Reconciliation Of Cost And Financial Accounts
Where accounts are maintained on the integral accounts 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. The difference between the two sets of accounts arises because of the following reasons:
(a) Items included only in financial accounts
There are number of items which appear only in financial accounts, and not in cost accounts, since they neither do nor relate to the manufacturing activities, such as,
(b) Items included only in the cost accounts
There are very few items which appear in cost accounts, but not in financial accounts. Because, all expenditure incurred, whether for cash or credit, passes though the financial accounts, and only relevant expenses are incorporated in cost accounts. Hence, only item 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 by the proprietor.
(c) Items accounted for differently in cost accounting and financial accounting
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