A Reconciliation Statement or a Memorandum Reconciliation Account should be drawn up for reconciling profits shown by two set of books. Results shown by any set of books may be taken as the base and necessary adjustments should be made to arrive at the results shown by the other set of books. The technique of preparing a reconciliation statement as well as a memorandum reconciliation account is as under:
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:
- Ascertain the various reasons of disagreement (as discussed above) between the profits disclosed by two sets of books of accounts.
- If profit as per cost accounts (or loss as per financial accounts) is taken as the base.
ADD
- Items of income included in financial accounts but not in cost accounts.
- Items of expenditure (as interest on capital, rent on owned premises etc.) included in cost accounts but not in financial accounts.
- Amounts by which items of expenditure have been shown in excess in cost accounts as compared to the corresponding entries in financial accounts.
- Amounts by which items of income have been shown in excess in financial accounts as compared to the corresponding entries in cost accounts.
- Over absorption of overheads in cost accounts
- The amount by which closing stock of inventory is undervalued in cost accounts.
- The amount by which the opening stock of inventory is overvalued in cost accounts
DEDUCT
- Items of income included in cost accounts but not in financial accounts.
- Items of expenditure included in financial accounts but not in cost accounts.
- Amounts by which items of income have been shown in excess in cost accounts over the corresponding entries in financial accounts.
- Amounts by which items of expenditure have been shown in excess in financial accounts over the corresponding entries in cost accounts.
- Under absorption of overhead in cost accounts
- The amount by which closing stock of inventory is overvalued in cost accounts.
- The amount by which the opening stock of inventory is undervalued in cost accounts.
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 above shall be deducted and items to be deducted shall be added i.e. the procedure discussed above shall be reversed.
Memorandum Reconciliation Account
Reconciliation can also be done by preparing a Memorandum Reconciliation Account. This account is a memorandum account only and does not form part of the double entry. A specimen form of Memorandum Reconciliation Account is given below:
Memorandum Reconciliation Account
| Particulars | Particulars |
| To Financial Expenses: Discount Fine and penalties Bank Interest Underwriter’s Commission Donations Goodwill written off | By Profit as per Cost Accounts |
| To Under-charge of depreciation cost accounts | By Financial income Rent Interest Dividend Profit on sales of assets |
| To Under-absorption of overheads | By Items charged in cost accounts: Interest on own capital Rent on own building |
| To Under-valuation of opening stock in cost accounts | By Over-charge of depreciation in cost accounts |
| To Over-valuation of closing stock in cost accounts | By Over-absorption of overheads By Over-valuation of opening stock |
| To Profit as per Financial Accounts | By Under-valuation of closing stock in cost accounts |