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Reconciliation of Cost and Financial Accounts

VSAT 2022

An Introduction

Reconciliation brings individuals together to mend fences or reach an understanding. Two siblings who heal their connection after some conflict exemplify reconciliation. A cost reconciliation statement examines the profits or losses reported by expense financial accounts categories.

It is a declaration that identifies the root reasons for the net loss or profit that differs between financial and cost accounts and makes the necessary corrections to eliminate them. The reconciliation process ensures the integrity and accuracy of financial data. A thorough reconciliation process also ensures that no illegal changes were made to transactions while they were being processed.


Need for Reconciliation of Cost and Financial Accounts

The issue of reconciliation does not exist in cases where there are no distinct cost and financial accounts. However, in cases where financial and cost accounts are kept separate from one another, the two accounts must be reconciled regularly.

Even though the same fundamental transactions are covered by both sets of books, the figure of the profit declared by the former and the latter are at odds with one another.


Due to the following factors, a reconciliation of the two pairs of books' outcomes is required:

  • To determine the causes of the variance in the loss or profit in financial and cost accounts, to clearly state the situation, and to ensure that no accounting errors have been made.

  • To guarantee the mathematical dependability and accuracy of the accounting system to perform cost estimation, cost control, and a review of the financial accounts.

  • To ensure consistent methods for calculating depreciation, equity value, and overhead.

  • To improve cooperation and coordination between the operations of the finance department's cost and financial sections.

Need for Reconciliation Accounts


Need for Reconciliation Accounts


Reconciling Statement

To get at the records of the same accounts held by a third party, a reconciliation statement first starts with the company's record of the outstanding balance, adds and deducts reconciling elements in a series of extra columns, and then applies these changes. The bank reconciliation aims to clarify the discrepancies between the two variants of the accounts and to give an independent confirmation of the accuracy of the balances in the corporate account.

The reconciliation statement includes a breakdown of the discrepancies between the two accounts, making it simpler to identify reconciling items that may be incorrect and require modification. Both internal and external auditors might benefit from using reconciliation statements.


Below are some other reconciliation types we normally encounter in the financial world.

  • Credit card reconciliation. Credit card reconciliation is similar to bank account reconciliation.

  • Balance sheet reconciliation.

  • Cash reconciliation.

Reconciliation Statement


Reconciliation Statement


Example of Reconciliation of Cost and Financial Accounts

Mark's son’s & Co. has a balance per pass book of $1,000 as of 31st March 2019. It has a balance as per Cash Book as of 31st March 2019 of $1050. Further details are listed below:

A cheque of $300 was deposited but not collected by the bank.

Bank charges of $50 were recorded in Passbook but not in Cash Book.

Cheese worth $200 was issued but not presented for payment.

Bank interest of $100 was recorded in Passbook but not in Cash Book.

From the above, prepare a statement reconciling the cost and financial accounts figures.

Solution:

Particulars

Amount (in $)

Amount ( in $)

Balance as Per Passbook


1,000

Add: Cheque deposited, but not collected

300


Bank charges not recorded in cashbook

50

350

Less: Cheque issued, but not presented for payment

200


Bank interest received unrecorded in cashbook

100

(300)

Balance as Per Cheque Book


1,050

Conclusion

Reconciliation is a basic accounting process that verifies the money spent or earned equals the money leaving or into an account after a fiscal period. Reconciliation may be achieved through two methods: documentary analysis and analytics review. Account reconciliation is essential for firms and individuals since it allows them to check for fraudulent behaviour and prevent financial statement problems. As part of standard accounting operations, reconciliation is often performed at regular periods, such as quarterly or monthly.

FAQs on Reconciliation of Cost and Financial Accounts

1. What is the purpose of reconciling cost and financial accounts?

The main purpose of reconciling cost and financial accounts is to identify and correct any discrepancies between the two sets of accounts. This helps to ensure that the profit figure shown in financial accounts is accurate and consistent with the company’s actual performance and that any non-recurring or unusual items are excluded from the profit figure. Thus, the aims, objects, principles, and methods of maintaining cost accounts and financial accounts differ, meaning the profits shown by the accounts may not align.

2. Is it necessary to reconcile cost and financial accounts?

Yes, reconciling the two sets of accounts is important as it allows for an accurate understanding of a company’s financial performance. Differences between the cost and financial accounts results can be caused by factors such as over- or under-absorption of indirect expenses, incorrect valuations of stocks, or incorrect allocation of costs. Since both cost and financial accounts are maintained independently and have different purposes and accounting procedures, the profit or loss shown may also differ.

3. In which accounting system is there a need for reconciliation?

There is no standard way to perform account reconciliation. However, generally accepted accounting principles (GAAP) require double-entry accounting—where a transaction is entered into the general ledger in two places—and is the most prevalent tool for reconciliation. Account reconciliation is particularly useful for explaining the difference between two financial records or account balances. Some differences may be acceptable because of the timing of payments and deposits. Businesses and individuals may reconcile their records daily, monthly, or annually.

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