The two systems of accounting viz. financial and cost accounts co-exist in the same organisation and they deal with same basic transactions say, purchases, consumption of materials, wages and other expenses. But the difference of purpose calls for a difference in approach in collection, analysis and presentation of data to meet the objective of individual system. Financial accounts are concerned with the ascertainment of profit or loss for the whole operation of the organisation for a relatively long period usually a year, without being too much concerned with cost computation, whereas cost accounts are provided for ascertaining the profit or loss made by manufacturing or product divisions/products for cost comparison and preparation and use of variety of cost statements. The difference in purpose and approach more often than not results in a different profit from what is disclosed by the financial accounts and this establishes the need for a reconciliation of profit between cost accounts and financial accounts.
Thus, reconciliation between the results of the two sets of books is necessary due to the following reasons:
- It finds out the reasons for the difference in the profit or loss in cost and financial accounts.
- It ensures the mathematical accuracy and reliability of cost accounts in order to have cost ascertainment, cost control and to have a check on the financial accounts.
- It contributes to the standardization of policies regarding stock valuation, depreciation and overheads.
- It facilitates more coordination and promotes better co-operation, between the activities of financial and cost sections of the accounting department.
- Reconciliation places management in better position to acquaint itself with the reasons for the variation in profits paying the way for more effective internal control.