# Reconciliation of Cost and Financial Accounts
## Why reconciliation is needed
When cost and financial accounts are kept separately (i.e., under a non-integrated system), each set may report a different profit. It is essential to reconcile the two so the cost accounts can be relied upon.
Reconciliation requires that sufficient detail is available to locate the differences and the reasons behind them. Each item of difference is then added to or subtracted from the profit shown by one of the accounts to arrive at the profit shown by the other.
## Two methods of reconciliation
Reconciliation of the balances of the two sets of accounts can be done by preparing either:
1. A Reconciliation Statement, or
2. A Memorandum Reconciliation Account.
## Causes of differences between Financial and Cost Accounts
### (a) Items included in Financial Accounts only
Purely Financial Expenses (recorded in financial books, ignored in cost books):
- Interest on loans or bank mortgages
- Expenses and discounts on the issue of shares, debentures, etc.
- Other capital losses (e.g., loss by fire not covered by insurance)
- Losses on the sale of fixed assets and investments
- Income tax, donations, subscriptions
- Expenses of the company's share transfer office
Purely Financial Income (recorded in financial books, ignored in cost books):
- Interest received on bank deposits, loans and investments
- Dividends received
- Profits on the sale of fixed assets and investments
- Transfer fees received
- Rent receivable
### (b) Items included in Cost Accounts only — notional expenses
These are charged in cost accounts even though no actual cash is incurred:
- Charges in lieu of rent where the premises are owned
- Interest on capital at a notional figure (though not actually incurred)
- Salary for the proprietor at a notional figure (though not actually incurred)
- Notional depreciation on assets that are fully depreciated (book value nil)
### (c) Items whose treatment differs in the two sets of accounts
- Certain items may simply be treated differently in each set.
- Example: Cost accounting may use a different method of depreciation from the one allowed under financial accounting.
### (d) Varying basis of valuation
- The basis on which stock (inventory) is valued can differ:
- Financial Accounts: stock is valued at cost or market price, whichever is lower.
- Cost Accounts: stock is valued at cost only.
- This difference in valuation basis causes the two profits to diverge.