Cost vs Financial Accounts Reconciliation

Reconciling profits between cost and financial accounts involves adjusting for items treated differently or appearing in only one set of accounts. When calculating profits as per Financial Accounts starting from Profits as per Cost Accounts, specific purely financial items that reduce profit in financial accounts are deducted.

Deducted Financial Items Analysis

The process requires identifying items that are expenses or losses in financial accounting but are not considered in cost accounting. These must be subtracted from the profit calculated using the cost accounting method.

Item Analysis:

• A. Interest on loans or bank mortgages: This is a financing expense recorded in financial accounts. It reduces financial profit. As it's typically excluded from cost accounts, it is deducted when reconciling from cost profit to financial profit.
• B. Interest received on bank deposits, loans and investments: This is investment income recognized in financial accounts. It increases financial profit. To reconcile, this income is added to the cost profit, not deducted.
• C. Expenses and discounts on issue of shares, debentures etc.: These are expenses related to raising capital, treated as financial charges. They reduce financial profit and are absent in cost accounts. Thus, they are deducted.
• D. Loss by fire not covered by insurance: This is an abnormal loss recognized in financial accounts. It reduces financial profit. Since it's not a part of regular cost accounting, it is deducted during reconciliation.
• E. Rent Receivables: This signifies income earned but not yet received (accrued income). It increases financial profit. Therefore, it is added to the cost profit, not deducted.

Reconciliation Key Items

From the analysis:

• Items deducted: Interest on loans (A), Expenses/discounts on share/debenture issue (C), Loss by fire (D).
• Items added: Interest received (B), Rent Receivables (E).

The purely financial items deducted are A, C, and D.