Question

List the steps involved in the preparation of Reconciliation Statement.

Hint:

Start with cost profit, adjust for incomes, expenses and stock differences.

Answer 1

A Reconciliation Statement is prepared to match the profit shown by cost accounts with the profit shown by financial accounts.
This is needed because of the differences in recording certain items.
The steps involved are:
1. Start with the profit as per cost accounts or financial accounts as the base figure.
2. Add items shown only in financial accounts like incomes or gains not recorded in cost accounts (e.g. interest received).
3. Deduct items shown only in financial accounts like purely financial expenses not in cost accounts (e.g. losses on investments).
4. Adjust under or over absorption of overheads if any, since these cause differences.
5. Add or subtract stock valuation differences if opening or closing stock is valued differently in cost and financial accounts.
6. Calculate the net profit or loss after all adjustments to ensure both accounts match.
This helps check the accuracy and reliability of both sets of accounts.