Loss due to obsolescence charged in financial accounts 2850
(vi) Bank interest and dividends received 375
(vii) Income-Tax paid 20,150
(viii) Loss due to depreciation in inventories charged in financial 3375
accounts
(ix) Stores adjustment credited in financial accounts 237
Solution: 3
Reconciliation Statement
Particulars Amount Amount
Tk. Tk.
Profits as per cost books 106,200
Add:
1. Excess of depreciation charged in cost a/c (6250 - 650
5600)
2. Over absorption of office overheads 850
3. Interest on loans (Credit) 4,000
4. Bank interest and dividend received 375
5. Stores adjustment 237 6,112
1,12,312
Less:
1. Under absorption of works overheads 1,560
2. Obsolescence charged in financial books 2850
3. Income tax paid 20,150
4. Loss on depreciation of inventories (charged in 3375 27,935
financial books)
Profit as per financial books 84,377