# Reconciliation of Cost & Financial Accounts
Because cost and financial accounting record transactions for different purposes, profit shown by the two systems usually differs. A Reconciliation Statement explains this gap.
## Three Sources of Difference
1. Transactions only in Cost Accounts (notional items).
2. Transactions only in Financial Accounts (purely financial items, appropriations, abnormal items).
3. Difference in the amount of recording (depreciation, inventory valuation, over/under absorption of overhead).
## 1. Items recorded only in Financial Accounts
Financial expenses (not in cost books):
- Goodwill written off
- Preliminary expenses written off
- Interest on loan
- Loss on sale of asset
- Discount on issue of shares
- Expenses on issue of shares
- Company's share transfer office expense
- Loss by fire (only the portion not covered by insurance)
- Donations, Income Tax
Financial incomes (not in cost books):
- Dividend received
- Profit on sale of asset
- Interest received on loan
- Rent received
- Transfer fee received
## 2. Items recorded only in Cost Accounts (Notional / Imputed)
- Notional Rent
- Notional Salary
- Notional Depreciation
- Notional Interest on Capital
These are charges in cost books that have no cash outflow, so they don't appear in financial books.
## 3. Difference in Amount
- Different methods of charging Depreciation (e.g., SLM vs WDV).
- Different bases of Inventory Valuation (FIFO/LIFO/Weighted Avg.).
- Over- or Under-absorption of overheads when not transferred to Costing P/L (i.e., kept as supplementary rate / carried forward).
## Reconciliation Statement (Format)
| Particulars | ₹ |
|---|---|
| Profit as per Cost Accounts | xxx |
| Add: Items to be added | xxx |
| Less: Items to be subtracted | (xxx) |
| Profit as per Financial Accounts | xxx |
### Direction Rule (starting from Cost Profit)
- Add: Financial incomes not in cost books; over-absorption of OH; lower depreciation in financial books; closing stock undervalued in cost books / overvalued in financial books.
- Less: Financial expenses not in cost books; notional charges already debited in cost books; under-absorption of OH; opposite inventory valuation differences.
(Reverse the signs if you start from Financial Profit.)